Small Birds in a Big Sky

By Alexander L. Taylor III

Upstart airlines, no-frills or all-frills, fill the gaps left by the majors

Dallas' Muse Air promotes itself as the only nonsmoking airline and turns away passengers who want to light up. At no-frills Sunworld International, based in Las Vegas, pilots make sales calls, work in the back office and can sometimes be seen carrying out the garbage after a flight. On all-frills Regent Air, passengers are stuffed with French wines, Beluga caviar and Maine lobster.

New carriers like these are changing the face of U.S. air travel. A few years ago, most airlines offered identical fares and service; once passengers were inside a plane, they could be forgiven for forgetting which line they were flying. Today's travelers have a bewildering abundance of choices about when and where to fly, what service is available en route and how much to pay.

Clearing the runway for these airlines was the industry deregulation in the late '70s. By giving all carriers more freedom in setting their routes and rates, deregulation made it possible and profitable for upstart outfits to search for gaps in the service provided by major trunk lines. Since 1978, at least 16 jet-flying passenger airlines have been launched, in contrast with none in the previous 20 years.

Deregulation has also made it possible for small carriers to use larger planes on longer routes, allowing them to expand and grow more profitable. Says Lehman Brothers Analyst Robert Joedicke: "An airline involves mobile assets, and if you're not making money moving people from A to B, then you can try it from A to C. This is what the small airlines have done rather effectively."

These children of deregulation are making life difficult for their larger competitors. The nine major airlines, those with annual revenues of more than $1 billion,* have seen their domestic market share slip from 95% to 87% during the past four years. Continental, TWA and Eastern are staggering under heavy losses and have launched risky strategies to trim costs. Braniff, which was pushed into Chapter 11 bankruptcy in May 1982, will probably not begin flying again under its new owner, Hyatt Corp., until March 1.

The upstart airlines are succeeding by finding markets either overlooked or ignored by the big trunk carriers. One such newcomer is Hawaiian Pacific, a new Los Angeles-based airline that has begun advertising nonstop service to Honolulu. Founded by a former TV game-show producer, Hawaiian Pacific plans to serve 15 mainland cities as far east as New York City, where nonstop flights to Hawaii have mostly been unavailable. Still awaiting the resolution of questions about its financing and Civil Aeronautics Board certification, the new airline hopes to begin service on Feb. 15 with five leased 747s. After only two weeks of promotion, the airline claims it has already booked $12.8 million worth of tickets.

Perhaps the biggest weapon in the arsenal of the upstarts is price. Hawaiian Pacific will charge only $338 for a round-trip ticket between Honolulu and Denver, vs. the usual fare of $700. The leader in bargain-basement flying is three-year-old People Express. It jolted the industry last summer by offering flights from Newark to London for only $149, vs. $275 for most regular coach fares.

On People Express, the price of the ticket covers little more than the actual seat the passenger occupies. It costs $3 to check a bag and 50-c- for a soft drink or coffee served on board. The `a la carte formula has proved profitable. Third-quarter revenues more than doubled from a year ago, to $81.8 million; profits have rose 64.7%. Explains Harvard Professor John Meyer, an author of the forthcoming industry study Airline Deregulation: The New Entrepreneurs: "Pleasure travelers and even lower-echelon business travelers are sensitive to price and will buy from those who offer lower fares."

Such aggressive pricing has forced the bigger lines into following suit, even though their profits have suffered. During the second three months of this year, 86% of all passengers flew on discount fares. Five years ago, just 24% did. Discount fares are now available on 88% of all U.S. flights, in contrast with only 59% in 1978.

The new airlines can charge less because they are holding down costs. Few are unionized, and wage scales are well below industry standards. Flight attendants make as little as $10,800 a year; starting pay at major carriers is about $13,500. Most pilots earn a maximum of $32,500; a senior captain for a big carrier earns more than $100,000.

Despite the paltry pay, it is not unusual to see flight attendants for small lines working as reservation and ticket clerks, baggage loaders and plane cleaners. Pilots often double up in dispatching or sales. They all hope to cash in later on. Nevada-based Sunworld pays most of its workers only $10,800 a year in salary, but gives them 100 shares of stock and promises to pay out 20% of the line's gross operating profit when it makes any. Says Marketing Vice President Raymond Haley: "We're all betting on the future."

