Mayday in the Market

In the earlier years of the jet age, swiftly growing travel and the sheer efficiency of the new planes sent airline stocks soaring -- in some cases more than 1,000%. "Many a house was built on the profits that people made from 1961 through 1966 in their airline investments," says Bache & Co. Analyst Henry Siegel. Now the airline stocks are no longer the high and the mighty. They are among the leaders in the market's decline, down as a group by 37% since the beginning of the year. The drop is accelerating: the index of air stocks fell by a startling 11% in five trading days two weeks ago and again by 6% last week. TWA, Pan American and Western Airlines skipped their second-quarter dividends because of sharply reduced earnings.

Costly Steaks. The industry makes no attempt to gloss over the serious de terioration of its finances. To get at least temporary relief, it is negotiating in Washington for the second fare in crease this year. Air travel has traditionally reflected the ups and downs of the U.S. economy, since, as one air line executive puts it, "vacation dollars are expendable dollars." Inflation and the incipient economic slowdown have cut into travel for both business and pleasure. In the first six months of 1969, passenger travel rose 11% from the 1968 level, 4% less than anticipated. During June, six of the eleven trunk carriers reported significantly lower increases.

To break even, generally 50% of the seats on jets have to be filled. The load factor, which averaged 53.7% in the first half of 1968, was down to 50.3% this year. Industry analysts say that every 1% drop in the load factor costs American Airlines, for example, at least $10 million in annual earnings.

Much of the trouble is the result of fierce competition among the carriers.

They keep adding bigger and costlier planes to their fleets and try to attract more business with lures like family-fare reductions. Northeast Airlines had a first-half loss of $1,289,000. At least some of that can be attributed to the galloping price of beef -- and Northeast's high cost of living up to its billing as "the all-steak airline."*

New Routes. The competition is heightened by the Civil Aeronautics Board, which generously grants new routes to satisfy every line so far as possible. After ten years of investigations, reviews, reversals and reappraisals, the CAB last week brought the hotly contentious Hawaii-route case to a characteristically unsatisfactory close. Where only Pan American, Northwest and United Airlines have competed in the past, eight carriers will now vie for a share of the market. As a result, profits on the Hawaii run are likely to be marginal at best. In anticipation of the award, Western Airlines alone added 35 planes to its fleet, and it blames the delay in the CAB ruling for 31% of the line's $5,100,000 loss during the first five months of 1969. The long-disputed South Pacific route award finally went to American Airlines, which will fly to Australia, the Fiji Islands and New Zealand. In addition, the CAB last week granted new or extended routes to twelve domestic airlines in the vast "Southern Tier" stretching from Florida to California.

The airlines have some huge bills coming due. They are beginning to pay for the $10.3 billion in new equipment that they have ordered, including the 374-passenger Boeing 747 jets that will go into service before year's end. In the tight money market, they have to pay about 9% interest on borrowed money. To avoid sinking deeper and deeper into debt, they must get a return of at least 10.5% on their capital investment. Last year their return was only 5.3%.

The jumbo jets may cut operating expenses about 25%. But before the money-saving giants start taking off, airmen expect damaging labor strikes. The first strikes will probably hit in early August and could force some cancellations of vacation flights. As much as 45% of an airline's operational expenses consists of labor costs. Every additional wage increase would cut closer to the quick. In the longer run, some mergers seem almost inevitable to reduce the problems of climbing costs and too much competition for too little traffic. If the U.S. can get by with only four auto manufacturers, it should be able to make do with fewer than eleven trunk carriers and scores of regional and nonscheduled lines.

* The company calculates that the average freshly broiled steak dinner served aloft costs $2.65.

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