Merger Mania Has Climbed Sky High / Fulfilling Industry Predictions

Article excerpt

NEW YORK (AP) - Merger mania has climbed sky high.

The nation's airlines are now buying each other at a rapid clip, fulfilling predictions of an industry shakeout in which only a handful of the strongest carriers is expected to survive.

The contraction of the industry, coming eight years after its deregulation, began last summer when United Airlines agreed to buy the Pacific routes of Pan American World Airways for $750 million.

Since then Dallas-based Southwest Airlines has bought Muse Air, investor Carl Icahn took control of Trans World Airlines, People Express bought Frontier, Piedmont acquired Empire Airlines and Northwest agreed to buy Republic.

Then last week, Texas Air agreed to buy Eastern, which would create the biggest U.S. airline operation. That was quickly followed by TWA's offer to purchase Ozark Airlines.

More mergers are expected and observers question whether secondary carriers such as Western, Pan Am and USAir will remain intact. Western, sensing the threat, says it is weighing anti-takeover measures.

The industry's current giants - United, American and Delta - are aggressively using their own resources to remain dominant players by building huge route networks across the country.

Such far-flung service, if operated efficiently, is seen as a key to survival since it gives an airline a powerful marketing tool for building customer loyalty. In the process, such huge airlines could freeze out weaker competitors.

The major carriers, in turn, are forcing most other airlines, especially those hobbling financially, to respond in kind.

""The prevailing strategy is that in order to attract passengers you will have to be able to take them anywhere,'' said Marilyn K. McKellin of the Value Line Investment Survey, a securities research firm. And for many that has meant joining forces with a rival.

While the restructuring continues, the traveler is expected to benefit. The move toward far-flung route systems reduces the need to change airlines during a trip. And the fierce battle for customers and the airlines' continuing push to cut costs also should keep downward pressure on prices.

Even with fewer airlines the competitive environment ""would probably prevent fares from rising too much,'' said Joel Wechsler, owner of Federal Travel Service, a Boston travel agency.

Before 1979 the government decided which airlines flew where and how much they charged. With deregulation, the carriers are free to invade each other's regions, discount prices and otherwise elbow their way to additional market share.

It took a few years, however, for the major airlines to learn to effectively compete in deregulated skies. Burdened by their regulated cost structures but forced to cut fares to match new low-cost carriers such as People Express, the veteran airlines lost hundreds of millions of dollars in the early 1980s. …