After completing a fast-track bankruptcy reorganization last year and apparently regaining its footing under the leadership of CEO David Siegel, US Airways now faces its biggest challenges.
The seventh-largest U.S. airline must confront serious financial impediments and competitive pressures—both old and new—that threaten to shrink the airline and lessen its appeal to corporate travel buyers. If it is to maintain its current role in the market, US Airways must survive a Southwest Airlines attack on its Philadelphia hub, find a new middle ground with increasingly irate labor unions and make good on a federally backed loan. The degree to which its network could change remains unclear. In the most extreme scenario, corporate buyers lose a major East Coast supplier.
To avoid that fate and meet financial requirements on a $900 million federal loan guarantee approved last February, US Airways is considering the sale of certain assets. Potentially on the block are the East Coast shuttle, regional operations, certain airport slots and facilities and perhaps even one of its hub operations.
A source familiar with the airline's situation said the company has not yet decided to sell any of those network elements, though it has hired Morgan Stanley to identify saleable assets and explore potential buyers.
The overall impact on corporate buyers, and US Airways' ability to attract new business, depends on what is sold, if anything, and to whom. For now, many travel managers proactively are piecing together contingency plans as they wait for more concrete developments. Desensitized to financial instability at their preferred airlines, most corporate clients are not likely to abandon US Airways at this juncture.
One of the more attractive assets potentially available to competitors is the US Airways Shuttle. Northeast shuttle routes typically cater to business travelers and attract corporations either as a standalone solution in the Northeast corridor or as one element of a larger, network deal.
"Boston-Washington is our biggest market, so it is a huge concern," said Stefanie Tretola, travel services administrator for the Mitre Corp., whose two main headquarters are located in those metropolitan areas. "We have some back-ups in place, but all we can do for now is hold tight."
Meanwhile, business fares on the US Airways Shuttle routes in the first week of January were up more than 100 percent year over year, according to Deutsche Bank Securities and Harrell Associates. Competing fares for Delta Shuttle services were up by a similar amount. Overall, US Airways' business fares were up 7 percent year over year, the biggest increase among major U.S. carriers.
At Pittsburgh International Airport, US Airways' new, long-term lease covers only 10 of the 50 gates it currently uses. The remaining 40 gates and associated facilities now are on month-to-month leases. The carrier pledged to maintain a schedule until September 2004 that is "close to its existing service" of 375 daily flights to almost 100 destinations.
"I am concerned about what may transpire as far as service in the Pittsburgh base," said Paul Lang, manager of travel services for Bayer Corp., whose North American headquarters is in Pittsburgh. "We have kept a close eye as best we can and have started developing contingency plans to address different scenarios for our city pairs and overall market coverage."
US Airways appears unlikely to sell Philadelphia assets as it plans to fight Southwest Airlines for the market
(BTN, Nov. 10, 2003), but, in general, and considering the fragile financial condition of the nation's airlines, the list of potential buyers isn't very long. Ambitious low-cost carriers with comparatively strong balance sheets may show interest, though the asking price for those assets may preclude many airlines from bidding.
Should any LCC grow further at the expense of US Airways, travel managers in impacted markets would have greater impetus to review supplier portfolios
(see story). Similarly, acquisitions by a major competitor could improve that airline's position in bidding for corporate business.
Eclipse Advisors, whose Philadelphia headquarters offers a front-row seat for the coming Southwest attack, suggested reports of asset sales were, at least in part, negotiating ploys meant to pressure labor unions. "We suspect that it will have a small impact on some corporations' decisions to contract with US Airways, particularly in the Boston and New York shuttle markets," said the company, a unit of American Express. "If US Airways sells the Shuttle to an airline other than American, we see little effect on corporate travelers. Delta, American and the new Shuttle owner will still compete hard for traffic in New York, Boston and Washington."
Eclipse analysts also said US Airways is not desperate enough to sell off a hub operation—Charlotte, Philadelphia or Pittsburgh—but said, "If a low-fare carrier moves aggressively into a US Airways hub, although some nonstop routes may disappear, companies would pay significantly less on airline spend for traffic to and from the city."
US Airways' directors reportedly will review the company's opportunities at a board meeting next month. The company last week already stated its intention to merge Allegheny Airlines and Piedmont Airlines, two wholly-owned subsidiaries in the US Airways Express network. If finalized, the plan would lead to fewer turboprops in the Express fleet. "The preferred option is to merge Allegheny into Piedmont," US Airways said in a statement. "The other and less-preferred option would be a partial asset transfer to Piedmont, the liquidation of the remaining Allegheny assets and the shutdown of the Allegheny operation."
A potentially smaller network is one of several developments at US Airways that clouds the carrier's future. Other immediate challenges include a deteriorating relationship between airline management and labor unions unwilling to grant another round of concessions, a shaky financial situation that one bankruptcy and several versions of a business plan have not yet fixed and intensifying competition from low-cost carriers that, unchecked, will hasten US Airways' demise.
Southwest's entry into Philadelphia later this spring, for example, at first will offer to corporate travel managers favorable spot-buy options to just a few destinations. But the carrier plans to grow Philadelphia services well beyond the routes initially announced, which include Chicago Midway, Las Vegas, Orlando, Phoenix and Providence. Within a few years, Southwest likely will offer much more network coverage for local companies, as it has for several years at Baltimore Washington International Airport since supplanting US Airways as the airport's largest operator.
In their latest industry report, Unisys R2A travel and transportation consultants suggested Southwest's Philadelphia service within five years will include flights to Cleveland, Houston, Indianapolis, Kansas City, Los Angeles, Raleigh/Durham, Salt Lake City, the San Francisco area, Seattle and St. Louis.
Unisys R2A also said US Airways' inability to achieve sufficient cost reductions is "not a good omen" heading into the Philadelphia battle. "In fact, over the last two years, its position vis-à-vis Southwest has deteriorated, with its unit costs relative to Southwest's increasing from 181 percent to 184 percent."
As pressure mounts, a sense of desperation has replaced the optimism that permeated US Airways' camp last spring when the airline emerged from bankruptcy
(BTN, April 28, 2003). The carrier's pilots union already has called for the resignations of David Siegel and other top executives.
"In bankruptcy, these senior executives had every tool, every advantage they needed, to turn the airline around—yet they've failed," said Capt. Bill Pollock, chairman of the US Airways Master Executive Council of the Air Line Pilots Association, citing high operating costs and low revenues "resulting from failed business strategies."
Meanwhile, the Association of Flight Attendants this month filed a lawsuit to prevent US Airways from involuntarily furloughing more than 500 flight attendants. AFA last week said an arbitrator ruled in its favor, and that management's proposal violated contract terms.