The Air Transportation Stabilization Board and the bankruptcy court overseeing US Airways' restructuring last week gave the carrier more time to meet its financial obligations. It was one of several recent developments shaping efforts by US Airways and United Airlines to emerge from Chapter 11.
Both carriers already have had a busy month in court. While progress has been made, neither publicly has presented a detailed, long-term survival strategy. Nevertheless, many of the corporate clients that have stuck with these carriers as part of preferred agreements continue operating under an assumption of business-as-usual, albeit with a watchful eye on unfolding events.
US Airways' newest deal requires the carrier to maintain minimum liquidity levels and prepare to emerge from Chapter 11 protection by June 30
(BTNonline, Jan. 13). Meanwhile, an operational fiasco in Philadelphia during the recent holiday travel period did little to engender customer confidence while Southwest Airlines' planned entry into Pittsburgh represents yet another competitive blow.
Though the court this month ruled that US Airways can reject its current agreement with the International Association of Machinists and Aerospace Workers, US Airways said it would hold off on doing so in the hopes that the union would approve a revised labor agreement. IAM is scheduled to complete the ratification vote this week. IAM was the only major US Airways union not to approve a consensual agreement ahead of the judge's ruling.
US Airways said it also would "proceed with respect to the court's granted relief" and work with the Pension Benefit Guaranty Corp. to fundamentally alter employee pension plans. The judge's ruling may set precedent for how other airlines deal with crippling employee pension costs, notably United.
US Airways may have won a few victories in court, but it lost a major holiday battle by experiencing an operational "meltdown," according to CEO Bruce Lakefield. Management and employee groups pointed fingers at each other for staffing shortages and a baggage-handling collapse that delayed thousands of pieces of luggage at the carrier's Philadelphia hub and prompted a federal investigation. "We suspect that the airline will not look good in any review," said Helane Becker, analyst with The Benchmark Co.
On the revenue front, the move by Delta to radically alter domestic fares
(see story) is expected to reverberate around US Airways' network. Though US Airways already embarked on a strategy to bring lower, simplified fares to many of its markets, UBS analyst Robert Ashcroft said completing the reorganization process "is going to be harder if value pricing is prevalent" and that newer, industrywide pricing would negatively affect US Airways for as long as a year.
Having already matched Delta in head-to-head markets, US Airways seemingly cannot afford to surrender passengers. While all major competitors carried between 3 percent and 9 percent more passengers last year than in 2003, US Airways' passenger growth was under 1 percent. In a year of recovering traffic volumes industrywide, US Airways' increase in revenue passenger miles was most modest, both in the domestic market and systemwide.
A new hurdle is Southwest's planned entry into Pittsburgh, representing yet another advance into a US Airways stronghold. Though US Airways already began dismantling hub operations in the market, it still flies nonstop service to 50 markets as the city's largest carrier.
Southwest said it would begin Pittsburgh service in May—its 61st station —but did not announce any specifics.
"Pittsburgh has a number of corporate headquarters and it looks like a very thriving community," according to Southwest CEO Gary Kelly, noting that the airport's catchment area covers more than two million people. "It is underserved and overpriced. They have suffered for a long time with high fares."
"We are glad to see someone step up to the plate and fill in some of the gaps left by US Airways," said one Pittsburgh-area travel manager. "We are disappointed US Airways cut so many routes and they can no longer expect 100 percent of the business."
Even so, the Pittsburgh travel manager, like many peers, said there are no corporate mandates to avoid US Airways and that traveling employees, unless booking particularly far in advance, remain comfortable making reservations on the airline. Other sources said corporate clients are relying on protections afforded by credit card companies and continue to use the airline.
"I have not yet pulled the trigger on anything that would stop people from booking US Airways," said Gary Polito, corporate travel manager at Bose Corp. in Framingham, Mass., "but they do appear shaky and I am working with our travel agency's supplier relations group to monitor the situation."
"We are still advising travelers to book US Airways, just not that far in advance," added Richard Wooten, director of corporate travel services for Bethesda, Md.-based Lockheed Martin. "We have communications ready to go out if something does occur."
Indeed, longer-term prospects for US Airways are very much in doubt. The judge overseeing the case this month reportedly raised "grave concerns" and sources suggested hesitancy on the part of companies considering new or renewed corporate travel deals. Analysts remain divided, with some expecting the carrier to hang on indefinitely and others predicting a more timely demise.
"At this point, it looks as though US Airways will continue to use the rope that ATSB gives it," said The Benchmark Co.'s Becker. "We expect US Airways to go through that cash rapidly. This just delays the inevitable liquidation date."
A more upbeat Lakefield said, "While we still have much work to do, I think our most difficult period is behind us."
Meanwhile, US Airways last week lost a key figure in its restructuring efforts as senior vice president of marketing and planning Ben Baldanza left the company to become president and COO of Spirit Airlines. Leading a series of executive changes, US Airways named Bruce Ashby as executive vice president of marketing and planning with responsibility over several functions, including sales, pricing, distribution and yield management.
Like US Airways, bankrupt United Airlines recently has been quite active inside and outside the courthouse. In a message last week to employees, CEO Glenn Tilton characterized the previous week as "among the most significant" in its 25-month restructuring.
On the positive side, the company reached new agreements with unions representing mechanics and flight attendants—eliminating the need for a trial to determine if the airline could unilaterally impose new agreements on labor groups—but in a serious blow to transformation efforts, Judge Eugene Wedoff rejected a pact between management and the Air Line Pilots Association. Several concerns were raised, not the least of which was the prickly issue of employee pensions. United has said it needs to terminate all existing pension programs to accomplish its restructuring.
Meanwhile, in court documents submitted earlier this month, United said it would ask for another extension for the exclusivity period to file a business plan. The deadline currently is Jan. 31. In requesting a three-month extension, United said it hopes to "capitalize on positive momentum in implementing its restructuring objectives." Judge Wedoff previously granted such extensions on multiple occasions
(see story).United this month also plans to begin downsizing its fleet by rejecting aircraft leases. It said it plans to remove 15 Boeing 737s from its operation as part of a larger plan to reduce its fleet by 68 aircraft and cut domestic capacity by more than 10 percent.
As it removes mainline aircraft, United continues to grow operations handled by Ted, its low-fare unit. On April 3, Ted will launch service from Chicago Midway Airport—across town from United's O'Hare hub and at the site of coming Southwest expansion—with multiple daily flights to both Denver and Washington Dulles.