At the helm of US Airways for just over a year, CEO David Siegel on March 31 guided the airline out of bankruptcy after seven months of court-supervised restructuring. BTN editors David Jonas and David Meyer last week spoke with Siegel about US Airways' emergence from Chapter 11 and its future prospects.
BTN: Considering the extremely rough road that lies ahead, was emerging from bankruptcy last month a mixed blessing?
David Siegel: It feels better to be out than in, but I guess it is a mixed blessing. We feel good about having accomplished all that we could in the courts. We fixed the balance sheet, took a lot of money out of our cost structure and improved liquidity. Now we can focus on growing the business. While everybody else is distracted trying to do some of the things we have done during the past seven or eight months, we can stay ahead of the rest of the industry and continue on the path of implementing our business plan.
BTN: You seem to have garnered nearly universal praise for the restructuring thus far, but competitors and analysts still question if US Airways' unit costs are low enough to allow for effective competition.
Siegel: It is a fair criticism. Yet, before we restructured we were the number-six network carrier with the number-one highest cost structure, and now we are now the number-six carrier with the number-six cost structure. We'll still lose money this year. The industry will lose money this year. The revenue environment is uncertain.
While we dramatically have improved our relative position, the whole industry continues to be under pressure. That just says our work is not done. We still need to reexamine our business model. Yet, if you look at it as a horse race, we were dead last and now we are kind of toward the front.
BTN: Certainly strides have been made on the cost side. What sorts of strategies are you seeking to employ in terms of revenue generation?
Siegel: We are doing several, broad-brush things. We are trying to optimize the existing network. We have right-sized the fleet, down to 279 mainline shells. We are about to deploy over the next two or three years a very large number of regional jets. We have the United partnership domestically and are going to join the Star Alliance and do more on an international basis later in the year. And we are bringing in best practices on analytical decision-making tools for pricing, revenue management, scheduling and planning.
We are implementing a different strategy with the network by making the hubs work together on a more complementary basis and better capitalizing real estate positions we have at the preferred airports in New York, Boston and Washington.
BTN: Please explain your capacity reductions and the overcapacity problem still facing the industry at large.
Siegel: If you look at August 2001 and today, industry revenue is down about 30 percent and our capacity is down about 30 percent, so we have been the only disciplined competitor matching capacity with demand. The rest of the industry, with the more recent cuts, is down maybe 12 percent to 15 percent. In simplistic terms, if revenues are down 30 percent—half in capacity reduction and half in yield—you would say that another 15 percent of industry capacity needs to come out.
The math is obvious, but everyone has a different definition of excess. Some people say one competitor that has about a 15 percent marketshare and currently is operating in Chapter 11 should go away. Some people would say that everybody has a marginal hub. We have Pittsburgh, Northwest has Memphis, Continental has Cleveland, American has St. Louis and Delta has their position in Dallas and I argue in Cincinnati and Salt Lake. So another way for capacity to come down is for everyone to shut down their uneconomic hub positions.
A third alternative is everyone pares back capacity 15 percent around their networks because they do not want to shut down a hub, but it is not clear what the new level of demand is. Even though the war is over, demand still is depressed. What is the new baseline? It appears to be a permanent drop in demand and we are trying to assess if we have to take additional capacity out. We continue to evaluate our marginal hub position in Pittsburgh.
BTN: Back to alliances, how is the United partnership currently performing, and what is the vision for the next few years?
Siegel: It is tracking ahead of forecast and we are very pleased with the results as we have pursued a fast-track implementation. By summer, we expect to see meaningful value. It takes three or four years for these alliances to mature. One reason is the customer needs time to become enfranchised and understand the network opportunities. Yet, there also is the practical issue of creating, in our vision, a seamless product with United. Some of that will take time.
Also, you have joint corporate sales and joint promotions to leisure customers, and there is a purchasing cycle: training the salesforce, putting together new corporate opportunities and then selling in. But once the alliance is mature, the numbers we laid out to the Air Transportation Stabilization Board show a couple hundred million dollar benefit a year to US Airways, and we think that is on the conservative side.
