Amid talk of a possible liquidation, bankrupt US Airways in recent weeks completed a reorganization that eliminated several corporate sales positions while emphasizing newer distribution models, analytical support and growth areas within its system. The changes reflect US Airways' direction toward a simplified fare structure, a point-to-point system and a lower-cost operation. Though the airline said existing corporate accounts would not be impacted directly, many buyers are aware of such larger issues as labor costs, fuel prices and a dwindling cash balance that may prevent US Airways from surviving the winter.
Delta Air Lines, meanwhile, gave itself "a matter of weeks" to finalize a new contract with its pilots to avoid bankruptcy, following union approval last week of an agreement to avoid pilot shortages.
Whether in bankruptcy or trying to avoid it, all carriers are getting hammered by fuel costs. The price of a barrel of crude oil on the New York Mercantile Exchange last week reached record levels in peaking above $50. At the same time, domestic passenger yields continued to deteriorate. In all, the U.S. airline industry is expected to post losses near $5 billion this year.
"For 2005, however, we continue to model for a breakeven year," said J.P. Morgan Securities analyst Jamie Baker, "though admittedly the outcome is largely up to the Organization of Petroleum Exporting Countries and US Airways' bankers." He currently is using $38 oil in his 2005 estimates and assuming US Airways survives, "which is by no means assured."
The carrier, however, made progress late last week by finalizing a tentative agreement with the Air Line Pilots Association that would save it $300 million annually if ratified by union members. The deal is essential for the carrier's survival but must be complemented by new agreements with unions representing flight attendants, mechanics and other employees. The judge overseeing US Airways' bankruptcy case on Thursday will decide if the company can impose temporary wage cuts on unions that had not reached new deals with management. Without targeted labor cost reductions, the airline's cash balance would reach critically low levels by February, prompting liquidation, according to court documents.
"The consequences of a liquidation would include the loss of approximately 34,000 jobs, the cessation of approximately 3,300 flights per day—an inconvenience or worse—to almost 1 million passengers per week and essentially no recovery for general unsecured creditors," US Airways said last week in a filing.
Meanwhile, the airline last month completed a two-phase sales restructuring. Positions at the director level and above were cut from eight to four. In the field, US Airways consolidated three director positions at each of its primary hubs into one, went from 27 district sales managers to nine regional managers and added one account manager for a total of 54.
"Our network is moving around a bit, and we moved some people out of smaller places into bigger ones," said Doug Leo, vice president of sales and international. He said the "basic sales fundamentals have not changed" and that larger accounts will receive the same level of support from the field sales team while smaller accounts will continue to be served centrally from headquarters.
Considering its expanding simplified fare structure—and corresponding reduction in requests for waivers and favors—fewer corporate sales resources are necessary. "We'll need fewer corporate contracts, and the ones we have will be simpler," Leo explained.
US Airways, however, is reallocating resources to developing alternative booking channels for corporate accounts, selling its expanded services to the Caribbean and Latin America and identifying new opportunities.
"For example, we have been predominately selling business class across the Atlantic in our hubs and primary markets," Leo said, "Now we are trying to look at smaller cities that connect over our hubs because there is a lot of business traffic there."
Meanwhile, some of the carrier's corporate clients continue to fret over the carrier's plight and explore alternatives. "We told the travel department to scale down US Airways bookings," said Gary Polito, corporate travel manager at Bose Corp. in Framingham, Mass. "We don't want to get stuck with unused tickets."
Tina Itschner, corporate travel and purchasing manager at HNTB Corp. in Kansas City, Mo., also is concerned, not only about ramifications to her company's travel program but also larger competitive dynamics around the industry. "We do quite a lot of business in US Airways markets, particularly in the Northeast," she said, "so we will have to watch those markets to see how we would be affected."
Though executives at competing carriers said they are getting calls from nervous US Airways corporate clients, there is little a buyer can do from a contractual standpoint unless the carrier dramatically reduces or eliminates service in key city pairs
(BTN, Sept. 20)."US Airways has been a good partner and we want to support them, but their future is uncertain," said Chris Staal, vice president of global sourcing strategies for Stamford, Conn.-based Thomson Corp. "They are pulling down service and putting in regional jets where they can. It is becoming more challenging for them to be a corporate airline."
As travel managers brace for potential changes to preferred supplier portfolios and develop contingency plans, many US Airways frequent flyer program members wonder if they should redeem their accrued points.
"Airlines entering the liquidation phase, in which operations cease and the assets are sold, are likely to demonstrate little concern for unused award tickets or unredeemed miles," according to a recent report issued by IdeaWorks, a brand development and marketing consultancy. "Unused mileage will likely be rendered worthless."
IdeaWorks said potential US Airways award tickets outstanding in 2003 exceeded 6 million, with total award liabilities near $85 million. "We are telling travelers who have frequent flyer miles to cash them in," said Bose's Polito.
Meanwhile, regional jet manufacturers Bombardier and Embraer suspended the balance of huge orders placed last year by US Airways. The carrier cannot accept delivery of new aircraft unless it re-emerges from bankruptcy protection and reworks financing terms. The orders were to represent a cornerstone of US Airways' restructuring plan by providing growth opportunities on short- and medium-haul routes.
Delta's Restructuring Still Outside Courts, For Now
Delta sidestepped a bankruptcy filing last week when its pilot union ratified a deal that temporarily would recall retired pilots in the event of shortages. The airline still must secure $1 billion in annual cost-savings from its pilots in the coming weeks or it will file for Chapter 11 protection. Delta CEO Gerald Grinstein last week in an employee memo said the company on Jan. 1 would cut pay by 10 percent for executives and non-union personnel and make other changes to employee compensation programs. He also refused his own salary for the balance of 2004.
"We continue to believe the company is on borrowed time and, given the level of third-quarter losses we estimate, we believe that a Chapter 11 filing is still around 80 percent," said Helane Becker, analyst with The Benchmark Co.
Meanwhile, bankrupt United Airlines, also is making changes within its sales structure. The airline confirmed the departure of Dan Walsh, formerly vice president of North America sales. In the interim, Graham Atkinson, senior vice president of worldwide sales and alliances, has assumed those duties.
United's ongoing bankruptcy in itself should not dissuade corporations from contracting with the carrier, according to Laurence Smith, a corporate travel advisor and attorney with Wolff & Samson in West Orange, N.J. "The issue we see coming up is larger companies trying to decide between American and United as their preferred domestic partner," he said. "Assuming the economics and flight schedules are comparable, we are not advising clients to steer clear of United. United is not going to disappear overnight, and there are no assurances that American's business plan is sustainable."