The MacNeil/Lehrer Report; Airline Turmoil

[Tease]

ROBERT MacNEIL [voice-over]: Why are some of the nation's biggest airlines feeling poorly? Is it the recession or too big a dose of deregulation?

[Titles]

MacNEIL: Good evening. The federal government today refused to give immediate permission for ailing Braniff International to let Pan American World Airways use its South American routes. The four-year route concession was a deal worked out to stem the losses Braniff has been suffering, and to stave off possible bankruptcy. But the Civil Aeronautics Board said it needed more time to study the plan, and would decide by the end of July. Braniff is only one of the leading airlines suffering financially. Half of the dozen top American carriers reported losses of some $800 million last year, yet much of the industry is prospering. Some blame the present economic climate for the turmoil in the airlines; others claim that too-hasty deregulation of air travel has brought proud names to the brink of collapse. Tonight, just what is happening to the airline industry? Jim?

JIM LEHRER: Robin, making sense of what's happening to the airlines financially right now is almost as difficult as figuring out their fares. Both defy logic. Six of the nation's 12 largest airlines did show a loss last year. But that means, obviously, six made a profit. Three of them -- Delta, American and USAir -- a goodly profit. All airlines operate in the same environment: the negatives of a national recession, high fuel costs and the flight restrictions brought on by the air controllers strike; the positives -- at least to some -- of deregulation. Since 1978, airlines have been virtually free to enter any markets they wished, free to set any fares they wished. The result has been health and happiness for some, disaster for others. But there is much confusion to it. Some big trunk airlines are hurting, but not all of them. Many new, smaller, regional airlines have come in and done well; others are bombing out. But for consumers, the real confusion is on fares. It costs $225 to fly coach from Los Angeles to New York, but $276 to fly half that distance, say, from Denver to Washington, D.C. Part of the new illogic, for reasons we're going to hear debated, that are currently part and parcel of the American airline industry. Robin?

MacNEIL: Clearly one of the hardest-pressed airlines is Braniff.For a closer look at what's troubling that airline and the industry in general, we have the chairman of Braniff, Howard Putnam. He is with us at public television station KERA in Dallas. Mr. Putnam, first of all, how do you feel about the CAB putting off that decision today?

HOWARD PUTNAM: Disappointed. We were counting on that to happen rapidly, to turn the operation over to Pan American, and had hoped very much that after the Justice Department had said it was not anticompetitive, and after the Department of Transportation had endorsed it, that we had hoped very much that the CAB would approve it.

MacNEIL: Why is it so crucial to you?

Mr. PUTNAM: Well, Braniff is in a turnaround, and we are getting this airline down smaller to our fighting weight as we go through a financial restructuring. And this would have allowed us to immediately get some additional cash in, and also would have allowed us to --

MacNEIL: Pan Am would have paid you for your concession.

Mr. PUTNAM: Yes. Thirty million dollars over a two-year period. And it was an operating agreement, a joint venture, for a four-year period. And Pan Am would have immediately picked up the entire South American operation and run it for the next four years.

MacNEIL: Now, as it is, having to wait until the end of July for a decision, how long can your airline hold out, do you think?

Mr. PUTNAM: Well, we're going to hold out. The employees of this company have a lot of spunk, and we've had a tremendous amount of support from the public and the business community, and we're going to have to figure out some creative ways in the next few days and over the weekend as to how to go about this again. The CAB did not say no, to my knowledge, and I think they also have opened the door to us to say, "Go out and look for some other opportunities. Maybe there is someone else out there who would make you an even better offer." And maybe the chairman can comment on that later.

MacNEIL: I see. Now, what do you believe has put Braniff in this position? What are the problems or what are the situations that have caused your problem?

