"Lower airfares may be norm"

Thursday, May 23, 2002 

Lower airfares may be norm
By Hal Mattern
The Arizona Republic


The rock-bottom airfares of recent months are unlikely to go away
completely, forcing airlines to lower their operating costs if they
expect to survive in an industry altered by Sept. 11, the architect of
deregulation said Wednesday in Phoenix.

Michael Levine, a former federal aviation official and now a Harvard Law
School professor, told the Phoenix International Aviation Symposium that
airfares would have to return to their late-1990s levels before the
industry could return to business as usual. But he said business and
leisure travelers probably wouldn't go along.

"I happen to believe fares will not return to the status quo," said
Levine, a former airline executive who in 1978 devised the practices
used to deregulate the industry. 

To return to profitability, he said, the nation's major airlines will
have to lower their costs to a level that will allow them to offer fares
that customers are willing to pay.

"If they can, all of the (major) carriers will be viable," he said. "But
the adjustment will take a while, and I think we can all agree that it
won't be pretty."

The industry already is testing the waters of a new fare structure.
America West Airlines, for example, has slashed fares and relaxed
advance-purchase rules and Saturday-night stay requirements on tickets
bought at the last minute by business travelers. The move riled some
other airlines.

The need for structural change in the airline industry was a common
theme throughout the three-day symposium, which was sponsored by Phoenix
Sky Harbor International Airport. Airline executives and analysts agreed
that the current slump, aggravated by the Sept. 11 terrorist attacks,
isn't the same as past cyclical downturns, when the industry was able to
bounce back and grow without changing the way it operated.

This time, it faces major systemic problems, including high labor costs,
excess capacity and an outmoded business model, analysts said. Major
hub-and-spoke carriers also face stiff competition from a growing number
of low-cost, low-fare airlines.

Some analysts said that a spurt in business travel in the 1990s, fueled
in part by the dot.com boom, resulted in artificially high airfares.

James Higgins, an analyst with Credit Suisse First Boston, called it a
"business travel bubble" that burst when the economy began to slow in
2000.

"The airlines bid up business fares to a point that is unsustainable,"
Higgins said.

Airline executives said another major challenge facing the industry is
airport security, which is now being controlled by the federal
Transportation Security Administration. They said the "hassle factor" at
airports, combined with increased security fees tacked onto ticket
prices, have prompted more people to drive rather than fly on short
trips.

"I'd give the TSA very low marks on quality, cost and turnaround time,"
said Richard Anderson, CEO of Northwest Airlines. "(They) had better
find out how to move people more efficiently."

The airlines aren't the only ones suffering. Airplane makers also have
seen a major drop-off in business.


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