Air Transport World

Battle of the pocketbook. (rasing fares may cause customers to find alternatives) (finance)

The U.S. airline industry complains that, except for very good years, such as 1988, its profit margins are far lower than the 4-5% experienced by the rest of industry. Higher fares, carriers say, are the cure.

Some people, though, question whether higher fares are the answer. Unless the industry takes a more mature approach to controllable costs and revenue diversion, the higher fares could push travelers to alternatives and kill growth projections. Both business and leisure passengers demonstrated early this year that they can do without travel-unless the price is right. For the price to be right and profits to follow, costs have to be right.

The airlines were quick to go public about uncontrollable problems such as the temporary jump in fuel prices and fewer passengers caused by Gulf War fears. They have even taken the extraordinary step of asking the government to "lend" them approximately $4 billion in ticket-tax money to tide them over those two problems. Some European airlines already have won at least a temporary respite from government expenses.

It is difficult, however, to find airlines as forthcoming about factors that they can control. But as any psychologist knows, it's hard to treat a problem that the patient won't acknowledge. 40% on lower tiers

When American Airlines initiated 2-tier union contracts in 1983 to compete with lower-cost airlines, many thought that the old-line carriers were on the way to solving their biggest cost problem. All the other high-cost airlines had to do was say to their unions, "Gee, we don't like this but that devil [AMR Chairman Robert] Crandall made us do it." County NatWest estimates that 40% of airline employees are paid at lower-tier rates.

But some carriers did a better job than others. According to Airline Economics, Inc., unit labor costs at five major carriers, American, Pan Am, Texas Air-including Continental and Eastern-Trans World and United, did decrease between 1985 and third-quarter 1990. …

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