The MacNeil/Lehrer Report

HUNTER-GAULT: Well, how can you afford to make it and have your fares set so much lower, given all of those problems?

Mr. BURR: Well, the -- there really isn`t too many secrets to the business. Asset utilization is what we basically depend upon. And, without getting too technical, assets really are your planes, your people and your markets. And we depend upon high utilization of our planes, and we depend on a very high utilization of our markets, which is high-frequency in those markets. We also depend on the very low prices to fill up the aircraft. When you fill up the aircraft with high frequency you generate a lot of revenue, and that covers the costs and makes a return.

HUNTER-GAULT: Are you using aircraft that are different-- smaller, or the same size as the major carriers`?

Mr. BURR: No. we just bought fourteen 737 aircraft, which is the Boeing aircraft that`s got about 100 seats in it, and that`s being utilized all over the world by many, many carriers.

HUNTER-GAULT: How did deregulation fit in your decision to start a new airline?

Mr. BURR: Well, without deregulation we couldn`t have done what we`re doing.

HUNTER-GAULT: What do you mean by that?

Mr. BURR: Well, we couldn`t have started. For 40 years you couldn`t start an interstate airline. The previous airline act, going back to 1938. basically made it extremely difficult if not impossible to start a new airline. It was feasible to start one within the confines of one state. But really only Texas and Florida and California were-- had enough geography to sustain an airline within one state. But with the act. which passed in `78, it then became feasible to go to the government, to the Civil Aeronautics Board, and ask for a certificate, a showing of fitness. And the government has in the last several years taken this very seriously and has acted very rapidly, in our case in less than a hundred days to find us fit to proceed to provide service in the eastern third of the United States in 27 markets.

HUNTER-GAULT: And if this act had not been in effect then you could not have started up?

Mr. BURR: No. Actually, I can`t say that we could not have. It would have taken a great deal longer. It would have cost a great deal more money. And I think if we had applied ourselves for many years we probably eventually could have gotten a certificate. But it was such a stringent requirement that almost nobody attempted to get a certificate. Once the act passed, it became much easier, and. as I say. we were able to do it in less than a hundred days.

HUNTER-GAULT: All right. We`ll come back. Jim?

LEHRER: Back during the deregulation debate, representatives of the smaller regional airlines expressed the fear they would be demolished by the bigger trunk lines, and one of those who said that was Edwin Colodny. chairman and president of what was then Allegheny Airlines. His line is now called US Air, which reported a $42-million or 75-percent increase in profits for the first nine months of this year, compared to a $ 138-million loss for the ten largest trunk airlines. Mr. Colodny. I understand the last two months` figures you`ve just gotten recently also show a continuation of the good news.

EDWIN COLODNY: That`s right. Jim. For the 11months ended November 30th the profit is $56 million, or up 78 percent over a year ago.

LEHRER: I see.

Mr. COLODNY: A very, very fine performance.

LEHRER: What happened, sir. as a result of deregulation that you didn`t expect to happen?

Mr. COLODNY: Well, certainly the fuel impact did not come quite the way we expected it. It created a tremendous problem for operators of large aircraft, and those of us with smaller twin-engine fleets have an advantage in the economics of our operation.

LEHRER: Why

Mr. COLODNY: Because we do not consume as much fuel, and therefore we have the flexibility with smaller aircraft to move into markets on a much more rapid basis without the need for very high passenger loads per mile. An operator of an L-1011 or a DC-10 requires substantially greater loads to break even. Whereas the operators of the Boeing 737 or the DC-9s-- we arc able to achieve profitability with lower loads. Deregulation gave us the opportunity to expand our airlines into longer haul flying, which was always available to the larger carriers, but only available on a very restricted basis to the regional carriers.

LEHRER: Now, why was that? Why was it not available before?

Mr. COLODNY: Well, under government policy the so-called trunk airlines were favored by policy for the longer-haul, denser routes. The regional carriers were restricted to smaller-city-pairs and generally shorter distances. And in the old days that meant lower profit potential compared to the longer-haul routes.

LEHRER: But you`re still using your smaller airplanes for these longer hauls. Is that the secret to US Air`s success?

