=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/c/a/2002/12/10/BU33745.DTL ---------------------------------------------------------------------- Tuesday, December 10, 2002 (SF Chronicle) UNITED AIRLINES/After bankruptcy/That was then, this is now/To survive, air= lines take low-cost approach Carolyn Said, Chronicle Staff Writer If you're over 50, you may remember when boarding an airplane was such a special event that men wore ties and women heels. Today's travelers slouch on board in flip-flops and shorts. The airline industry itself has gone through even bigger changes. The pr= e- deregulation skies of a quarter-century ago now seems as quaint as that dress code. Before Congress enacted the Airline Deregulation Act of 1978, the airline industry was dominated by big, monolithic players: United, Eastern, Pan American, TWA, American, Delta, US Airways. It doesn't take a CPA to calculate how many of those airlines are still flying -- nor an MBA to assess the fiscal health of the remaining ones. Airlines are expected to lose $9 billion this year. The major airlines a= re coming in on a wing and a prayer. United is in bankruptcy, cold-shouldered by Uncle Sam in its bid to get loan guarantees for the cash infusion it desperately needs. American is freezing pay raises in an effort to cut $3 billion to $4 billion. Workers at US Airways -- which filed for Chapter 11 bankruptcy in August -- are coming under increasing pressure to agree to more cost savings. Eastern, Pan Am and TWA are long gone. So, did deregulation fail? Not quite. Deregulation has been a boon for consumers -- and forced airlines to inhabit a Darwinian world. The Sept. 11 terrorist attacks -- coming on the heels of a big decline in business travel and skyrocketing labor costs for many carriers -- hit the industry like a tidal wave. But airlines that can adapt to the changed realities will still survive. "If United is going to have to shape up to get through, then so be it. That's part of the natural forces," said John Heimlich, director of economic and market research at the Air Transport Association, a Washington, D.C., group that represents U.S. airlines. The main promise to consumers -- that increased competition would spur lower costs and more choice -- has indeed come to pass. Adjusting for inflation, fares are down 45 percent since deregulation was enacted, according to the ATA. Yes, the trade-off has been that flights are crowded and frequently late. Airline travel has become a cattle call -- but it's also become easily available to the masses instead of confined to the jet set. In 1971, fewer than half of American adults had flown; today more than 80 percent have. For the industry, deregulation has instilled some harsh lessons. "The Pan Ams, TWAs -- airlines that were the pride and joy of the aviati= on industry -- are no longer around -- not because deregulation was wrong, but because it was right," said Randy Peterson, editor of Inside Flyer magazine. "Deregulation gave airline managers the opportunity to meet their wildest expectations in expanding," said Bill Oliver, an aviation analyst with the Boyd Group in Evergreen, Colo. "It also gave them the opportunity to make some pretty dumb decisions." One of the first casualties was Braniff International Airways, which tri= ed to grab multiple markets, assuming deregulation wouldn't last, he said. "That was the original bankruptcy after dereg, in 1982." TWO WAYS TO GO Two types of airlines roam the skies post-deregulation. There are the traditional, "network" carriers like United, American and Delta that rely on a "hub-and-spoke" approach to cover a vast swath of territory. Then there's a newer type of beast: the low-fare carriers with a regional focus like Southwest and JetBlue that fly "point to point" between certain specific cities. "If people say they love JetBlue or Southwest, then they should be singi= ng the praises of deregulation,' said Heimlich, from ATA, the airline trade group. "They're there because of dereg. They didn't have to spend a fortune and battle the U.S. government to seek to fly on certain routes. It's a free- market entry." Although at a quick glance the major airlines look like flying dinosaurs compared with the more-nimble low-cost carriers, experts say the market needs both -- but the majors that survive will have to take on more characteristics of their smaller rivals. United tried to do that in California. But its United Shuttle proved unsuccessful, because it was unable to compete directly against Southwest as a short-haul, low-cost operation. Southwest and other discount airlines found a huge, underserved market of travelers who were willing to skip frills for cost savings. They figured out how to contain costs by sticking to secondary airports, setting up operations in a select number of cities, using just one type of aircraft and having more flexible work rules. "They are a success story because they managed to construct airlines who= se costs are in balance with their revenue," said Frank Werner, a finance professor who specializes in airline management at Fordham University in New York. But that doesn't mean the other type of carrier is headed for extinction -- although some majors may not survive. "The basic notion of hub and spoke" -- the central concept for major network carriers -- "makes sense," Werner said. "There's no way you could fly enough direct flights to enough small locations (under the point-to-point system). If you can bundle everyone who's going to Fargo, N.D., together into one or two planes a day, then you can fly those people. For serving the smaller, rural and medium-size areas, hub-and-spoke is vital and will continue. " But he and other experts said the majors will have to pare down their approach -- and that the flying public will notice the changes. LEANER TIMES AHEAD The biggest one is likely to be fewer flights and longer waits for connections. "When the airplane is out at the spoke city, rather than leave it sitting there for an hour or two until it can fly back to the hub and hit the peak connection time, they'll send it right back so it may only sit on the ground at the spoke city for one-half hour," said David Swierenga, chief economist for the ATA. "That means the passenger will have to leave the spoke city earlier and wait for a connecting flight in the hub city longer." The change will cut airlines' costs for labor and planes. "It's better utilization of the aircraft and crew," Swierenga said. "It could result in the carrier being able to continue to offer low fares." Some majors have already begun changing how they operate. "Hub-and-spoke is evolving," said Oliver. "Airlines got to a point where they almost broke the system, creating so much congestion at certain times of day they could not get out of their own way. American particularly has taken some decisive steps (to address this). "In Dallas/Fort Worth and Chicago, for example, they no longer have extreme peaks. If you're coming in from a smaller city, you have to wait a little longer" for a connection. MORE TRIMS Airlines will look at other ways to cut labor costs. "If you've been in = an airport recently, you've seen the kiosks now being used for check-in procedures," Swierenga said. "That takes the entire labor content out of that process; it's a big savings for carriers. Similarly, reservations and sales over the Internet rather than through customer service agents lower costs, he said. There are still more areas where the majors will have to adapt. "They can retire their most-expensive aircraft to lower capacity (in line with demand) and keep their most fuel-efficient aircraft," Werner said. "They can cut down on catering." United's bankruptcy is likely to scare unions that don't want other carriers to face the same fate. "United will use its bankruptcy to cut its labor costs probably in half," Werner said. "That will take away a lot of the bargaining power of pilots, mechanics and flight attendants with other airlines." Those airlines will ask for voluntary cuts with bankruptcy court as the alternative. In fact, said Peterson of Inside Flyer, "United's bankruptcy may be one = of the best things that could happen to the airline industry because it will cause other airlines to go back and have a chance to restructure labor in a way that is good for employees, the future of the company and the cost of travel for consumers." E-mail Carolyn Said at csaid@sfchronicle.com.=20 ---------------------------------------------------------------------- Copyright 2002 SF Chronicle