United Airlines and US Airways this month each asked for and received more time to complete restructuring programs and regain financial stability. The judge overseeing United's bankruptcy case gave the company another month—until May 8—to exclusively file a reorganization plan, while a government board gave partner US Airways more time to make good on loan payments and seek possible buyers for certain segments of its operation. The two carriers were given breathing room against the backdrop of a decelerating recovery in the airline industry.
"Hopes for a meaningful U.S. airline financial recovery in 2004 are fading fast," said UBS analyst Sam Buttrick in a recent note to investors, citing fuel costs and low-cost competition that continues to pressure domestic revenues. "We have lowered our fiscal year 2004 U.S. airline industry forecast from a loss of $500 million to a loss of around $2.3 billion."
US Airways' reorganization efforts in some way mirror the sluggish pace of industry recovery, and CEO David Siegel acknowledged the current plan is not working fast enough.
To buy some time and avoid default, the carrier renegotiated terms of a $1 billion loan backed by the Air Transportation Stabilization Board. Though ATSB agreed to the restructure terms by a 2-1 vote, the U.S. Department of Treasury voiced its objections, stating that "the presented waivers do not preserve many of the stronger taxpayer protections previously agreed to between ATSB and US Airways."
The loan originally went into effect March 31, 2003, upon the airline's emergence from Chapter 11 bankruptcy protection
(BTNOnline, March 31, 2003). Under the new deal, US Airways paid to ATSB and other lenders $250 million. In exchange, it received more time to meet financial covenants and loosen restrictions on "pursuing asset sales"
(BTN, Jan. 19). The carrier also must "significantly narrow" losses in 2004, regain profitability in 2005 and maintain an unrestricted cash balance of $700 million. The carrier's current unrestricted cash balance is roughly $925 million.
"This agreement gives us a narrow window for management and labor to continue to work together to make the changes necessary to get this company back to profitability," said US Airways chairman David Bronner.
In a presentation last week to employees, Siegel laid out some of his plans, calling for new labor deals by the summer, a reconfigured fleet that relies heavily on regional jets but possibly excludes first class, a best-in-class Internet site by later this year, new inflight features that "are better" than JetBlue's and a simplified low-fare structure in Philadelphia meant to fend off Southwest Airlines' imminent attack.
"They beat us on the West Coast, and they beat us in Baltimore. If they beat us in Philadelphia, they're going to kill us," Siegel said of Southwest. "They now have four gates in Philadelphia. If they go to eight, its over."
Siegel said US Airways will counter the Southwest "enemy" in a manner similar to America West's revival, while shunning the failed strategies of TWA in St. Louis. "We tried small fixes," he said, noting the carrier remains at risk of defaulting on loan terms as early as June. "We know those don't work."
Meanwhile, Siegel acknowledged that asset sales are "a trademark of failing carriers," but said, "We may have to burn the furniture to stay warm."
Standard & Poor's went a step further, saying US Airways' performance has been "unsatisfactory and behind original plans," and that long-term prospects remain in question. "Accordingly, acquisition by another airline or some other form of close integration into a broader alliance remains the best ultimate solution for US Airways," the ratings agency said.
Taking into account some of the hard lessons learned by its partner, United has taken a slower track in emerging from bankruptcy and now is targeting late summer, rather than the previous June 30 goal. To be sure, certain factors remain beyond United's control, including ATSB's deliberations on the company's second application for federal backing on a loan package and pension relief legislation now being debated on Capitol Hill.
The tenuous situation at US Airways, meanwhile, continues to weigh heavily on United. For starters, any substantial retrenchment by US Airways likely would impact potential revenue generation of the existing codeshare relationship. In the more immediate term, United still must convince ATSB to back most of a $2 billion loan package, a difficult task given ATSB's experience to date with US Airways. ATSB's approval is contingent partly on the board's perception of United's business plan.
Meanwhile, a United spokesperson said the bankruptcy judge "likely" would give the company yet another 30-day extension—to June 8—to submit a plan for reorganization, should United again ask for more time. That the judge only is granting one-month extensions rather than the full 90 days United sought this spring suggests "the judge is tiring of the slow pace," said Robert Mann of R.W. Mann & Co., an airline industry consulting firm in Port Washington, N.Y.
Industry insiders are divided on United's prospects. Some insist United's cost-cutting—slowly but surely—will help reposition it as a competitive carrier. Others aren't so sure and wonder if the company's low-fare Ted operation will be successful. "United has done a terrific job in getting costs down, but on an apples-to-apples basis in our Denver backyard, their costs still are 57 percent higher than ours," said Frontier CEO Jeff Potter, speaking last month at the Masters Program in Washington. "Frontier is not the cause of United's ills, so when I see Ted in our backyard I just don't get it. It is not lower cost, nor does it have higher utilization. They match our fares, but United always matched our fares."