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The fact is that past fare wars have been one of the chief causes of the recent Darwinian merger wave. Says Economist Alfred Kahn of Cornell University, who is widely viewed as the father of airline deregulation: "Instability is the price we pay for competition." Indeed, some 150 airlines have filed for bankruptcy or ceased operation since 1978, as the industry has lurched from occasional feast to occasional famine. The low point for deregulated airlines came in 1982, when the industry suffered an $800 million operating loss. The best unregulated year was 1984, when industry-wide profits hit $2.3 billion. But last year airline earnings dipped 39%, to $1.4 billion, meaning that on average, carriers had profit margins of only 2%. The first half of 1986 has once again been a bloodbath, with losses of $765 million. Says Kahn: "Some diminution of intense price cutting is probably necessary and healthy." Agrees Dan Smith, an executive with the Dallas-based International Airline Passengers Association: "Even consumers realize that airlines have to make a buck."
Many of the conditions that fostered the rise of the discount carriers no longer prevail. Right after deregulation, the major airlines were at a serious disadvantage: during the time they were protected by the Government from competition, they had become high-cost, unionized operations. In the previous 40 years, the old Civil Aeronautics Board had received 79 applications from companies that wanted to become long-distance, interstate airlines; not one was approved. When competition was opened up in 1978, the fleet of new carriers generally employed relatively cheap nonunion labor and used smaller crews on their aircraft than established airlines did. Some upstarts, like People Express, championed pared-to-the-bone competition, in which low ticket prices took the place of almost all amenities.
But the bigger airlines slowly fought back. United, American, Piedmont and others have set up two-tier hiring, with lower pay scales for new employees. On some planes, the three-person flight crews of yore have been reduced to two. Established airlines have been able to offer frequent-flyer programs and the convenience of powerful computerized reservation systems to woo back customers. The counterrevolution has to a large extent worked. Says George James, president of Washington's Airline Economics: "There is far less motivation for going into the industry now that the big companies can compete well."
Even so, consolidation does not make it inevitable that the benefits of deregulation will disappear. Says Harvard Economist John Meyer, an expert on airline deregulation: "This may not mean the end of low fares, just the end of $99 transcontinental fares." The Department of Transportation's Scocozza argues that "as long as there is head-to-head competition in the marketplace, we should not be concerned." For every airline merger, Scocozza adds, "I see a smaller carrier taking its place." Houston-based TranStar, for example, is now offering a $79 fare between Miami and Los Angeles. As far as overall customer choices are concerned, Al Becker, a spokesman for American Airlines, argues that today "most people can get to more places more frequently than at any time in the past."