This article from NYTimes.com has been sent to you by psa188@juno.com. The Airline Industry Seeks Bigger Portions of Pie in the Sky December 22, 2002 By EDWARD WONG To do business in a capitalist system is to subscribe to the maxim of no pain, no gain. The profitability of companies can suffer in the short run as they undercut each other for a slice of the economic pie. But the ailing airline industry says: enough for now. It is asking itself whether the pie is now being divvied up among too many large network carriers for any real profits to be made, and whether the shutdown or buyout of some might not return their rivals to financial health. The most likely losers in a wave of consolidation would be United Airlines or US Airways, both now flying under bankruptcy protection and thus vulnerable to liquidation or eventual buyout. Virtually every airline executive admits that the industry's capacity is bloated now because of overexpansion in the 1990's, and that drastically shrinking capacity is vital to recovery. But is consolidation really what the industry needs? American industries that ride with the economic cycle often go through waves of consolidation during times of bust, sometimes whittling down to a handful of big competitors. That gives the survivors power to raise prices and reap greater profits. But consolidation has not always worked out in the long-term interests of those companies. "It can be a mixed blessing," said Ron Chernow, author of "Titan: The Life of John D. Rockefeller Sr.," which detailed the monolith that was Standard Oil. "In the short run, it can help stabilize an industry that has been chaotic. The problem is that over the course of time, by being insulated to the competitive forces that had originally driven the consolidation, the industry can become hidebound and non-innovative. And that can make it vulnerable to forms of competition coming from outside the industry or from outside the existing circle of dominant companies." The Big Three of the American automobile industry - General Motors, Ford and Chrysler (now DaimlerChrysler) - fell prey to such stagnation. The companies increased their market share through consolidations that began in the first half of the 20th century. By 1960, four companies controlled 90 percent of the domestic market; then Chrysler bought out American Motors in 1987, a move that should have made the three survivors stronger. But the insular oligopoly stayed rooted in old ways of manufacturing and marketing. In the last 25 years, the rise of more nimble foreign companies revealed what dinosaurs the Detroit companies were. Their market share has plummeted to 63 percent. In fact, you could argue that with roughly a half-dozen big network carriers, the airline industry was already too insular, and maybe consolidation would have left it in worse shape. The problem was that none of the network carriers was motivated to seek ways to operate more efficiently. It took the growing popularity of maverick Southwest Airlines, and the success of new low-cost carriers like JetBlue Airways and AirTran Airways, to inject fear into the doddering oligopoly. The last big merger in the industry, the buyout of TransWorld Airlines by American last year, made American into the world's largest carrier. That should have given the big carriers more pricing power and revenue share. But other factors - the terrorist attacks, the continuing recession - have driven ticket prices to an all-time low, and American is struggling to dump costly planes and workers acquired in the buyout. "Mergers in general are a pretty risky proposition," said Clifford Winston, an economist at the Brookings Institution and co-author of "The Evolution of the Airline Industry." "Anywhere from 30 to 70 percent of these things are considered not to be financially successful." The railroad industry has seen a few benefits from consolidation in the last two decades. In the early 1980's, it was suffering from some problems afflicting the airline industry - overcapacity, too much competition. A deregulated market soon pushed dozens of companies to consolidate into today's four major rail operations. As companies combined, overlapping routes were cut and greater efficiency was achieved. But the railroad industry is not exactly a paragon of financial robustness, and it would be difficult to hold it up as an example of consolidation's curative powers. There are also aviation experts who argue that consolidation is not necessary because the revenue pie is big enough to support a half-dozen large network carriers. What those airlines need to do, they say, is drastically cut their costs so they can offer lower fares to woo passengers. "If you add up those piles of revenue, in my judgment you get a pile of revenue that ought to be able to pay for the operation of those networks," said Michael E. Levine, a former airline executive who is a professor at Yale Law School. Some industry experts say the troubles at United and US Airways indicate that the airlines are poised for a second major round of consolidation resulting from deregulation in 1978. They note that deregulated industries often see huge short-term consolidation, and that this round could be part of that, since deregulation has no fixed schedule. But an engineer of airline deregulation, Alfred E. Kahn, a professor of political economy at Cornell University, disagrees. He said he never expected the industry to consolidate so widely, and still does not believe it will, because pure competition in an industry with high fixed costs would be too brutal for the players. "Those oligopolies would probably not fight to the death," he said. But how large an oligopoly can the airline industry sustain? Six companies? Three? Even now, a quarter-century after deregulation, the answer still hovers somewhere above the clouds. http://www.nytimes.com/2002/12/22/weekinreview/22WONG.html?ex=1041578413&ei=1&en=30041e8c349fe285 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company