BTN: We understand the joint corporate sales effort already has begun
(see story).Siegel: We already have made hundreds of presentations to corporations to jointly sell and have had some good success. But it does take time because every corporation has its own decisionmaking cycle. As we get out in front of corporations, every quarter the product offering is that much more attractive and competitive because we have implemented more codeshare cities and worked out more of the kinks.
BTN: On the topic of corporate sales, we have been hearing more about reciprocity at the most senior levels. Have you been getting requests for your attention to reciprocal negotiations?
Siegel: We have been proactive with that, more so than in the past. We are an important customer to a lot of our vendors. Our new equity sponsor, the Retirement System of Alabama, has great equity relationships. They have a portfolio of operating companies, including a very large media company, for example, that has thousands of employees around the country. We will make sure that we have competitive offers into those operating companies to get a better share of their business.
BTN: In your mind, are airfares at sustainable levels or is deeper, more comprehensive reform necessary?
Siegel: Absolute revenues are not at a level that can sustain the industry. Something has to adjust to the marketplace. We have always said there needs to be changes to the fare structure that are more consumer-friendly but also revenue-neutral to revenue-positive for the industry. We continue to test ideas, as do other carriers. We would agree that the fare structures need to be simplified. We think the low end needs to come up—and we tried to initiate some things there last year that got unwound this year—and the high end needs to come down. There needs to be a convergence, but how do you do that where you are not revenue-negative?
Some of the experiments of other carriers, where they have tried to simplify, have had a significant adverse impact to the industry. The reduction in price did not sufficiently stimulate enough volume, and they were revenue-negative decisions. You are seeing some of these experiments being dialed back. The industry will search for a structure that works for the consumer and for the airlines. There will be a lot of experimentation to test the elasticity of demand.
BTN: How far off is profitability?
Siegel: It is so hard to say because we are all trying to get a grip on what the real revenue environment is and the extent of the war impact. There is a consensus that the industry loses a significant amount of money this year. Given our restructuring, we will outperform the other network carriers. People are thinking 2004 will be unprofitable and 2005 is when we will make money. It is largely driven by what happens with revenues, and it is hard to predict.
Clearly, the whole industry is on an unsustainable path. We, being the first to restructure, are extremely well-positioned relative to the rest of the industry. We are the lowest-cost major network carrier, and we continue to bring in best practices and challenge the business model. We have built into our plan significant cost reductions over the next two to three years. We are not done.
BTN: An important element of US Airways' restructuring is regional jet deployment. What is the plan and how close is an order from a manufacturer?
Siegel: The order will be very soon and very large. We will deploy RJs in three ways: downgauge lowest load factor narrowbodies and redeploy them for other opportunities; add new markets that were too far for a turboprop and too thin for a mainline jet; and look at opportunities to replace turboprops based on passenger preference or for competitive reasons.
Of the 300 RJs we plan to add, they will fall roughly evenly into each of those three categories. We have a pent-up demand for regional jets that has built up during the past four or five years, so there is lots of catching up to do against the rest of the industry. It will be positive from a marketshare perspective and positive from a customer product perspective. And as you add regional jets, it brings in a lot more feed to the mainline.
BTN: Do you expect additional airline bankruptcies among the major carriers?
Siegel: There are carriers that have a lot of liquidity. As a practical matter, it is unlikely they would file, and it becomes an interesting bluffing game with labor. Others clearly have cash-burn liquidity issues and are on the precipice. The industry will restructure, but there will not be uniform success across carriers. You may have a situation of haves and have nots.
There are three of us who have had burn rates and a liquidity position that forced us to do a significant out-of-court restructuring or go through the process. They are obviously us, United and American. With Delta, Northwest and Continental, the question is, Do they have sufficient liquidity and/or are their burn rates low enough where it would be difficult for them to achieve the same degree of success in restructuring the cost base? It will be interesting to see where we all are in a year or two.