The Perils of Competition

By Kenneth M. Pierce

It was still near the peak of the summer travel season, but an eerie silence reigned last week in Concourse D at Denver's Stapleton International Airport. Nearby, the entire 42-aircraft passenger fleet of Frontier Airlines sat grounded. In the terminal building, there were occasional scenes of chaos as anxious Frontier passengers, left stranded by a sudden shutdown, scrambled to find other airlines that would accept their tickets. As the paralysis wore on, groups of Frontier's 4,700 employees huddled in airport corridors and union halls to glean the slightest rumor of their fate.

Money-losing People Express, Frontier's troubled, no-frills parent, had pulled the plug on its cash-short subsidiary six weeks after announcing that Frontier was to be sold to powerful United Airlines, the largest U.S. commercial carrier, for $146 million. People executives continued to pursue negotiations with United, which had been pledged some of Frontier's most important assets in return for a $46.7 million advance payment. But the remainder of their original deal was in tatters. At last, on Thursday, Frontier formally filed a Chapter 11 bankruptcy petition. Said People Express in a statement: "Unless some other entity is willing to acquire Frontier's business, Frontier has no plans to resume service."

The Denver crisis illustrated some of the snarls that have entangled parts of the airline industry -- and especially People Express -- in the stiff competitive environment that People did so much to create. The revolutionary . discount airline could no longer afford to operate Frontier, which it had bought only last November, since the Denver-based subsidiary was dropping an estimated $10 million monthly. Even after the shutdown, People was losing about $1 million a day as a result of its ownership of Frontier, and in the view of many analysts, is being kept alive largely on the $46.7 million from United. Chicago-based United had conditioned the Frontier purchase in part on reaching an agreement with its 6,435-member chapter of the Air Line Pilots Association. Unless those pilots consented to let their Frontier counterparts join the United fleet at substantially lower wage levels, at least for a time, the People Express deal would be off. Despite much negotiation, the United pilots, who made substantial wage concessions only last year, continued to balk. United, which had already claimed some of Frontier's valuable gates and hangars at Stapleton in exchange for its down payment, decided to get tough. It announced that it would not buy the balance of Frontier because the grounded airline had been damaged beyond repair. Said United on Wednesday: "The airline we attempted to purchase does not exist anymore."

But heated maneuvering continued. People Express Chairman Donald Burr later said the parent company had canvassed "every other available alternative," including the possible sale of Frontier to other parties. Eventually, rumors began to grow that Newark-based People, which only five years ago threw the entire passenger-airline industry into a tailspin, might itself be quietly on the backroom auction block.

The red ink that People is continuing to spill comes atop losses of more than $165 million in the three financial quarters ending in June. The projected deficit for People during all of 1986 could exceed $200 million. Said Industry Analyst Louis Marckesano, of the Philadelphia-based securities firm Janney Montgomery Scott: "The heat was on People Express to make a deal. United was under no pressure to complete the buy."

As if the Frontier-People-United ordeal were not test enough for the air- travel industry, yet another important airline merger hit turbulence last week. In a surprise move, the Department of Transportation turned down, at least temporarily, the $676 million purchase of Eastern Airlines by Houston- based Texas Air, a deal that would have leapfrogged the newly merged unit past United as the country's biggest carrier. The hang-up came as a shock because - Justice Department trustbusters had advised Transportation last May that they favored the merger.

The rub, as the Transportation Department saw it, was the level of continued airline competition on the lucrative New York-Boston and New York-Washington routes. Eastern has long dominated those airlanes with profitable hourly shuttle flights, but one of the Miami-based airline's chief competitors has been New York Air, a Texas Air subsidiary. In May, Texas Air agreed to sell a block of takeoff and landing rights along the shuttle routes to Pan American World Airways, in order to create a service that would continue to compete after Texas and Eastern had merged. But Pan Am complained that it still needed more "slots," as the lucrative rights are known. Transportation officials agreed. After learning of the turndown, Texas Air maintained that it was "totally committed" to the Eastern merger. At week's end executives of both airlines were conferring to ponder ways to meet the Transportation Department's objections.

With reporting by Thomas McCarroll/New York, with other bureaus