JIM LEHRER: Good evening. Something strange is going on in the airline business, or at least it appears strange to those of us whose only contact with airlines is as a consumer. On the one hand, the news is full of stories about hard times, gigantic airlines suffering gigantic losses, resulting in cutbacks in service, layoffs of employees and searches for savior-type mergers. High fuel costs and reduced traffic brought on by the sagging economy are cited as the reasons. But the papers are also full of stories about new airlines being started and small airlines being expanded, many of them to compete directly with those already losing money. And there`s the question of fares. On the one hand, there are pitched battles between airlines to see who can have the lowest fare between two points, while on other routes fares are skyrocketing upward. On the surface it doesn`t seem to make sense, but those directly involved say there are non- strange reasons for what`s happening, and we get them tonight from the heads of three very different airlines, and an expert whose job it is to analyze the industry to make sense of what`s happening to it. Robert MacNeil is off. Charlayne Hunter-Gault is in New York. Charlayne?

CHARLAYNE HUNTER-GAULT: Jim, most of this strange business started with the airline deregulation act of 1978. That was the first giant step taken by the Carter administration aimed at ending government oversight of the entire transportation business, including railroads, trucks and buses. For airlines, deregulation has made it easier to raise fares and abandon unprofitable routes. It has also made it easier for new airlines to challenge incumbents in existing markets. For example, here on the east coast a young upstart called New York Air is challenging Eastern Airlines` venerable New York to Washington shuttle. And if all goes as planned, another newcomer will make its east coast debut next spring. It will be known as the People Express, and, operating out of Newark Airport, it will eventually service 27 cities. Fares will range between 41 and 55 percent below existing coach rates. The chairman and chief executive officer of People Express is Donald Burr. Mr. Burr was formerly president of Texas International Airlines. Mr. Burr, with the dismal economic climate and the effect it`s having on the airline industry in general, where do you get the confidence to start a new airline?

DONALD BURR: Well, perhaps I`m too young to have enough wisdom, but actually pieces of the airline industry are doing quite well, and this would appear to us to be a very good time to start a new airline.

HUNTER-GAULT Well, what are the specific things that make you hopeful that it could succeed?

Mr. BURR: Well, we`ve seen in our experience that traffic tends to respond to low prices, and we expect to be a very low-price competitor in the business. And many low-price carriers are doing well right now and we think that in an economic recession that low prices are attractive.

HUNTER-GAULT: Well, won`t you have the same kinds of problems that this sagging economy has forced upon your larger competitors -- I mean higher fuel costs and things like that?

Mr. BURR: Sure. We`ll absolutely pay the same kinds of fuel rates that the other carriers pay. We will confront the same kinds of hardships that other carriers have to confront. But we`ve done that for many years in our prior airline experience and don`t find that to be insurmountable.

Mr. COLODNY: Well, that`s one of them. Using the assets more productively, getting many more seat miles per day out of the same DC-9 that we used to fly frequently over 150-mile segments. Now we fly those same jets to Florida and Texas, and they do substantially greater productivity for us.

LEHRER: In terms of just basic costs, you mentioned fuel. How do your basic costs differ, say, with a large airline that is running these big airplanes to haul one passenger, say, 500 miles? Are there other factors involved?

Mr. COLODNY: Well, if you`re flying 500 miles in a DC-9, the cost per plane mile is substantially lower than in a DC-10 or a 727-200. And as a result of that we are able to schedule frequency, which is the key to good, successful short-haul air travel, and the fellow with the larger equipment frequently cannot schedule as frequently as we do. And as a result-- the business traveler in particular desires the convenience of choice, and frequency is that vehicle.

LEHRER: What do you see in the future for US Air? Are you aiming to become one of those trunk air-- you`ve already grown significantly; do you plan to become a "big trunk airline"?

Mr. COLODNY: Well, we`ve already been reclassified as a trunk airline by the CAB. but those designations really don`t mean anything any more. Our objective is to run a very profitable airline with good profit margins. In this industry today, without a good profit margin you cannot re-equip, you cannot survive. Our objective is not growth for growth`s sake, but simply to run a profitable operation, and that means controlling the growth that we undertake and not overcommitting to excessive debt or other commitments which burden the carrier, such as has happened with Braniff.

LEHRER: Okay. Thank you. Charlayne?

HUNTER-GAULT: Not all of the major carriers are in trouble. One of the exceptions is Trans World Airlines. In the third quarter of this year. TWA`s pre-tax profits jumped 82 percent, to $55 million. TWA`s president and chief executive officer is C.E. Meyer. Mr. Meyer, why is TWA in so much better shape than most of the other major carriers?

C.E. MEYER: Well. Charlayne, I think the major reason is that over a year ago, in August of 1979, we recognized that we were going to enter a recessionary period, and we adjusted our flying level in accordance with what we saw that was going to happen.

