America West Airlines last week gained final approval for a federal loan guarantee, but government backing does not ensure a long-term future nor the short-term ability to attract and retain corporate business. As horrific quarterly earnings reports continue trickling in across the industry, some corporate buyers are less willing to negotiate new contracts with the most financially strapped carriers.
However, certain airlines, including AWA, are beefing up corporate account management efforts and offering attractive deals to drum up business travel. With a bit of strategic thinking, a sound back-up plan and a little confidence, corporate buyers may uncover new opportunities to reduce travel costs and develop stronger airline partnerships amid the industrywide crisis.
"We are affected. Disrupted AWA operations could be devastating," said a travel manager for one of America West's large corporate clients. "But the major carriers will get so difficult to work with that some people will go to the second-tier players because they will have the only good deals available."
AWA—which will be closely monitored by others considering federal loan guarantees—certainly hopes that is the case, but is not waiting for corporations to get frustrated with its competitors. It is expanding override programs for Phoenix-area travel agencies, studying a global distribution system-bypass product for travel agents, enhancing its small business Corporate AWArds program by adding new partners, refocusing on account management and, perhaps most daringly, going "nose to nose with Southwest" in 12 of the largest markets from the Phoenix hub to the West Coast.
Effective earlier this month, AWA expanded its lowest fare bucket on those routes, offering 97 percent of all seats for $89 each way, up from 60 percent. "We are trying to overcome the perception that Southwest ought to be your first call if you are looking for a cheap seat within seven days," said vice president of sales Ron Cole.
Other operations designed to fend off Southwest Airlines' advance either have been significantly pared down, as has Delta Express, or, in the case of both United Shuttle and US Airways' MetroJet, completely disbanded. The difference, Cole explained, is America West's low-cost structure and a "hometown hero" perception in the Valley of the Sun.
Trans World Airlines on several occasions in the 1990s received critical upfront support from the local St. Louis business community (BTN, March 17, 1997), but it remains to be seen whether Phoenix can help AWA avoid an ultimate fate similar to TWA's.
"America West is betting the farm on Phoenix, which is a growing community," said Jack O'Neill, president of corporate travel at TQ3 Maritz Travel Solutions. "But there is a lot of nonstop service, from Southwest and others, to lots of places."
America West, however, claimed its corporate client base has remained stable and, since Sept. 11, even secured "a very large corporate account that we had been pursuing for years." Cole, meanwhile, was surprised that questions from travel managers did not come flooding in during the loan guarantee approval process. "Most of our big corporate accounts had some confidence that we would pull through," he said. "Conversely, we have received very good feedback since the announcement of the approval."
Still, analysts are not convinced AWA can successfully execute a long-term financial recovery. It has not finished in the black since it eked out a small profit in the third quarter of 2000 and next week is expected to announce a 2001 fourth-quarter loss near $2.50 per share.
Fortunately for most corporations without significant volume flowing through America West's hubs, the carrier's failure would have a limited impact because of its relatively limited route structure.
The same cannot be said of US Airways, and especially not of United Airlines, both of which are in financial jeopardy. United, however, said it again has refocused on corporate business in the wake of Sept. 11. "Since that day, we have negotiated a number of new contracts with key accounts," said Frank Laurie, the carrier's recently appointed global accounts manager. "The issue of viability did not come up as readily as you would think."
Laurie cited United's immediate moves to decrease capacity and manpower, cut spending and defer new aircraft deliveries. "We are trying to be proactive with our corporate partners and travel managers, telling them that United is very solid and has stored up liquidity. Also, our network strength means we stand to gain a larger recovery than some other carriers," he said, adding that strong partnerships with Star Alliance carriers improve the prospect for recovering multinational business.
United won't announce its fourth-quarter earnings until Feb. 1. Analysts predict a very large loss of between $12 and $18 per share.
For its part, US Airways refused to comment specifically on corporate sales initiatives and recovery. A spokesperson said, "We continue to work closely with our customers on both a corporate and individual basis to reassure them that US Airways values their existing and future business."
US Airways chairman and CEO Stephen Wolf last week said the carrier "is fully prepared to go to the loan guarantee board if we decide we need to," but added there were no current plans to do so despite a fourth-quarter loss of $552 million.
Meanwhile, other fourth-quarter losses reported last week included $798 million at American Airlines parent AMR Corp., $149 million at Continental Airlines and $216 million at Northwest Airlines. Delta Air Lines, which will not report until Jan. 31, expects a fourth- quarter loss near $500 million.
Unsurprisingly, Southwest's quarterly profit—announced last week as $63.5 million—is expected to be the only positive performance among all the majors. By the time all carriers report, industrywide fourth-quarter losses likely will top $3 billion. That does not instill confidence in corporate buyers seeking new or renewed deals, especially from the weakest of the bunch that may have curtailed travel management support in an effort to reduce costs.
"I can look at the numbers, but I cannot help looking at sales support and customer service," said Georgina Smith, vice president of travel at Cablevision in Bethpage, N.Y. "Without that responsive sales support and ability to serve travelers on the road, it makes me step back and think of things in a different way."
Kevin Iwamoto, global air and car supplier manager at Hewlett-Packard, added that viability of weaker carriers is a legitimate concern that should be factored into RFPs. "The burden of proof is on the carrier to provide adequate financial stability documentation," he said.
Of course, many travel managers have no choice but to work with their local hub carrier and face dwindling discounts, depending on how well-defended the hub is from major competitors and low-fare players. Other travel managers, however, are optimistic and on the hunt for attractive deals.
Michael Gaither, director of corporate operations at the Simon Property Group in Indianapolis, said he won't shun struggling carriers, so long as they remain operational. "If they are giving me a fair deal that beats the others on price, I can't ignore that," Gaither said.
Bill Hubric, vice president at Management Alternatives, agreed opportunities should become more apparent as financially weaker airlines get more aggressive. "But that is both good and bad," he explained. "On the one hand, they are hungry and you can beat them to death. On the other hand, you want them to stay in business."
Several buyers and consultants, cautioning against speculation and knee-jerk reactions, noted that airline failures, even in the current environment, are difficult to predict. In any case, concerned buyers may consider negotiating upfront discounts rather than risk losing back-end rebates and should have a contingency plan to more easily shift travelers to other carriers, if necessary.
Nevertheless, any degree of hesitancy on the part of corporate clients would only exacerbate revenue shortfalls and decaying passenger yields and could push certain carriers closer to federal loan guarantee applications.
America West's loan guarantee—covering nearly $380 million of a $429 financing package—comes at a cost. The Air Transportation Stabilization Board, in approving the application by a two to one vote, asked for and received warrants representing 33 percent of the carrier's non-voting common stock and guarantees of labor cost control. The Master Executive Council of the carrier's pilots union, commenting on labor cost control in a hotline message, said, "How the company will commit to this condition is still a mystery to all of us."
Other major carriers would like to secure financing on their own and avoid being beholden to the government, but smaller carriers more vulnerable to the economic slowdown and revenue drop-off compounded by Sept. 11 are more likely to apply. Kansas City-based Vanguard Airlines already submitted its application and both Las Vegas-based National Airlines and Raleigh/Durham-based Midway Airlines are candidates. Carriers have until June 28 to request a piece of the $10 billion set aside for loan guarantees.