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Is Alaska Big Enough For These Two?


The Corporation

IS ALASKA BIG ENOUGH FOR THESE TWO?

When travelers talk about cutthroat competition among airlines, Alaska is not a market that springs to mind. But recently, the battle for passengers in the cold North has become red hot--and nasty. A carrier called MarkAir Inc. is challenging a former partner and the region's dominant carrier, Alaska Airlines Inc., with low fares that threaten Alaska Airlines' 19-year streak of profits. The battle is raging in the courts, too. And here's more spice for the drama: MarkAir Chairman Neil Bergt, a pal of Frank A. Lorenzo's, retained the former Texas Air Corp. chairman as adviser for a public offering.

This is far from the standard David vs. Goliath tale. True, MarkAir, a cargo airline until 1984, has one-ninth of Alaska Airlines' $1.1 billion in revenues and nowhere near the resources. But there are bizarre twists: Until November, the pair enjoyed a cozy relationship that helped both pull in consistent profits. MarkAir was able to keep Alaska Airlines out of certain key markets as it fed passengers to the larger airline at Anchorage. But last fall, Bergt tried to sell MarkAir to Alaska Airlines. After he was rejected, Bergt declared war, plunging MarkAir into his rival's territory. Alaska Airlines terminated the joint agreements.

EASTWARD HO. MarkAir entered the prime Anchorage-to-Seattle market in late 1991 with a flock of low fares. Competitors matched them, and round-trip fares of $300 to $900 plummeted to $200. Bergt doubled MarkAir's jet fleet, to 12 Boeing 737s. And MarkAir added jet service to cities in southeast Alaska, where Alaska Airlines had had a monopoly. Now, Bergt is weighing a new wave of expansion, into Oregon and California.

That's where Lorenzo comes in. Bergt needs capital and felt that an obscure carrier such as his would have trouble raising it. So he tapped Lorenzo, whom he had met in 1981 while running Western Air Lines Inc., later bought by Delta Air Lines Inc.

Lorenzo's Houston-based consulting firm, Savoy Capital Inc., reviewed MarkAir's business plan and won Bergt introductions on Wall Street. Lorenzo says his firm isn't investing its own money. But he argues that MarkAir's prospects are good: By offering propeller-jet service within Alaska, he says, MarkAir is the "lifeblood to countless small communities." And its recent expansion brings travelers "options"--lower prices. Numerous sources say Lorenzo helped line up Kidder, Peabody & Co. to underwrite an initial public offering for about $35 million.

An IPO seems chancy, especially since the current chief executive would like to be elsewhere. "I've been fighting this battle all my life, and I'd like to sell out," says Bergt. "But I'd never leave MarkAir in bad hands." With Lorenzo in the wings, the possibilities are intriguing. Lorenzo says his own role is strictly advisory. But Robert J. Joedicke, an airline specialist at Lehman Brothers Inc., notes that Lorenzo's Jet Capital Corp. won control of Texas Air 20 years ago by converting consulting fees into stock. He adds: "Lorenzo has not always been one to make his objectives crystal clear."

ARCTIC FIESTA. Whatever Lorenzo's ultimate role, MarkAir has already caused Alaska Airlines real grief. Investors, fearful of the price war's effects on earnings, are backing off, and Alaska Airlines' stock has fallen 18%, to around 19, from its high in January. Nearly a third of Alaska Airlines' revenues come from routes now served by MarkAir. According to Zacks Investment Research, analysts in the last 12 weeks have downgraded earnings estimates by 28% to $1.17 a share for 1992. Prudential Securities Inc. forecasts a loss.

Alaska Airlines CEO Raymond J. Vecci declined to comment, saying he is tired of responding to Bergt. His airline is responding plenty, pushing into Alaskan cities where MarkAir once enjoyed a monopoly. Despite fare wars, it has maintained its high service standard. Recently, it ballyhooed its new service in Barrow, in the far north of the state, by throwing a Mexican fiesta for the entire town of 2,500. Still, Vecci has said in interviews with the Anchorage Daily News that his airline has weathered challenges before and will weather this one. Analysts agree, but some note that if low-cost Southwest Airlines Co. enters the territory, troubles will only intensify.

MarkAir's own future is certainly open to question. Bergt says it could survive without the IPO. But the airline has been selling off assets to raise capital. It recently sold two large cargo planes for an estimated $12 million to $20 million. And in December, the airline sold and leased back three hangars with a state authority, grossing $5.8 million. Scott Hamilton, editor of Commercial Aviation Report, says that given MarkAir's inevitable losses on developing new markets, "they would have to do something to generate fresh cash." As for an IPO, "I certainly wouldn't want to invest in the carrier that's going up against the competition MarkAir is going against." That now includes United Airlines and Delta.

Bergt argues his advantage is in MarkAir's low costs. "Alaska Airlines is an old dinosaur," he says. "They let their costs run amok." MarkAir's costs approach those of superefficient Southwest Airlines, Bergt claims, and MarkAir's strategy is the same: "If you get air transportation down cheap enough, people will travel. It's a matter of running a thinner, leaner airline."

Bergt, 56, has spent two decades trying to do just that. Reared in Alaska, he got his start flying propeller planes to the state's rural villages for cargo airline Alaska International Air Inc. Bergt took the carrier private in 1979 in a leveraged buyout. The company flourished by transporting construction materials for oil exploration. Bergt moved briefly into the national aviation spotlight in 1981 when he became CEO at Western, but he left within 17 months.

He returned to Alaska International and began expanding into the more promising passenger business, renaming the carrier MarkAir. Initially, its chief competition was Alaska Airlines. But in 1986, Bergt worked out the marketing agreements with Alaska Airlines that made in-state fare wars between the two a rarity. MarkAir also purchased a commuter airline, sending propeller planes into 130 rural Alaska communities.

Relations between the two deteriorated last fall. Bergt says Alaska Airlines changed the terms of agreements. Vecci says Bergt never complained. But by November, lawsuits were flying. Alaska Airlines accused MarkAir of stealing passengers. MarkAir alleged antitrust violations.

The rivalry shows no signs of cooling. MarkAir is continuing its low fares through the summer season. Alaska Airlines will likely match them. It's the kind of destructive price war Lorenzo could tell both carriers all about.Hal Bernton in Anchorage, Alaska, and Andrea Rothman in New York


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