HUNTER-GAULT: What do you mean by that?

Mr. MEYER: Well, we reduced the flying we were doing, and the capacity we were putting into the air. This entailed, also, having to reduce the employment levels in the company, which is a very difficult decision to make. But, having done that, we had our capacity much more in line with the demand that was out there in the marketplace, and that has helped us greatly. I might also add that in 1977 we recognized the inevitability of the deregulation and we began to restructure our route system so that we emphasized, if you will, the strengths of that route system rather than its weaknesses. And that came together for us, I think, in the last two years as well.

HUNTER-GAULT: Have there been any other effects or benefits to TWA as a result of deregulation?

Mr. MEYER: I think the latter one that I just mentioned is the most important. Deregulation has allowed us to rationalize our route system, that is, to add route segments where it made sense for us to add them, and to delete them where it did not make sense, building, if you will, stronger structures around hub systems, which is a concept that most carriers employ in emphasizing, as Mr. Colodny mentioned, profitability rather than market share.

HUNTER-GAULT: And hub systems are centers of--

Mr. MEYER: Centers where you control or at least dominate the traffic in and out of a city, such as St. Louis, where we have a large hub system. Or. really, at John F. Kennedy Airport here in New York, where we have a number of flight frequencies coming in from domestic U.S. cities to depart in the evening for Europe.

HUNTER-GAULT: And before the deregulation act you couldn`t do that without going through a lot of red tape, or you couldn`t do it at all?

Mr. MEYER: That`s correct. For about the first-- or the last 20 years, TWA was granted. I don`t believe, any new routes by the Civil Aeronautics Board. Once deregulation came and we had the ability to fly where we wanted to. we added some 15 cities to our system.

HUNTER-GAULT: Well, why hasn`t deregulation had the same effect on the other major carriers, like, say, Braniff?

Mr. MEYER: Well, I think in Braniff`s case it`s a well-known fact at this point that they were a little too aggressive in pursuing route expansion plans, while at the same time we were faced with the economic problems of a 100-percent increase in the price of turbine fuel, and recession.

HUNTER-GAULT: Is Braniff an exception, or would you say that`s generally true of most of the big carriers that are in trouble now?

Mr. MEYER: No. I think perhaps the industry -- which will show a loss this year--could have probably been profitable had most carriers reduced capacity so that it was more in accordance with the demand that has existed throughout 1980.

HUNTER-GAULT: How much do-- are those big carriers now threatened by the new. little guys on the block -- or the air, as it were?

Mr. MEYER: Well. I think you`ve reported the New York Air coming into the New York-Washington market, and there are other smaller carriers, such as Don`s new carrier, that will be coming into many smaller markets. We. TWA. mostly fly into most of the large cities in the United States, and our route structure is more-- longer-haul route structure. So that we do not have many instances of head-to-head competition at the present time with the smaller carriers.

HUNTER-GAULT: And your fare structure won`t be affected by their reduced rates?

Mr. MEYER: Well, our fare structure has been affected, certainly, by a great deal of competition in the transcontinental markets, and that has affected our profitability. Fares there have really been too low to cover costs through the summer months. I might say that fares are still a bargain, and they have been one of the greatest bargains around for many years. In I960, a New York-Los Angeles round trip cost $214. Just a couple of weeks ago it was costing $268. a 25 percent increase. While. I believe, during that period of time, a New York subway ride went up 300 percent, and your daily New York Times 400 percent.

HUNTER-GAULT: All right. Thank you. Jim?

LEHRER: Finally, the real bad news; a look at those large airlines which haven`t been as fortunate as TWA. It comes from Michael Armellino, vice president for investment research at the Wall Street firm of Goldman Sachs. Mr. Armellino specializes in airlines and transportation investments. First, in general terms, how bad off are the big airlines. Mr. Armellino?

MICHAEL ARMELLINO: Well, in general terms ten or eleven major airlines will lose about $200 million this year. Last year they made a profit of about $250 million, and the year before. 1978. which was an all-time high, they had a profit of just over a billion dollars.

LEHRER: Any particular air-- Braniff has been mentioned several times. Arc there any airlines besides Braniff that are really in serious trouble?

Mr. ARMELLINO: Well, if you mean by "serious trouble" losing a substantial amount of money, yes. If you mean by "serious trouble" a question of viability, I`d say, no. that isn`t the case.

LEHRER: But Braniff does have a viability problem?

Mr. ARMELLINO: Braniff. I`d say. is one of the more strapped airlines now. yes.

