SAN DIEGO UNION 1983 SUN AUG 28
"PSA PRESIDENT SEES ROUGH GOING FOR AIRLINES"
"If I had the choice of sitting in this seat with another airline, I don't think I'd move."
That's Paul C. Barkley, president of San Diego-based PSA, comparing his own hot seat with the hot seat of other airline presidents.
"It's going to be rough," said Barkley, of the immediate future. The beleaguered airline industry is likely to engage in fare wars that will decimate everyone's already-stretched balance sheets and profit and loss statements. The domestic airline industry lost money in 1981 and 1982, "and will probably lose money again this year," said Barkley.
It's no different for PSA. The airline lost money on operations in 1981 and 1982. (The parent made bookkeeping profits.) "This year's traffic is good but disappointing. We made a small operating profit in the third quarter, but the fourth quarter is in doubt and the full year is in doubt," he said.
That's because three other carriers recently put a thumb tack under Barkley's seat. United Air Lines, Air California and Western announced sharp increases in their flights between Los Angeles and San Francisco. In total, beginning in September, there will be 70 direct flights between Los Angeles and San Francisco airports -- up 47 percent from last May and up almost 60 percent from early last year, when the number of flights was down because of lingering effects of the air controllers' strike.
As soon as the competition rammed Barkley's seat, Wall Street butted out. Dean Witter Reynolds bumped PSA from buy to hold and Bateman Eichler, Hill Richards scratched it from its recommended list. The stock swiftly lost about one-third of its value. Now, Barkley and a number of other PSA executives are buying the stock, selling for $21. Book value is $33 a share.
The raids by United, Air Cal and Western just aren't meaningful enough to do that much damage to the stock, said Barkley. The direct run between the L.A. and San Francisco airports (which the three airlines entered) represents only 11 to 12 percent of PSA's total business. Also, a large percentage of United's traffic represents people transferring to other flights.
PSA still has 45 percent of the passenger traffic in the total Los Angeles-San Francisco corridor (including satellite airports San Jose, Oakland, Long Beach, Orange, Ontario and Burbank), and about the same share of the direct route between the two airports.
With such a hefty market share, PSA can throw its weight around. United has filed its intention to raise fares $5 in the corridor (from $75 top fare and $55 discount to $80 top fare and $60 discount) and, "We're thinking about dropping fares $5. If we did this, everybody would follow. With our large share, they couldn't afford not to," said Barkley. "Airline travel is price-elastic."
PSA has also changed its schedules to run every hour on the hour; is putting special emphasis on running on time and is increasing its advertising budget. In January it will move into spiffy new quarters in Los Angeles. It has doubled its San Francisco space and will move into entirely new facilities there next year.
Also, PSA's plane-buying binge of the last several years should start paying off. The company leveraged itself to the eyeballs to finance a fleet of 29 Super 80 aircraft (it has 23 of them now), and that gives it a leg up on competitors at the Long Beach, Orange County, Burbank and San Jose airports, which have tough noise restrictions which don't affect the Super 80.
The McDonnell-Douglas Super 80 is more fuel-efficient than other aircraft, and Barkley believes that when fuel prices start rising again -- "and they surely will," he said -- PSA will be in the catbird seat vis-a-vis the competition.
Also, the average age of a PSA airplane is just 3.54 years. It's a craggy 11.37 with United, 10.81 American, 10.87 Republic, 10.22 Air Cal, 11.54 Continental, 7.67 Western and 3.18 Southwest. It will take billions of dollars of capital to replace these airplanes, and most airlines are pathetically overleveraged. Indeed, debt comprises a whopping 64 percent of PSA's capitalization (down from 72 percent last year) and, "We're in better shape that most airlines," Barkley, pointing to "a $50 million working capital position" and a nice pile of cash. "A lot of airlines have negative working capital and very old fleets," he said.
The airlines' travail really started in the late 1970s, when, just as it was adjusting to deregulation, it was hit with a doubling of fuel prices; a deep recession that dented air travel severely and the controllers' strike, which restricted number of flights. Then the fare wars commenced, as the airlines fought to survive. Now, with the economy recovering and more and more airport positions opening up (with the controllers' strike further in the past), the airlines are harassing one another by adding flights.
The "mayhem," as Barkley described it, will last for "a couple more years," he said, when the airlines' fat days may come again, and PSA should be in excellent shape to cash in.
The problem, however, is that the airline industry has had precious few fat years in its entire history. And the environment over the next several decades may well be worse.