Mr. PUTNAM: Well, first of all, I am an advocate of deregulation, and do not want to see any re-regulation. We came to Braniff six months ago to see if we could turn this Texas-based airline around. Braniff took advantage of deregulation in 1979 and expanded to many citites and many countries, and bought a lot of airplanes and got a tremendous amount of debt. It could have all worked very well had not the overexpansion in tandem with the economy getting soft and fuel prices going up -- hadn't that all occurred. Now we are in a retrenching situation to try to refinance the airline. I do not blame deregulation for it. Deregulation gave us an opportunity.

MacNEIL: I see. How is it, do you think, that, working in the same climate as you are, some airlines are doing well?

Mr. PUTNAM: Well, you have two types of airlines that are doing very well. One is the new-entrant type airline, or like Southwest Airlines, where I used to be, who have high productivity and low cost stuctures, and have never let the bureaucracies and the overhead get in, as some of the older airlines have. That's one. Or you have one which, like a regional carrier, like a USAir, who has controlled their growth. We didn't control our growth at the time of expansion.

MacNEIL: Would you rather see Braniff or other airlines go under -- go bankrupt -- than have the government reintroduce regulation to protect you?

Mr. PUTNAM: Well, I would like to answer it a little differently. I don't want to see any airline go bankrupt, but I vowed when I came to Braniff and told the Board of Directors that, "If you are expecting me to go get a government-guaranteed loan, I'm not the guy to do it. We're going to do this through free enterprise, or the company doesn't deserve to make it." What we were, I guess, most disappointed about today was, here was Pan American and Braniff, who had come up with a creative idea on a joint venture, which doesn't cost the taxpayers a cent, and we weren't allowed to put that into effect, at least as yet.

MacNEIL: Well, we'll hear some comments on that presently. Thank you. Jim?

LEHRER: As we've said, not all major airlines are hurting like Braniff. One of the healthiest is USAir, which ranks number one in its operating profit margins, and on net profit margins among the nation's 12 largest airlines. Edwin Colodny is USAir's chairman and president. From your perspective, what did USAir do that Braniff did not do, or what did Braniff do that you didn't?

EDWIN COLODNY: Well, I think Howard Putnam put his finger on it, Jim: he said U.S. Air controlled its growth. One of the --

LEHRER: But you did grow under deregulation?

Mr. COLODNY: Absolutely. We've added 15 major cities, but on a very deliberate way over a period of three years, not in a period of six or twelve months, as Braniff originally tried to do. I think the fact of the matter is that some carriers thought that because the lid came off the cookie jar, it was all right to get a belly ache, and we tried to avoid that. I think the other major premise that any air carrier has to follow is not to get so far out ahead of its financing capability. Excessive debt is going to kill one or more carriers if the banks do not go along with them.

LEHRER: You do see some major bankruptcies coming, then?

Mr. COLODNY: I did not say that. I said if the banks don't go along with them. And if the economy stays in a low period for an extended period of time, several airlines will remain in deep trouble.

LEHRER: But let's take your -- okay. The controlled-growth part of it. But, I mean, you've been hit with the recession. I'm sure that business is just as soft on USAir as it is on other airlines, and you're paying the same price for fuel that others are. Why is it that you've been able to maintain a profit?

Mr. COLODNY: Well, first of all,we developed the use of our jet fleet under deregulation in an effective way, getting longer hauls out of the jets. Instead of just being confined to very short-haul, high-cost segments, we were able to utilize our assets in a more efficient way. Secondly, because of deregulation, we have been able to increase fares to keep pace with inflation.

LEHRER: You're not involved in any price wars, Mr. Colodny?

Mr. COLODNY: Oh, we're involved in many price wars, but at the same time, we have tried to maintain an effective yield over the system as a hole.

LEHRER: But is that fair to raise the fares where there is not really a lot of competition, where there are no price wars, and yet lower them where there aren't? Aren't those folks subsidizing these other folks?

Mr. COLODNY: That's the way the free market works. There are price loss leaders all over this country in every consumer product field, and the airlines are no different now than any other consumer product. You may not make as much on the apples, but you try and make it up on the sugar.

LEHRER: I take it that you're not ready to re-regulate the airline industry?

