Kevin O'Toole/LONDON
Air South's recent bankruptcy has struck a chill note for US start-up airlines. Although the carrier may have been a relatively small player, its demise is dangerously close to home for a low-cost airline sector in which nobody is looking secure.
The financial performance of the once flourishing independents was dreadful in 1996. Returns over the first half of this year have, in most cases, been just as bad, as a glance across a selection of the leading players shows (see table). To add to the mix of carriers listed here, which is buoyed up by such long-standing independents as American Trans Air and Midwest Express, there are at least another half-dozen low-cost operators oozing yet more red ink.
There is no doubt that the sector as a whole is woefully short of cash. A wave of new investment money which poured into the industry over the past year has largely been swallowed by mounting losses.
Worse still, much of the damage is being laid at the door of a threat which will not be easily shifted - predatory pricing by the resurgent major US network carriers. The start-up industry warns darkly that if nothing is done to level the playing field - and legislation is in the offing - the US low-cost experiment ultimately may be crushed.
It was not always so. In the early 1990s, Southwest Airlines made it into the major league on a diet of low-cost, no-frills, service, producing profits to shame the network majors. Then came the seemingly unstoppable rise of ValuJet, doubling in size every few months and making profits virtually since the day it was launched - in stark contrast to the latest wave of start-ups such as Western Pacific or the reborn Pan American World Airways.
So how has the low-cost movement become so badly derailed? The most obvious place to look for a turning point was in Florida in May 1996, with ValuJet's high-profile crash.
The ensuing public outcry about safety aboard the new breed of fast-growing low-cost operators sent passenger traffic tumbling. It also propelled an embarrassed US Department of Transportation (DoT) and Federal Aviation Administration into a frenzy of air-safety checks and forced them to tighten the screws on aircraft-maintenance procedures.
ValuJet was forced to ground its fleet for more than 100 days, and the fall-out spread throughout the sector. Kiwi International Airlines, which was finally winning the fight back into profits, was an immediate casualty as a slice of its fleet was grounded. By the time that ValuJet was relaunching services in September 1996, Kiwi had filed for bankruptcy from which it re-emerged only in July. Load factors suffered universally. Carnival Air, for example, complained that it had failed to make a profit since the ValuJet crash, as it announced earlier plans to merge with Pan Am.
ValuJet itself, able to survive on the healthy cash reserves stored up during its glory years, announced that it would take over AirTran Airways, in a move designed to give renewed impetus to its comeback, and access to a new name.
While the lasting impact, if any, of the fall in public confidence is difficult to gauge, the effect of new levels of FAA scrutiny have been clear and sizeable. US airline consultant Morton Beyer believes that the FAA's action may have doubled maintenance costs. In 1996, that came on top of the dip in passenger traffic, a rise in fuel costs (now subsiding) and the re-introduction of the federal ticket tax.
The theme is taken up by the Air Carriers Association of America (ACAA), a new group set up to fight the corner of smaller airlines against the club of major network carriers in the Air Transport Association. ACAA executive director Ed Faberman says that, while the industry accepts the need for close safety scrutiny, the US Government is in danger of an "over-regulation", which is already stifling new start-ups.
He argues that the issue is not so much in the detail as in the uncertainties which are left hanging over carriers by a DoT/FAA decision-making process which is often painfully slow.
What most observers are agreed on, however, is that, while none of the events of the past year has helped the cause of the start-up airlines, the real damage is being done by the tightening grip of the major network carriers.
Latest figures suggest that the majors now have a bigger slice of the domestic market coming through their networks than at any time in their history. They also appear keen to keep it that way.
Their response to the likes of ValuJet four years ago was late and ineffective, coming at a time when the emphasis was on putting their own houses in order rather than seeing off troublesome, but relatively tiny, competitors.
This time around, the majors are in the middle of an unprecedented profits bonanza and keen to keep hold of the advantage - defending their networks against start-ups with well-targeted fares sales and capacity increases .
"The root cause of the impending collapse of many hopeful little start-up airlines is the ruthless and unrestrained predatory competitive practices of the major airlines," said Beyer in a recent paper. Only days later the Air South bankruptcy appeared to prove him right.
There have been several formal complaints so far, says Faberman, but neither the DoT nor the US Justice Department has yet shown much interest. The lack of action has come too late for some, he adds. Air South was one complainant, while Frontier, with its high-profile case against United Airlines, is throwing in its lot with Western Pacific.
Faberman also complains that new entrants have been kept out of lucrative, but slot-controlled, airports such as Chicago, New York and Washington.
The ACCA believes that only federal-government action will have a chance of levelling the playing field, and lobbying efforts appear to have caught the eye of the Senate transport committee. Proposals are in the process of being drafted, and stand some chance of becoming law in 1998 if they build a head of support in Congress. That may be too late for some of the start-ups, but the smaller carriers are hoping that the presence of pending legislation will curb the excesses of predatory competition.
In the meantime, the independent carriers have begun fighting a rearguard move to contain costs and pull back a little on capacity. Among the more established independents, AmTran, which entered the scheduled market with a burst of growth over the past few years, slashed capacity in the final quarter of 1996 to concentrate on its core charter business. Reno Air is also talking of "more moderate growth", while AirTran and Frontier have been trimming and re-aligning their route structures.
The gains barely show through in figures for the first six months of this year, but July and August results suggest that they are making inroads in raising load factors.
Consolidation is also in prospect through the mergers and acquisitions due for completion over the next year, but Beyer is sceptical that they will achieve much unless the competition issue is addressed. "It just means that the money is being poured down one black hole rather than two," he says, already having likened such alliances to "-a pair of drunks staggering down the street trying to hold each other up".
Even Faberman admits that prospects remain bleak without at least the promise of Government action. "I think that we have a window of opportunity, but I'm a realist and, if the Government doesn't take these steps in the next year or so, we will see the window close," he warns.
Source: Flight International
