Facing a Low Ceiling on Growth

Stewardess Kathy Lloyd is lucky: she was hired as Ethel Kennedy's social secretary at Hickory Hill, Va. Pilots Mel Vos and John Stout are doing all right; they have gone into the tree-planting business northwest of Chicago. Some of their fellow crew members at United Air Lines are becoming postmen, salesmen and teachers. Others are still looking, and growing more desperate. For 16,500 U.S. airline employees suddenly out of work (of a total force of 300,000), the new lean look of air travel has brought a wrenching change.

The adjustment is less devastating but nonetheless disagreeable for residents of communities--including Pittsburgh, Lafayette, Ind., and Billings, Mont.--that have lost much of their scheduled air service. It is also tough for businessmen who cannot get a seat on tightly booked New York-to-Chica-go or Los Angeles-to-Washington flights, and for weekend skiers unexpectedly stranded on Sunday evenings at Denver's Stapleton Airport.

For U.S. airlines, though, the cutbacks are a key to profits. The carriers over the years have become overstaffed, overequipped and overcompetitive. The industry's average load factor over the past three years has been 52%, meaning that nearly half the available seats were unsold. Last year three of the eleven trunk lines--American, Eastern and Pan American--lost money.

When the Government in October ordered the restrictive fuel allocations that began this month, airline executives set about slicing overhead like so many chefs trimming fat from a steak. They took 1,500 domestic flights from the daily schedule of 13,800. They grounded 275 planes, 16 of them jumbo 747s, from their fleet of 2,400. And they furloughed low-seniority workers from jobs that may never be restored.

Still, many airline executives remain pessimistic. Even the new efficiencies cannot make up for higher costs and lower business resulting from the fuel shortage. Early last year jet fuel was selling for 110 to 140 a gallon. Now the carriers pay 500 to 600 a gallon, and the price is heading for 650. Pan Am, faced with day-to-day refueling crises, is getting offers from mysterious hustlers who want to sell fuel at up to 810 a gallon. A 10 rise in the price of fuel costs the industry $100 million a year.

Meanwhile, traffic is expected to falter if a further economic slowdown leads to lower corporate profits, higher unemployment and reduced discretionary income. Airline Analyst John Laporte of Wall Street's Pershing & Co. foresees passengers deserting the lines because of the "inconvenience factor" of limited schedules. Laporte forecasts that, compared with 1973, traffic will show no gain this year and may even drop as much as 5%. Many other analysts echo the prediction of United President Edward Carlson, who expects "zero growth" for the industry this year. Average profits probably will run to a slim 4% on investment.

If 1974 is a bad year for the airlines, it will not be for lack of effort on their part. Though tight fuel allocations already have been eased, the trunk carriers maintain their original cuts in schedules, employees and planes. Eastern Executive Vice President Charles J. Simons has called for a 4% increase on tickets to cover rising general expenses, plus an added surcharge for increased fuel costs, and the Civil Aeronautics Board will probably grant these requests. The international lines began charging 4% to 6% more three weeks ago, and are looking for another 7% increase on March 1 and still another increase later in the year.

Fewer Amenities. Simons also says, "We ought to see whether we can't cut out some of the frills, so that all the relief from the fuel problem doesn't have to be an addition to fares. Some gain might be accomplished by doing away with things we compete on: free liquor in first class and meals no matter what time of day it is." Eastern Chairman Floyd Hall plans to ask the CAB for permission to meet with other airline heads to talk about reducing competitive amenities.

Already there has been some cooperation among airline executives in planning route reductions, and the carriers would like federal approval to work out broader agreements to limit competition. Hall says that without help, perhaps in the form of federal subsidies, some airlines face bankruptcy or nationalization. The CAB provides $67 million a year in subsidies to several regional lines, and it is authorized to subsidize any airline that operates hi the national interest and is in trouble. Likely candidates for such subsidies are Eastern, Pan American and TWA. In another attempt to meet rising costs, some lines may explore mergers and route consolidations this year.

No-Shows. The Government probably will also clamp down on no-shows. As schedules have tightened, passengers have hedged their reservations by making multiple bookings. At some airlines, no-show rates have doubled during peak periods. American has 18,000 no-shows a day, and United counts more than 22,000--10% to 15% of their capacities. The CAB'S remedy may be to require passengers to pay for tickets up to four weeks in advance and then charge penalties of $25 to $100 to passengers who miss their flights. United's Carlson opposes a tough no-show policy. "A customer really can be caught unavoidably by weather or lose a taxi," Carlson says. "Then he's facing a fine, and then come problems and antagonism." Delta and North Central managements share his view. The regulation, however, would not work only one way: for the airline that denies boarding to a passenger with a reservation, the fine would be $75 to $600.

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