Mr. COLODNY: Absolutely not. I think it would be a disaster to step in at this point and try to unscramble the eggs. Chairman Fred Kahn, when he scrambled this industry up said, "I've done it so well, they'll never get it back together again." And he was right.

LEHRER: How long is this turmoil going to go on, Mr. Colodny? Is the industry going to shake itself down?

Mr. COLODNY: I think we could look for another two to four or five years before it finally settles down, but that's a small time frame in the scope of economic history.

LEHRER: In terms of the country and in terms of the industry, how big a disaster would it be if a major airline, like Braniff, Pan Am, Republic -- Western is also supposedly close to the brink; Continental is having its problems. What would be the disaster fallout from that, in your opinion?

Mr. COLODNY: Well, obviously, it would not be good for this industry to have any carrier go out of business in the sense that it impacts the financial capability of everybody to raise money. On the other hand, the capacity capability of the industry is such that the public would not suffer substantially in the long run.

LEHRER: Thank you.Robin?

MacNEIL: Some people familiar with the industry question the ability of airlines to survive in a free-market environment. Melvin Brenner is a former executive with both American airlines and TWA who is now a private consultant to the aviation industry. Mr. Brenner, why do you think there is so much turmoil?

MELIN BRENNER: Well, certainly, the factors that have been mentioned, the recession and the fuel prices, are part of the problem, but deregulation has contributed immensely to the problem.

MacNEIL: How has it?

Mr. BRENNER: Well, this industry has many of the characteristics of a traditional public utility, and in a free market it tends into destructive competition, which we're seeing in the form of the price wars. It has very great difficulty in adjusting its capacity to the traffic when competition increases, and deregulation has increased competititon greatly. This was evident throughout its whole history, and we are seeing it now with the kinds of losses the industry is experiencing.

MacNEIL: Why can't it adjust its capacity quickly? You mean it takes too long to order planes and it's too hard to get rid of them once you've ordered them, or what?

Mr. BRENNER: Partly. The capacity of an airline comes in very large chunks. A plane which has a large, indivisible number of seats -- as many as 400 seats in a 747 -- and when traffic softens, as it does during a recession, there is no way you can shave 5 or 10 percent off the seats of a 747. Let me illustrate it this way. In 1980 the average load per trip -- the average passenger load per trip was about 90 passengers. Now suppose profits soften, so each carrier on the average lost one passenger per flight. There'd be no way it can shave its capacity down to make up for that one, and yet the loss of just one per flight for the industry would have lost $300 million in gross revenues.

MacNEIL: So what's the answer, in your view?

Mr. BRENNER: The answer in my view, and I admit it's difficult -- I agree with Ed Colodny -- that it's going to be very, very difficult to put the pieces back together again, but in my view the answer is, as best we can and gradually and with limitations, to restore some of the elements of regulation which kept this industry from getting into this kind of trouble in the past.

MacNEIL: Which elements?

Mr. BRENNER: First, control over prices to the degree necessary to prevent these absolutely absurd price wars.Mention was made a few moments ago of the absurdity of the present prices -- absurd for the public as well as for the airlines. And in many cases we are seeing fares which cannot make money for the airlines even if every seat were filled on every flight. Now, this is part of the nature of this particular industry, and to avoid that, restoration of some limited amount of rate regulation would be a first step.

MacNEIL: Well, how do you reply to the two airline heads you've just heard -- one doing not so well at the moment, and one doing quite well -- each saying, "No, we don't want it"?

Mr. BRENNER: My reply would be that gradually there is developing within the industry, and within the public generally, a growing feeling that, difficult as it may be, re-regulation is something that is going to have to come. Interestingly, as you may know, World Airways, which is one of the first of the real low-cost airlines, one of the most aggressive of the low-cost airlines, petitioned the CAB about a month ago to restore partial rate regulation in order to prevent these ruinous price wars. We're beginning to see more and more signs that there is an awakening -- that some re-regulation will be needed.

MacNEIL: Well, thank you. Jim?

