ROBERT CRANDALL: This Industry Is Always in the Grip of Its Dumbest Competitors

American Airlines chairman Robert Crandall on waging the fare war

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Q. American's new fares have ignited a vicious price-cutting war. Only six months ago, you insisted that airfares had to rise if the airlines were going to survive. Why have you reversed course?

A. Six months ago, I believed that prices had to rise because we simply could not make enough money to cover our costs. But I had not realized how slowly business travel had been growing in relation to overall air travel. Business travel had gotten too expensive, especially for small companies. During the past seven or eight years, a nonsensical fare structure had developed where we were all carrying a lot of passengers who paid far too little to cover the , cost of their trips. We kept losing money, and we were driving away our best customers.

Q. The old full fares may have been a lot higher than your new ones, but face it, they were irrelevant. Nobody paid them. Almost everyone flew at a discount.

A. Yes. Those who traveled did that, but remember, many people stayed home. Most businesspeople have to fly on short notice, and so they pay the full, unrestricted fares. And when business travelers couldn't afford it and could not take advantage of those cheaper, restricted fares, they simply didn't go. That's not good for business, and it's not good for American.

Q. How can you raise revenues by lowering your fares?

A. We studied this thing closely and realized that we could fix the problem by rearranging fares. We've simplified things. We will make the same amount of money on average per passenger, but we think we will attract more passengers.

Q. The stakes are high. The airline industry has been losing a great deal of money. Several airlines are in bankruptcy, and now you are lowering fares in hope of closing the gap by building more traffic.

A. But I think we have been proved right: our phone volume is much higher since we announced the new system. Our customers like it. We put a lot of thought into this fare structure. And it is permanent.

Q. But TWA and other carriers immediately undercut your prices, and now a bloody fare war is under way. How can you maintain your new fare structure in the midst of a price war?

A. Because I will make it work. But if other carriers insist on lowering their prices, we will follow them. We will maintain our simple, four-fare system ((first class, coach, seven-day and 14-day advance purchase)), but we will lower the ceiling if we have to.

Q. How low will fares go before prices stabilize?

A. I simply don't know. This industry is always in the grip of its dumbest competitors. I was surprised when TWA cut fares. I don't understand TWA's strategy. It doesn't make any sense, and therefore I don't know what they will do to further lower fares. All I know is that we have no choice but to match whatever low fare anybody puts out there. And so it will get as bad as they want it to get.

Q. Carl Icahn of TWA says you are trying to drive him out of business.

A. That's not true. How can I drive him out of business? He's already bankrupt! If anyone is trying to drive TWA out of business, it is Carl Icahn. Look, we will take a bigger hit on our revenues from the new fares than the weaker carriers will. American, United and Delta carry more full-fare passengers than TWA does, and it is the full fares that we cut by 38%.

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