Hunting The Predators

With only a pair of brand-new Boeing 737s sporting brightly colored orange-and-green tail fins, Pro Air Inc. is America’s newest passenger airline. Launched in Detroit’s City Airport last July by former Boeing lawyer Kevin Stamper, Pro Air offers fares as much as 85% less than giant Northwest Airlines’ on comparable routes. Passengers flocked to Pro Air, but Northwest, which dominates traffic in Detroit, was not about to let Pro Air grab share. Northwest quickly cut prices and added seats to Pro Air destinations, including Baltimore, Md.; Newark, N.J.; and Indianapolis, Ind. Under this assault, Pro Air recently abandoned one of its Indianapolis routes, as well as a $69 one-way trip to Milwaukee, Wis. Before you could say “Put your tray tables in their upright and locked position,” Northwest jacked up some Milwaukee seats to more than $200, according to Pro Air.

Airlines like Northwest have routinely blown new competitors out of the sky with such tactics, on the theory that letting a low-cost start-up get started up is a bad strategy. Just look at what Southwest Airlines has done. But the tactic–matching low prices and adding more seats, even if it means absorbing losses–has virtually shut out new competition and kept fares high. “The most grievous government failure has been [not to] prosecute what appear to have been flagrant cases of predatory competition by major airlines against new competitors,” says Alfred Kahn, the former Civil Aeronautics Board chairman who got deregulation off the ground.

Last week the feds stirred. Secretary of Transportation Rodney Slater said he may impose fines to stop predatory behavior by big airlines. “There is growing concern that the major carriers are willing to lose money–lots of it–in the short run to drive off competition,” says Slater. The department must wait 60 days before clipping any wings, and clearly Slater hopes the majors will back off before he has to start. Meanwhile, the Justice Department has begun an investigation into possible anticompetitive practices.

The megacarriers are making life miserable for discount airlines. Five, including Pan Am, Sun Jet and Air South, have recently failed. The stragglers, which include Frontier Airlines and Reno Air, have lost a combined $200 million. The big airlines, by contrast, logged record earnings last year of more than $5 billion, a rise of 28%, their fourth consecutive annual increase. No wonder. In the past year, business-class fares have increased 16%, and average air fares have risen 9%. Meanwhile, the price of jet fuel, the airlines’ biggest cost item, keeps dropping.

The big carriers say the start-ups flop because they are undercapitalized and poorly run, offering limited routes and flights, with no frequent-flyer clubs and other features. It is a circular argument, of course. The low fares of the upstarts are based on a cost structure that doesn’t have such extras as frequent-flyer programs. And the big airlines force them to burn through their start-up capital by stepping up the price wars.

American, United, Delta and Northwest contend that Slater’s warnings amount to interference in a tough market. “The small airlines want sympathy, so they accuse us of competing vigorously in the marketplace, which is and should be perfectly legal,” argues Jon Austin, a spokesman for Northwest. And a smart strategy, perhaps. But now the big carriers have managed to attract the attention of both the Transportation and Justice departments. As Microsoft can attest, a smart business strategy isn’t necessarily smart politics.

–By Adam Zagorin