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Sun, Jul 11, 2004 - Page 12 News List

Trying to put airlines back in business

The days when pilots were paid the same salaries aas CEOs are long gone, and employees in the world's airlines indutries may be forced to do more for less

By Micheline Maynard  /  NY TIMES NEWS SERVICE , NEW YORK

In a year in which beleaguered carriers hoped they would bounce back into prosperity, as they have so many times before, they are instead confronting the likelihood that the market has changed more fundamentally than at any time since the industry was deregulated in 1978. As a result, even the biggest companies may have to remake themselves radically, quickly and permanently, or face extinction.

PHOTO: NY TIMES

Bob Dylan once warned that "as the present now will later be past, the order is rapidly fading." He meant the political establishment four decades ago, of course, but his words also apply to the airline industry today.

In a year when beleaguered carriers hoped they would bounce back into prosperity, as they have so many times before, they are instead facing a market that may have changed more fundamentally than at any time since the industry was deregulated in 1978. As a result, even the biggest companies may have to remake themselves radically, quickly and permanently, or face extinction.

The predominant business model since deregulation -- based on wide availability of service, supported by customers willing to pay a premium for convenience -- is being buried by low-fare airlines that pick and choose their destinations and continually pare costs and ticket prices.

"This industry is transforming itself in front of our very eyes," said Patricia Friend, president of the Association of Flight Attendants, which represents 100,000 workers at several airlines.

The changes being forced on the industry today are as far-reaching as those unleashed when former US president Jimmy Carter pushed through deregulation a generation ago, she said: "This is Round 2."

Some executives say that if airlines simply trim their costs enough, they can withstand the onslaught as they did in previous slumps. But others say that the industry cannot just shrink this time, and that it must reshape itself, abandoning assumptions about consumers and labor contracts alike.

BROKEN HUBS

For example, the hub-and-spoke system, which funnels passengers from smaller cities to major ones, was embraced by most big airlines after deregulation. It may be on the endangered-species list, though, at least as the primary means of moving people around the country. And airlines are likely to evolve from one-size-fits-all megacompanies into niche operators aimed at specific demographics -- international business travelers, for example, or Florida vacation bargain hunters.

All the business models now being tested, however, share one goal: lower costs. The days when pilots were paid like CEOs are gone for good, and all employees -- including the people who clean the planes and restock the beverage carts -- will be pressured to work harder and perhaps work for less.

"The economic situation of the industry is a reality," Friend said. "We can't change that. We have no choice but to try to adapt ourselves to a new business model while preserving as much as we can."

Frank Lorenzo, the creator of the Texas Air Group, said change was long overdue. Lorenzo famously incurred the wrath of the unions in the late 1980s and early 1990s for the drastic cuts he imposed at Continental Airlines, giving it the lowest costs among major airlines as it emerged from bankruptcy protection. But he argued that the economic boom of the 1990s eased pressure on the rest of the industry to follow suit, at least until the market soured in 2001.

"The problems didn't go away," Lorenzo said in an interview. "They only got delayed. Now it's all coming home to roost."

Whatever happens, the industry will look much different from what it did after two previous waves of restructuring, resulting from economic slumps in the 1980s and 1990s. Both times, the industry essentially bounced back to its previous form, although with some casualties, including People Express, Pan American World Airways and Eastern Airlines, which shut down while Lorenzo was running it.

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