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Why The Commuter Airlines Are Flying High

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Although the effects of deregulation on the entire airline industry have been mixed, the new elimate of competition has brought brighter skies for many small commuter carriers besides PBA.

"Deregulation has been very much a positive thing for small eommuter airlines," says Patrick V. Murphy Jr., who is associate director of the Bureau of Domestic Aviation, part of the Civil Aeronautics Board. "It allows them to move into gaps left when larger earriers leave routes. The smaller ones have the flexibility to move in quickly. So, a big plus has been market opportunity."

Before the Airline Deregulation Aet of 1978, airlines needed permission from the Civil Aeronautics Board to adopt routes or change fares. Markets were tight, pricing was regulated, and the airlines were almost like utilities. Now, with the lifting of restrictions, commuter lines have flourished in a freer environment that allows them to muscle into new territory and set their own prices.

"It's been terrific," says Marden E. Leaver, a spokesman for United Air Lines Inc. "It's the first time in years that airlines are in a free-market environment, which is the name of the game in America."

The total number of commuter carriers in operation, about 260, still hasn't changed since deregulation. But, according to Tulinda Deegan of the Regional Airline Association, commuter lines carried about 20 million passengers in 1982, almost twice as many as in 1977. "The thing that has changed incredibly is the number of passengers served, " Deegan said. "The [commuter] lines in business are thriving."

A major factor for the burgeoning business in commuter carriers has been the revamping of federal subsidies to airlines. The long-running Section 406 subsidy, which was used to underwrite service to remote or unprofitable points, is gradually being phased out by deregulation, prompting larger trunk carriers to leave the routes up for grabs. Replacing Section 406 is a new program, Section 419, which provides funds for carriers to take over already established routes that have been abandoned. The shift in subsidies has benefited commuter earriers that are agile and aggressive.

It's very much free enterprise now," says Bruce Hicks, a spokesman for Continental Air Lines Inc. "The small commuter airlines reflect the true entrepreneurs in the airline industry."

However, if deregulation has given airline executives the freedom to succeed, it has also given them the freedom to fail. Suddenly thrust into a laissez-faire slugfest, managers now need marketing and pricing skills that were never before necessary. And, just as airlines were accommodating themselves to a looser marketplace, the air traffic controllers' strike hit in August 1981, damping an expansion that was just gathering steam. The cumulative effects of the strike, a worsening recession, and rising fuel prices made management mistakes very costly.

Two salient examples of poor management under deregulation are the hankruptcies of two regional commuter carriers on the West Coast, Golden Gate Airlines and Swift Aire. Both airlines were controlled by financier Justin Colin, who embarked on an ambitious project to expand routes and purchase equipment. Although he poured a reported $25 million of his own wealth into both companies, they crumbled in the fall of 1981 under the twin pressures of restricted travel because of the strike by the Professional Air Traffic Controllers Organization and a huge debt burden.

"Mr. Colin, in his zeal, didn't do things properly," admits James Lightsey, who was a top executive at both airlines at different times. "But, on the other side of the coin, you don't want to miss opportunity. Unfortunately, while he was expanding, and his cash flow was critical, Patco came along. He bad taken a risk, but the strike upset the apple cart."

Regulatory officials, however, are less charitable. Paul Cretch, deputy director of the Bureau of International Aviation at the CAB, bluntly states that "they were very, very poorly managed airlines. They had very bad reputations. It is a classic bad-management story."

Gretch argues that the two commuter carriers expanded too rapidly into new routes, without doing such preliminary work as advertising and preparing travel agents. He also says they juggled fares and schedules too frequently, in an attempt to undercut the competition, and purchased too many planes based on overly optimistic projections of flight volume. "They weren't necessarily victims of market forces . . . . The loud message here [at the CAB] was that they were mismanaged."

CAB chairman Dan McKinnon summarizes it, saying that "deregulation gave [airlines] the chance to make wise decisions or to make mistakes. Those that made mistakes fared poorly."

The demise of Air New England is another example of fatal mistakes made under the new ground rules of deregulation. The airline was a certificated airline that linked New England cities and New York, but it shut down on October 31, 1981, citing the Patco strike, adverse economic conditions, and the loss of federal subsidies because of deregulation. However, most airline analysts see the company's failure as another example of management unable to cope with the exigencies of competition.

John V. Coleman, director of the Bureau of Domestic Aviation, claims that Air New England's "biggest error" was its application for a certificate from the CAB to use larger planes. The airline was given the certificate in the middle '70s, in the midst of an oil crisis and slackening demand. In addition, certificated airlines are subject to more costly regulatory obligations, and higher maintenanee and fuel eosts.

"It was bad judgment that exhibited a lack of foresight," says Coleman. He adds that the change in subsidies had little to do with the company's difficulties, pointing out that it was given $6.1 million in grants in 1981, compared with $1.5 million in grants in 1975.

Charles Butler, former president of Air New England, contends otherwise. "That's hogwash," he says in response to government assertions that the shift in subsidies didn't appreciably hurt the airline. He points out that although the airline received subsidies right up to the very end, most of it was eaten up by inflation and the added costs of being certificated.

"Our operating efficiencies were as good as any other carrier," Butler says to charges that Air New England was mismanaged. However, he did say that "it's quite possible" that getting certificated was a mistake.

The fates of Golden Gate, Swift Aire, and Air New England demonstrate that deregulation favors commuter carriers that keep a lid on operating costs and debt, allowing them to offer lower rates and more flights in a market sector that depends on frequency. They also demonstrate that deregulation has created a Darwinian environment in which airline executives are highly accountable for their decisions. As Sally Scanlon, managing editor of Aviation Monthly, puts it, "Management isn't isolated from the mistakes it makes now."

Last updated: Feb 1, 1983




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