Barely four months old, America West Airlines in Tempe, Ariz., is prototypical. All the employees are nonunion. Since most have to handle several jobs, they are put through an intensive eight-week training program and must be able to type 30 words a minute as well as lift 70 Ibs. Baggage handlers sometimes find themselves working alongside Chairman and Founder Edward Beauvais.

America West is equally innovative in its operations. To attract business travelers, it added extra-large 5-ft.-long overhead baggage compartments to eliminate luggage closets, and installed expensive seats that are hinged in a way that provides an additional two inches of knee room. On board, passengers are pampered with Danish pastries during breakfast flights, croissants for snacks and unlimited free drinks in flight. Tight scheduling also allows America West to keep its planes flying ten hours a day, vs. an industry average of eight hours. That helps keep costs down to less than 5-c- a seat-mile, vs. 9-c- or more for big carriers.

So far the strategy seems to be working. America West is running 36 daily flights out of Phoenix and is on the verge of turning a profit. This month it has added 36 more flights and increased its fleet of Boeing 737s from six to ten.

A few new carriers are making a special pitch for the luxury market. St. Louis-based Air One provides all passengers with first-class service at coach prices. To date it has been a losing proposition. Air One has lost $14.3 million this year. But its passenger count picked up this fall, and it confidently plans to triple its fleet of planes as well as expand service to as many as twelve cities, possibly including Houston and New Orleans.

Flying on Los Angeles-based Regent Air is like staying in the high-roller suite at a Las Vegas hotel. The airline, which made its inaugural New York-Los Angeles flight in October, was founded by three former Caesars Palace executives. Regent Air chauffeurs passengers to and from the airport in limousines, furnishes in-flight secretaries and hair stylists, and even provides private lounges and staterooms. Just before takeoff, the cabin attendant purrs, "The sky is no longer the limit." The price for all that opulence: $1,620 to $4,320 for a one-way cross-country ticket (ordinary first-class fare: $650). Regent claims rising sales for its flights and insists that its fares really are a bargain compared with the $2,000-an-hour cost of flying by executive jet.

With the upstarts grabbing more and more business, major carriers are adopting new strategies. The parent company of Denver-based Frontier Airlines has created a nonunion subsidiary called Frontier Horizon, which is expected to chop per-passenger operating costs down to about two-thirds those of its corporate brother when it begins operating Jan. 9. Though Frontier officials claim that they are not antiunion, the airline's offices in three cities have been picketed.

If labor costs are trimmed, Harvard's Meyer expects the big carriers to compete more forcefully. Says he: "They have both economies of scale and experience in running reservations services, dealing with travel agents and operating terminals and marketing operations."

Despite their energy and eagerness, tiny carriers can face tough battles if they go head to head with established competitors. After a line named Mid Pacific began making inroads in the Hawaii market, Hawaiian Airlines started pointing out in its advertising that the average age of Mid Pacific's planes is 17 years. So far it is too soon to tell whether the advertising will cut into Mid Pacific's business; in nearly three years of operation, the airline has a near perfect safety record.

What the new carriers lack in experience, they often make up in hustle. The key to success for the lilliputian lines seems to be to stay small and keep their special character. Says Muse Air Chairman M. Lamar Muse: "We have to be different. When we banned smoking, it wasn't a moral crusade or anything, it was our perception of the marketplace." Muse is doing well. It turned its first profit, $780,000, in the third quarter of this year. Says Vice President John Puskarich of Sunworld: "We've all learned from BranifFs mistakes. Around here we follow the KISS method: 'Keep it simple, stupid.' " So far the formula is paying off. --By Alexander L. Taylor III. Reported by Richard Woodbury/Los Angeles and Adam Zagorin/New York

* United, American, Delta, Eastern, TWA, Republic, USAir, Northwest and Continental.

With reporting by Richard Woodbury/Los Angeles, Adam Zagorin/New York This file is automatically generated by a robot program, so viewer discretion is required.