LEHRER: Finally, the view from the government agency which no longer regulates the airlines, the Civil Aeronautics Board, set now to go completely out of business in 1985. Its chairman is Dan McKinnon, appointed last year by President Reagan. Mr. Chairman, should your agency step back into regulation, particularly to stop these wild price wars?

DAN McKINNON: Well, we really don't have that opportunity. The Congress determines that, and they've determined that our ability to control prices after the end of this year is gone.

LEHRER: Forget that little technicality. Do you believe the CAB should step back in?

Mr. McKINNON: No, I don't.

LEHRER: Why not?

Mr. McKINNON: I think we have an effective industry the way it is, and we've got some of the smartest men in the whole country running the airlines. There's not a single airline manager that I know about, of a major airline, that wants to get back and have me and the government telling them how to run their business. They think they know more about it than I do, and I think they do, too, and they can do an effective job of making their airlines efficient, and serve the interest of the public a lot better.

LEHRER: Is Mr. Brenner wrong when he says that he's picking up a growing realization in the airline industry, even though they won't come and speak about it publicly, and also within the public, that re-regulation has to come down the line?

Mr. McKINNON: Well, I don't hear about it on Capitol Hill. I don't hear about it from the airline presidents. I just don't hear about it anywhere from the public. They're getting better prices now under a deregulated environment than they could ever hope to get under a regulated environment. Because what's happened under regulation, an airline can hire people, they can have 300 vice presidents -- they can do all that, and all they do is take those costs, come to the CAB -- in the past; this is history -- come to the CAB and say, "Hey, it costs us so much to run this airline, we got to have a rate increase to cover these extra costs." There's no strain on them to be efficient and effective in their costs. This way, Colodny is so successful because he got into the game after deregulation came along, and he didn't get his costs all built up on him, so he's an efficient operator.

LEHRER: Does it bother you at all the fact that the short-haul passenger paying a higher fare-per-mile is subsidizing the long-haul passenger who is luckily caught in a price war?

Mr. McKINNON: Well, here's one of the problems, and this is a much-discussed issue, but a lot of people don't quite understand how that works. When you have deregulation, any airline could fly to any city they want in the country. So if an airline flies from Madison, Wisconsin, to Washington, D.C., or your Denver to Washington example, if they think -- if another airline thinks that price is too high, and they could do a more efficient job and get more people, all they gotta do is start flying flights from those two cities at a cheaper cost. Under deregulation you went from basing prices on a mileage cost -- you went to place 'em on what it actually cost to fly that route. Another little factor is, on your transcontinental rates that you pointed out on your screen earlier, there's a glut of wide-body aircraft on the market today, basically because of the recession. There's not enough passengers to go around, and you've got these big wide-bodies, and they can only fly long routes. So since you have the glut of those airplanes, it's cheaper to fly them at a loss than it is to park them on the ground. So you got low fares, and what people are doing is comparing those low fares that are really not economic at the moment to what a normal fare is on these shorter-haul routes. There's a lot of people that have forgotten, Jim, that since 1976 the cost of fuel for a jet was 31" a gallon; in 1981 it was $1.02 a gallon. Their costs have gone up, yet ticket prices are relatively cheap.

LEHRER: Mr. McKinnon, is your view on re-regulation going to change if Braniff or another major airline goes under?

Mr. McKINNON: Well, I sure don't think it will. I think Braniff's -- Howard Putnam's one of the best managers I know in the industry --

LEHRER: Okay, all right. Forget the Braniff example. I'm going to get to Braniff specifically in a moment, but if a major airline goes under in the next few weeks or months, would your view on re-regulation change as a result of that?

Mr. McKINNON: No.

LEHRER: Now, to Braniff specifically. You heard what Mr. Putnam said, and he's terribly disappointed in you and your fellow members at the CAB because you did not let him make his swap deal with Pan Am. Why didn't you?

Mr. McKINNON: That's not -- we didn't do it today.

LEHRER: Right.