LEHRER: Yeah. And that, of course, has led to this recent talk of a possible merger between Eastern and Braniff, correct?

Mr. ARMELLINO: Well, Eastern and Braniff disclosed that they were discussing that possibility. That`s as far as it has gone as far as 1 know.

LEHRER: Yeah. And what has caused these-- you`ve heard what the other gentlemen have said about-- particularly Mr. Meyer of TWA. his analysis of what has caused these other big airlines to hurt. And Mr. Colodny also had something to say about it, too. Do you agree with that basic assessment, that they just didn`t plan correctly?

Mr. ARMELLINO: I think it`s a little more complex than that. There are several airlines, as I believe both Don and Ed mentioned, that are doing very well this year, US Air obviously being one of them. There are several others: Southwest Airlines in Texas; Frontier, which is centered in Denver; PSA did very well prior to their strike. And it seems to me that what we had here is a cost pass-through business for the whole history of the airline industry prior to deregulation. Once the industry was deregulated, we had a commodity business. As Ed said, you can go pretty much wherever you want now. Therefore, being a low-cost producer in that business provides an enormous advantage -- low-cost producer in the sense of having the right equipment in the right-- the right kinds of equipment for your market. There are major differences in work rules among airlines, so that if an airline has lower costs per seat, he can price his product differently than an airline that has a disadvantage in that respect. And, as I said before, it`s a function of airplanes, it`s a function of route system to some degree, it`s a function of work rules. And the airlines that have been successful, it seems to me. have had a major advantage in work rules and therefore in pricing. And I would add. by the way. that the airline that will make the most money this year, and more money than last year, is Delta Airlines, which is a trunk carrier, number one. and. number two. has expanded and not contracted.

LEHRER: Well, why? Why has Delta been successful and others, like Braniff. United, and some of the others-- American has also lost money-- why has Delta been successful?

Mr. ARMELLINO: Well, again, I go back to my-- the point I made earlier. Delta, in fact, after the deregulation legislation was enacted, was not quite as aggressive as some of the others. In 1980, when most trunk airlines, anyway, have been cutting back on their capacity and their frequencies. Delta has been expanding. Now, Delta went into this period, number one, with much stronger financial than most of the other carriers. Number two, their cost per seat for their type of route system gives them a pricing advantage, so that, for example, Delta hasn`t taken all the fare increases that are available to them, which puts a bit of a squeeze on the competition. And the reason they can do that so effectively is because their production costs are relatively low.

LEHRER: Yeah, but Mr. Armellino, the average person doesn`t understand. I mean Delta`s airplanes are the same sizes as Braniff`s and United`s and American`s. Why does it cost Delta less money to transport those from one place to the other than the other ones?

Mr. ARMELLINO: Well, there are a couple of reasons, and I`m oversimplifying a little bit. But, number one, they have a very modem fleet. For example, the 727-200 is a good bit more efficient on a given haul than a 707 or a DC-8. which some of the larger trunks have been operating. That`s a major cost advantage. Number two. Delta has less debt service than other airlines, a function of being very profitable over the years. Ed Colodny referred to the fact that profits are important in order for an airline to survive and turn over their fleet, and provide the most efficient equipment. That`s a factor. And, except for their pilots, Delia`s employees are non-union, and of course they pay their people competitive wages with other companies. In fact they`ve never had a furlough of full-time employees. But there`s a trade-off there. Their work rules are somewhat more flexible than some of the trunk carriers. So, again, it gets-- it all gets down to relative production costs.

LEHRER: Generally speaking, in a word, Mr. Armellino. do you expect the problems for the big airlines to continue for a while until all of this shakes down, or have we seen the worst right now?

Mr. ARMELLINO: Well, if you mean have we seen the worst, 1 think we`ve seen the worst of the earnings. I said I expected a $200 million loss this year but the third quarter, in fact, in the aggregate, was better than the third quarter of 1979. I expect the fourth quarter numbers -- and, again, this isn`t for everyone, but in the aggregate -- will be better than the fourth quarter of 1979. And I believe that will continue into 1981. But my feeling is that unless the major airlines begin to discipline their organizations a little bit tighter and bring their costs into line, that long term they`re in trouble.

LEHRER: All right. Thank you. Charlayne?

HUNTER-GAULT: Mr. Colodny, what does that say to you in terms of this whole confusing pattern of air fares? Is that going to end any time soon or are we in for a long period of price wars?

