US Airways Courts Code Ally
US Airways last week was close to finalizing a codeshare arrangement with another major U.S. carrier, an important step in its recovery plan and effort to obtain a federally backed loan guarantee. Though US Airways said it has been in active discussions with several airlines—excluding Delta Air Lines—Continental and United airlines at press time were the most likely candidates.
Representatives of both US Airways and United last week confirmed ongoing discussions, indicating the one-time merger hopefuls once again could attempt a cooperative venture. "We shared information with our pilots making them aware of the possibility of us code sharing with them," said a United spokesperson. "But it is not a certainty, as US Airways is talking also with Continental and Northwest."
"We are talking to most majors and have only ruled out Delta because of the overlapping route structures," confirmed a US Airways representative. "We expect to announce an agreement soon."
US Airways needs desperately to align with a domestic and/or international partner to fully utilize its East Coast feeder operations and improve revenues. A new partnership is one element of the US Airways recovery plan currently under consideration by the Air Transportation Stabilization Board. US Airways earlier this month applied to ATSB for $900 million in federally backed loan guarantees to support $1 billion in loans earmarked for a restructuring.
At United, pilots union leaders last week endorsed the company's economic recovery plan, which now calls for $565 million in pilot compensation reductions over the next three years. The plan now will be presented to the rank and file for a ratification vote. UAL, which last week also announced it would save $430 million by trimming management and administrative employee compensation, plans to apply to ATSB for loan guarantees if other key unions, notably mechanics and flight attendants, "participate in a program of shared sacrifice." Little progress has been reported in those negotiations.
United and US Airways last July pulled the plug on an attempted integration after federal regulators indicated they would block the deal. Considering United's deteriorating financial performance throughout 2001, the demand falloff after Sept. 11 and ongoing labor strife, an approved merger would have been particularly problematic. However, a codeshare agreement would have fewer strings attached and less risk, and could leverage United's strength from the West Coast and Chicago O'Hare with US Airways' East Coast presence.
Continental, which is US Airways CEO David Siegel's old stomping grounds when he headed Continental Express in the late-1990s, also acknowledged active discussions with US Airways. Continental, however, already has a domestic partner in Northwest Airlines.
"Siegel is an old Continental general, and I can see a codeshare or something with the Wings alliance," said a senior executive at a large travel agency. "But the whole thing is very tenuous right now."
Another agency source familiar with the carrier's situation, said, "US Airways has the best feeder system on the planet but they have to align with someone to sustain it over the long haul."
A new partnership would help US Airways gain approval from ATSB, which recently rejected loan guarantee applications from Vanguard Airlines and tiny Frontier Flying Service. The green light is tied to US Airways' ability to slash labor costs, while rejection likely would lead to bankruptcy proceedings. The carrier will continue working with ATSB and labor union leaders to fine-tune its application. At press time, there was no timetable on a decision.
US Airways is the largest carrier so far to file for federal loan guarantees, but ATSB staff has been busy with other applications. American Trans Air filed its application a week after US Airways, while applications from Las Vegas-based National Airlines and Miramar, Fla.-based Spirit Airlines still are pending.
Additional applications, including a possible filing by United Airlines, may arrive at ATSB this week ahead of the Friday deadline.
US Airways, which has lost more than $1.4 billion since Sept. 11, cited demand weakness on the East Coast, higher security costs and the delayed re-opening of Reagan Washington National Airport. "No airline has felt the impact of the steep drop in consumer demand for travel more than US Airways," Siegel said.
The loan application is one prong of a far-reaching restructuring that also calls for a $1.3 billion annual cost reduction. Labor will bear the brunt, losing $950 million in wages and benefits, if management's initial proposals are accepted. However, key labor unions have proposed smaller cuts and negotiations are ongoing. The US Airways business plan also stresses expanded regional jet operations. The carrier is known to have political allies in Washington who favor the convenience of National Airport and seek to protect airline workers and constituents in small communities vulnerable to a US Airways failure. However, Siegel said, "This loan guarantee is not an entitlement, and we know we must demonstrate our ability to repay."
US Airways has said it will be forced into bankruptcy if it cannot slash costs and obtain the federal loan guarantee. "Other airlines do not want US Airways to file for bankruptcy," said one travel agency executive. "Now, it has the highest cost per mile in the industry, but with debts and labor contracts restructured, they would have the lowest costs of any of the majors. All major carriers have bankruptcy attorneys lined up to pull the trigger and get out of this pea soup and on to profitability, not just US Airways."
Aside from United, US Airways and America West, which last December was the first to get the okay from ATSB, other major carriers recently indicated loan guarantee applications are unlikely. However, American Trans Air, the 10th-largest U.S. carrier, requested a $165 million loan guarantee meant to prop up its diminished liquidity. The carrier pointed to a "solid business plan" that generated profitability through Aug. 31, 2001.
Earlier in the month, ATA expected an operating loss for the current quarter and for the full year, a result of current revenue weakness. The carrier also tweaked its price structure (see story, page 1), slashing many fares by as much as 40 percent.