Mr. McKINNON: We made the decision today that we didn't have all the facts on the situation, and you can't make an intelligent, wise decision unless you get all the facts. So today we decided that we needed more facts, and we're going to hold a hearing, and we're going to do it very fast. And we're going to get all the facts to make an intelligent decision. Under the law we're charged with looking into the competitive aspects of making those decisions that particularly affect Braniff and Pan Am in this situation. This talks about all the aviation routes, Jim, of all of South America, and what it in essence is talking about is, instead of having two competitive airlines down there, it's talking about having one airline from the United States service all South America. That creates certain questions.

LEHRER: But here you had, as Mr. Putnam said, you had two airlines in the private enterprise system, they were working out a deal that was going to get $30 million in cash to Braniff, which was hurting; it was a good deal all the way around, and you guys said, "All right, we'll give you a decision in July." Here's Braniff hard up.

Mr. McKINNON: We're very sympathetic to Braniff's situation. I want to assure you of that; I'm going to assure Howard Putnam of that. But we still, under the law, are charged with the responsibility of checking out the competitive factors. We also left a little door open, as he caught on very quickly, that maybe there's something that's less competitive that he might want to take a look at as well, in the meanwhile. And so --

LEHRER: He's free to do anything, right?

Mr. McKINNON: He sure is.

LEHRER: Okay. Robin?

MacNEIL: Mr. Putnam, that make you feel better?

Mr. PUTNAM: [laughter] I enjoyed listening to it. Thank you, Mr. Chairman.

MacNEIL: Mr. Brenner? You're the only one here who thinks that deregulation is the villain. Do you want to come back and defend your thesis?

Mr. BRENNER: Yes, I'd be glad to. To help do that, let me first put in perspective what has happened these last few years since deregulation as compared with the industry before. First, it's important to understand that the industry before had never had a situation where it had even two years in a row of operating losses. Now we are well into a third year in a row of serious operating losses. Secondly, the industry before has faced recession and jumps in fuel prices, and in the mid-1970s, after the Arab oil embargo, fuel prices jumped up just as sharply then as they have in the last few years, and there was a recession then. And the airlines did suffer a brief setback, brief and not very great. The new element today is not the combination of recession and fuel prices; it's deregulation. Third, I said before that I'm getting somewhat more company on my side of this. Just today I received a report from a committee of the Parliament in Canada who has been studying the question of whether Canada should move into deregulation. And in so doing they took evidence -- they had witnesses; I was up there, and others. And after a fairly exhaustive consideration they came out categorically saying they should keep regulation. They also concluded that [de]regulation has contributed to the problem here. They concluded that fares have not been a benefit for the public as a whole. So that this is part of what I referred to before as a growing sentiment in line with the views I hold.

MacNEIL: You don't detect any of that, Mr. McKinnon?

Mr. McKINNON: Well, Robin, I think we're ignoring a few of the facts. And one of the facts is that the steel industry, the lumber industry, the savings and loan industry the automobile industry -- are all hurting in this country, and I think if you just think the airline industry is going to sit there and bring in all the dollars all of a sudden while everybody else is hurting, you're ignoring some of the facts. To relate deregulation domestically and internationally is two different issues. When you want to talk about deregulation and what's going on in Canada or anywhere else in the world, you've got to remember that those governments have different purposes and uses for their airlines, including the national defense, flying the flag, creating employment. That's a different system of operating than we operate with in America. America believes in free enterprise and the companies are going to survive based upon their ability to serve the public need.

MacNEIL: Mr. Colodny, when deregulation was being argued, some people predicted it would lead to the gradual consolidation of many airlines into a fewer number of national trunk carriers. Do you expect that to happen, and is that a good thing?

Mr. COLODNY: Well, I think we were one of the carriers concerned when deregulation was being debated. And we were concerned that large carriers would gobble up all the small carriers -- those with the deep pockets. I think what we're seeing is a different scenario, namely, that smaller carriers can succeed, and larger carriers can get in trouble. But I do think that over the long run we will see fewer airlines in this country -- fewer major airlines. Now, it may take three, five, seven years before that's achieved, but I think it will come about.