Mr. COLODNY: Well, I see no immediate change in the pricing strategies. Charlayne. I believe there`ll be continued pricing experiments, new fellows coming in trying new fares. And I believe that under the projected deregulation that we can look forward to a continuing instability in fares. That doesn`t mean that the public will continue to be confused. I think the public will ultimately be able to sort out the fare structure much easier than today.

HUNTER-GAULT: How ultimately will that be?

Mr. COLODNY: Well. I`d give it another two to three years.

HUNTER-GAULT: Do you agree with that, Mr. Meyer?

Mr. MEYER: I do essentially. I think that`s part of the price we pay for deregulation and allowing the free market to determine pricing. Before, you had much more uniform pricing throughout the entire industry. Now it`s on a market by market basis, and that`s going to continue, and that`ll be to the consumer`s benefit.

HUNTER-GAULT: Well, but you said a few moments ago that you felt that the fares were too low in the first place, but that they were still a bargain. Does all this mean that the super-savers and the big discount rates are going to be a thing of the past?

Mr. MEYER: Oh, not at all, not at all. The super-saver fares will still be available, but at a somewhat higher price. And I think, again, the free market will sort this out. Carriers can`t continue offering uneconomic fares forever. They have to increase them. But the public is not going to be confronted with just, if you will, an easy situation and a common denom- inator for determining the fares between all pairs of points. It`s going to be a little bit more difficult.

HUNTER-GAULT: And you don`t think these smaller carriers, like Mr. Burr`s company, are going to force the prices down? I mean, how can you--

Mr. MEYER: Oh, they`re going to be part of the free market competition. Don`s going to come in and offer a fare that`s competitive, or more competitive. And then it`ll be up to the rest of us to match that. We already, though. I might say. are offering fare bargains.

HUNTER-GAULT: So are you going to force him up or is he going to force you down? What`s your bet on that. Mr. Burr?

Mr. BURR: I don`t think that we`re going to force each other too much. Ed`s got a completely different operation than People Express will have. He operates around the world and in very, very large interstate markets. So I don`t think we`ll have a-- have any huge impact on your marketing department. However, we`re very much committed to low prices. low fares. And we will have an impact. I think, very much, on the automobile market, the bus market and what we call the "sofa market".

HUNTER-GAULT: The "sofa market ?

Mr. BURR: "Sofa market." yeah. People who get off their sofa and make a trip into New York City to see a play or go to the ball game, that kind of thing. Our kinds of prices arc JFK to Manhattan type prices. And people have an option of getting up out of a Raleigh-Durham or a Buffalo or a Columbus -- the initial cities that we`ve talked about flying to -- and taking a trip into the city for the weekend.

HUNTER-GAULT: And you`ll be able to keep your fares low even as fuel costs continue to go up?

Mr. BURR: Well, as fuel-- if fuel prices go up, our prices will go up to-- we have to pay for the fuel. But fuel is only one element in the cost equation. And there are lots of other things we can do to help keep those prices down.

HUNTER-GAULT: Mr. Armellino. starting with you. just, in general, how much would you expect an airline passenger to be paying a year from now. compared to what they`re paying now?

Mr. ARMELLINO: Well. I would expect the average, which is probably not very representative-- I would expect the average to be up. from right now. maybe 15 percent. But I think, as Don said, it`s largely a function of fuel prices from here. If the situation in the near east were to cause another major increase in fuel prices, that might not be the case. But I`d go one step further and say that in the east, where prices have gone up faster than the average, I would expect the increase to be smaller than that because of people like Mr. Burr and some of the other carriers coming in.

HUNTER-GAULT: Do you agree with that. Mr. Meyer?

Mr. MEYER: I would expect the fares might be up somewhat greater than that.

HUNTER-GAULT: Mr. Burr, quickly, do you agree, generally?

Mr. BURR: Sure. Yeah

HUNTER-GAULT: Mr. Colodny?

Mr. COLODNY: I think 15 percent is a good estimate, but nobody can tell. I`d just like to comment on one point, however.

HUNTER-GAULT: Ten seconds.

Mr. COLODNY: Labor costs arc a major portion of the cost of an airline ticket. And productivity and labor costs have got to be looked at also as part of this equation.

HUNTER-GAULT: All right We have to leave it there. Jim?

LEHRER: Yes. Thank you. Gentlemen in New York, thank you. And good night. Charlayne.

HUNTER-GAULT: Good night. Jim.

LEHRER: Mr. Colodny. here, thank you very much. We`ll see you tomorrow night. I`m Jim Lehrer. Good night.