US Airlines: Fewer but Stronger

THE United States' airline industry is heading into a consolidation phase from which it will emerge with fewer but mightier players. Strong airlines will become even more dominant. Other carriers once synonymous with flying, such as Pan American World Airways, Trans World Airlines, and Eastern Airlines - will become shadows of their former selves or disappear completely, airline analysts say.

``It seems like the stronger players will have a chance to get relatively stronger,'' says David Pizzimenti, airline analyst for Nomura Research America.

The US economic slump will accelerate this change. A recession or recession-like conditions will squeeze airline profits because fewer people will fly. Rising jet-fuel prices, meanwhile, are boosting costs.

Every 1-cent rise in the price of a gallon of jet fuel costs the US industry $150 million, according to the Air Transport Association, an industry trade group. Carriers now pay about $1 a gallon - up 40 cents from the average price in 1989. That means the airline industry will pay an extra $6 billion in fuel costs alone if current prices hold for the next several months.

The combination of lower revenues and higher costs could cause record losses this year. Paul Karos, airline analyst for First Boston Corporation, expects US airlines will post combined losses of $1.4 billion this year, with only three companies - Alaska Air, Southwest Airlines, and United Airlines - posting a profit. Last month, Moody's Investors Service lowered its ratings of American Airlines and Delta Air Lines. ``We have long said that to wind up the consolidation phase, all it would take would be a recession or a fuel crisis,'' says Lee Howard, chief executive officer of Airline Economics Inc. ``Now we have both.''

In October, the number of US airline passengers posted its first decline of the year - a very slight 0.1 percent drop compared with October 1989. Any large declines in travel probably won't come until after the holiday season, says Tim Neale, spokesman for the Air Transport Association.

The industry has already undergone its first consolidation phase. After deregulation in 1979, new airlines took to the skies but couldn't stay aloft. By 1988, more than 200 carriers went bankrupt or were merged.

The second consolidation phase that now looms will see fewer bankruptcies and outright acquisitions, these airline analysts say. Instead, weak airlines will sell assets.

For example, financially ailing Pan Am raised desperately needed cash a few years ago by selling its profitable Pacific routes to United. Earlier this month it sold United its Atlantic routes as well for $400 million.

``I don't think we are going to see a lot of airlines disappear - with the exception of Eastern,'' Mr. Karos says. Of course, if the economic slump is more severe than he expects and lasts into 1991, then several weak carriers, including Pan American and TWA, would probably not survive, he adds. Eastern may not survive in any case.

On Nov. 14, the Miami-based carrier won a temporary reprieve from a US bankruptcy judge. Judge Burton Lifland agreed to release $15 million of the $50 million the troubled carrier said it needed to remain in business through January. Analysts suggest the judge won't allow the airline to fail until after the holidays.

Smaller, regional airlines are also feeling the heat. Last month, Midway Airlines pulled out of its Philadelphia hub, citing a cash crunch. As long as the federal government approves the sale of its Philadelphia operations to USAir, Midway should survive, several analysts say.

Small, regional airlines that have developed a market niche could continue operating for quite some time, Mr. Howard says. But by 1993 or so, they will face increasing pressure from four to six mega-carriers that will dominate the industry, these analysts predict. The three largest airlines - United, American, and Delta - are almost assured survivors. The next tier of airlines - USAir, Northwest, and Continental - could join the mega-carriers or be merged into a new entity that would compete on equal footing with the Big Three.