MacNEIL: Thank you. Jim?

LEHRER: Mr. Putnam, how do you see the future of the airline industry emerging from all of this chaos? Do you agree with Mr. Colodny?

Mr. PUTNAM: Yes, I generally agree with what Ed is saying. I think the leverage is going to be on the cost side, and we're trying to put an airline in place where Braniff --

LEHRER: I'm sorry. What does that mean -- leverage on the cost side?

Mr. PUTNAM: Well, you cannot, as you did under regulation, as Chairman McKinnon said, constantly go down to Washington and ask for higher fares to cover costs that have gotten out of control. So we've got to manage our costs. If we do that, and we're going to do that at Braniff, then you also have the advantage of being able to put in a fare structure that's lower, and you expose yourself to a much larger market and more people can fly. And at that point in time I think you've got to say that deregulation, then, has a value to the consumer, to the stockholder and everyone else. In the short run I understand Mel Brenner's concerns, but I can't agree that re-regulation will take care of it. A controlled economy is not going to work.

LEHRER: Do you feel, Mr. Putnam, that the fares are going to hold, they're going to stay down once they get down now as a result of deregulation? You really believe that?

Mr. PUTNAM: Well, in our case we plan to have a low, simple fare structure. We only have 15 different fares instead of nearly 600 that we had seven months ago.

LEHRER: Six hundred? You had 600 fares, different kinds of fares?

Mr. PUTNAM: Oh, and that's very few. I would imagine some of the larger airlines having in the thousands of kinds of fares, but we have it down to only 15 simple, unrestricted fares. That simplicity alone has great productivity benefits -- shorter reservation calls, less consumer confusion -- and so it saves on the cost side there as well. I think fares overall in the future will stay at a lower level, and I agree with the other fellows, than they would have if we were to re-regulate and cause everything to go back up.

LEHRER: Now, Mr. Brenner, you just really disagree with that, right?

Mr. BRENNER: Yes, I do. Perhaps I could clarify one of the points that was made earlier by one of the other members of the panel. I believe it was Chairman McKinnon who pointed out the glut of wide-bodied capacity on the large, transcontinental routes and similar routes, and how they were leading to price wars. Part of the reason for that glut is because of what has happened since deregulation in terms of the sheer number of carriers flying on those routes. New York-Los Angeles, for example, in the past, prior to deregulation, had very intense competition among three airlines. Today there are seven on that route. Same thing for New York-San Francisco, and so on. When you couple this increase in the number of carriers with the inflexibility I referred to before, it does indeed create the glut of capacity the chairman referred to, which creates the price wars, which creates the spiral the industry has been going in.

LEHRER: But, in a word, you don't believe that under the current climate that those prices are going to stay down, right? You don't think we're going to emerge from all of this with a basically lower price range for airplane travel?

Mr. BRENNER: Well, I should qualify that by pointing out the overall price of air travel hasn't really gone down. Since deregulation the overall average fare paid by the average passenger has gone up 55%. What has happened is it's gone down on some routes, but it's much more than made up for by enormous increases on other routes.

LEHRER: Mr. Colodny, what's your view of that, what the fares are going to do over this next four- or five-year period?

Mr. COLODNY: Of course, it's very hard to predict, but if you look at the driving force of capacity, right at the top, you are going to have some carriers with excess capacity, and they're going to try and bill it on a marginal-cost basis, and therefore try to stimulate the market with low fares. I think the test of what the new entrants will start reporting on earnings, if there are any earnings from those fellows who are driving the fares on the low end, yet remains to be seen. Not one of them has yet produced a profit.

LEHRER: We have to go. Robin?

MacNEIL: Mr. Putnam in Dallas, thank you for joining us. Mr. Golodny, Mr. McKinnon in Washington, Mr. Brenner in New York. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back on Monday night. I'm Robert MacNeil. Good night.