ROBERT CRANDALL: This Industry Is Always in the Grip of Its Dumbest Competitors

Q. American’s new fares have ignited a vicious price-cutting war. Only six months ago, you insisted that airfares had to rise if the airlines were going to survive. Why have you reversed course?

A. Six months ago, I believed that prices had to rise because we simply could not make enough money to cover our costs. But I had not realized how slowly business travel had been growing in relation to overall air travel. Business travel had gotten too expensive, especially for small companies. During the past seven or eight years, a nonsensical fare structure had developed where we were all carrying a lot of passengers who paid far too little to cover the , cost of their trips. We kept losing money, and we were driving away our best customers.

Q. The old full fares may have been a lot higher than your new ones, but face it, they were irrelevant. Nobody paid them. Almost everyone flew at a discount.

A. Yes. Those who traveled did that, but remember, many people stayed home. Most businesspeople have to fly on short notice, and so they pay the full, unrestricted fares. And when business travelers couldn’t afford it and could not take advantage of those cheaper, restricted fares, they simply didn’t go. That’s not good for business, and it’s not good for American.

Q. How can you raise revenues by lowering your fares?

A. We studied this thing closely and realized that we could fix the problem by rearranging fares. We’ve simplified things. We will make the same amount of money on average per passenger, but we think we will attract more passengers.

Q. The stakes are high. The airline industry has been losing a great deal of money. Several airlines are in bankruptcy, and now you are lowering fares in hope of closing the gap by building more traffic.

A. But I think we have been proved right: our phone volume is much higher since we announced the new system. Our customers like it. We put a lot of thought into this fare structure. And it is permanent.

Q. But TWA and other carriers immediately undercut your prices, and now a bloody fare war is under way. How can you maintain your new fare structure in the midst of a price war?

A. Because I will make it work. But if other carriers insist on lowering their prices, we will follow them. We will maintain our simple, four-fare system ((first class, coach, seven-day and 14-day advance purchase)), but we will lower the ceiling if we have to.

Q. How low will fares go before prices stabilize?

A. I simply don’t know. This industry is always in the grip of its dumbest competitors. I was surprised when TWA cut fares. I don’t understand TWA’s strategy. It doesn’t make any sense, and therefore I don’t know what they will do to further lower fares. All I know is that we have no choice but to match whatever low fare anybody puts out there. And so it will get as bad as they want it to get.

Q. Carl Icahn of TWA says you are trying to drive him out of business.

A. That’s not true. How can I drive him out of business? He’s already bankrupt! If anyone is trying to drive TWA out of business, it is Carl Icahn. Look, we will take a bigger hit on our revenues from the new fares than the weaker carriers will. American, United and Delta carry more full-fare passengers than TWA does, and it is the full fares that we cut by 38%.

Q. Icahn insists that he can compete only by operating as a discount carrier.

A. He’s wrong. TWA’s financial results would have improved if he had simply matched our fares. People choose how to travel based on price and frequency. Now our business is the closest thing we have in this country to a perfect marketplace. The prices are always equal because there’s nowhere to hide. You make one telephone call to your travel agent, and all of our prices come up on the computer. Anybody who offers a higher price for the same thing loses your business, so we all keep matching the competition. And when the prices are the same, people pick an airline according to the quality of its service. It is foolish to call yourself a discounter and throw away good service. Because the way this business works, the guy who offers superior service at the same price always comes out ahead.

Q. But Icahn cannot compete with you on equal footing. He is in Chapter 11. He doesn’t have your level of service, your new planes or the money to buy them.

A. Whose fault is that? You can’t invest capital in things like new planes if you don’t earn money. It isn’t my responsibility to worry about the financial inadequacy of my competitors. I have to worry about American Airlines and what’s good for our customers. TWA is bankrupt as a consequence of their past actions. They chose to pull out of their Chicago hub, which was a bad decision. They chose to sell off routes. They chose not to invest in new planes. They chose to allow the quality of their service to deteriorate. I didn’t. TWA is dead last in quality of service among the major carriers. And it is those things that have created their current financial situation. American made different choices, and is stronger as a result.

Q. Are you saying there is only room for one kind of pricing — your pricing — in the airline business?

A. No. Take Southwest. Their fares are extremely low. They have been the most successful airline in the industry for the past 20 years. But they are offering an entirely different product. There is no reserved seating. They have no galleys on their airplanes. They cannot transfer your bags to another airline.

Q. What about other no-frills airlines?

< A. The term no-frills is wrong. I mean, what is a frill? The ability to buy a ticket to Berlin is not a frill. Getting food on a transcontinental flight is not a frill. Getting your bags transferred to your connecting flight is not a frill. Our customers want these things. And when we slip up on any of these things, we hear about it.

Q. Given the tough economics of this industry, how many major carriers can survive?

A. I think there is room for more than three, fewer than six. There are seven now. American, United, Delta, TWA, Continental, USAir and Northwest.

Q. So you believe that two or three more major airlines will drop out?

A. I don’t think they’re going to drop out. Somehow or another they’re going to be combined with a national route system.

Q. You insist that your new fares are good for everyone.

A. They are. We got letter after letter from folks telling us that they worked hard to get a decent fare, and then they got on the airplane and the person next to them had bought a ticket yesterday for half the price. They said the discount rates weren’t fair, they weren’t flexible. They said the prices were too complicated. We read our letters. We talked to our customers. And we designed a system that is better for everyone.

Q. For everyone? You can hardly expect many vacationers to think it is better. Many fares no longer exist, the deeply discounted fares that made it possible for a lot of people to take vacations they won’t be able to afford now.

A. You mean those fares for green-haired people who only fly on Tuesdays? We are not going to offer those crazy fares. If others do, we will either ignore them or we will move our structure down to match the level. But we are going to stick to our four fares.

Q. How do you answer the critics who say that American is improperly attempting to impose prices on the entire industry, that you and United and Delta have become too powerful?

A. It’s a pretty sorry commentary on power when a company loses $40 million in 1990, when it loses $240 million in 1991, when it is compelled to cancel $8 billion worth of capital commitments such as new-airplane purchases, and when it formally gives up its long-term growth plan because of its inability to earn a return on its shareholders’ investment. That’s really not very much power, is it?