"US Airways: A year of worry"

Saturday, August 9, 2003

US Airways: A year of worry
Airline's future in Pittsburgh has been in doubt since its bankruptcy filing

By Frank Reeves
The Pittsburgh (PA) Post-Gazette


It's been a year since US Airways filed for bankruptcy, and this much is
clear: the surviving airline is a much leaner, more geographically focused
carrier that sees Pittsburgh playing a less significant role -- if it's to
play a role at all. Even as it continues to push for lower operating costs
at Pittsburgh International Airport under the threat of eliminating it as a
hub, the airline already has slashed operations there.

Whereas Pittsburgh International vied with Charlotte, N.C., for the bragging
rights as the airline's largest hub for most of the late '90s, Pittsburgh
International is now tied with Philadelphia for the No. 2 spot and, on
mainline jet operations, is a distant No. 3, with 136 daily departures, vs.
202 at Philadelphia and 254 in Charlotte. The airline's employment in the
region also has plunged, from 12,700 before the Sept. 11 attacks to under
9,000 at the end of June.

About the only solace local officials can take is that the misery to US
Airways employees and communities its serves is widely shared. Companywide,
employment has been slashed 18,000 the past two years -- a whopping 40
percent drop, from 44,700 in June 2001 to 26,600 at the end of June 2003
including 8,700 cuts the past year alone. Those who have stuck it out have
seen their pay and benefits slashed.

Reflecting on the year and a half since he took over the helm, US Airways
Chief Executive Officer David Siegel recently suggested that, in some ways,
the hardest part is yet to come. "Our restructuring was just the tip of the
iceberg. Every other carrier is struggling to develop and implement its plan
to lower costs and define its future in the industry."

The industry has been hammered repeatedly, first by the 2000-01 recession,
then by the Sept. 11 attacks and the subsequent plunge in passenger traffic,
which still hasn't rebounded. Adding to the industry's woes, said economist
Kenneth Button of the George Mason University School of Public Policy, was
this outbreak of SARS in Asia and the war in Iraq, which curtailed traffic
just as the normally busy spring and summer tourist season was about to
begin.

On top of all this has been the continued incursion of low-cost carriers
such as Southwest Airlines and JetBlue, which keep gobbling up market share
from US Airways and other major airlines. In pressing for concessions from
employees and lessors, US Airways' management repeatedly said its costs are
far out of line with those of the low-cost carriers, who didn't really start
pushing hard into US Airways' core Northeast and mid-Atlantic markets until
the late 1990s.

But for all the cuts and concessions US Airways has obtained in the past
year -- nearly $2 billion on an annual basis -- its unit costs, or the cost
of flying each seat it offers per each mile, are still considerably higher
than Southwest. Some industry analysts doubt that the airline will ever be
able to build a cost structure that allows it to effectively compete with
low-cost carriers.

It's not even certain its costs cutting will drop it far from its perch as
the perennially highest cost carriers among the major airlines.

United also has obtained concessions from its employees after filing for
bankruptcy protection last year, while American's unions granted huge wage
and benefit cuts in the face of that airline's threat to follow suit. And
Northwest, which warned its unions in the spring that it would have to seek
bankruptcy protection if workers didn't grant nearly $1 billion wage and
benefit concessions, said last week that a Chapter 11 filing wouldn't be
necessary as it continues to press for givebacks.

Given its focus on cutting costs, it should have been hardly surprising that
the airline would turn its attention to Pittsburgh International, analysts
said. Siegel has said that US Airways' costs at the airport, when measured
on a per passenger basis, were significantly higher than comparable airports
and that unless they are reduced, the airline will abandon the hub next
year.

Analysts disagree over the risks the airline would face if it's unable to
negotiate a new lease at Pittsburgh airport. "The only risk is that US
Airways will begin making money again," said Darryl Jenkins, who heads
George Washington University's Aviation Institute. "No East Coast carrier
needs three hubs in the East."

But Jon Ash, managing director of Global Aviation, a Washington, D.C.-based
consulting firm, said that "closing a hub is a tough proposition.'' When an
airline gives up control of a hub, it loses control over rates and fares,
and as other carriers move in to fill the gap, this can result in "a
substantial loss of revenue," he said.

Still, Michael Boyd of Evergreen, Colo.-based Boyd Associates believes the
risks of leaving a smaller market such as Pittsburgh aren't that high. No
other airline is likely to come in to establish a hub in Pittsburgh if US
Airways leaves, he said, adding that more carriers would likely serve the
airport, but not to the extent that US Airways does.

Perry Flynt, editor of the trade publication Air Transport World, noted that
the conventional wisdom in the industry is that there are too many hubs.
Indeed, a number of carriers have substantially cut back service at their
hubs or eliminated them all together, including American's slashing of
service last month at its St. Louis hub.

Even so, Flynt said he's not convinced that US Airways is ready to abandon
Pittsburgh. "What they appear to be saying is that a hub would work in
Pittsburgh if the costs are low enough," he said. US Airways has said it
would like to use the airport as a hub for its rapidly expanding regional
jet operations.

So far, the airline, state and local officials are still talking in the wake
of Gov. Ed Rendell's offer in June of $263.9 million in cost savings and
capital improvements at Philadelphia and Pittsburgh international airports.
US Airways notified the Rendell administration last week that it would be a
couple of weeks before the company would be prepared to present a
counter-offer of its own.

Pennsylvania officials publicly say they aren't surprised that it's taken
the airline so long to respond to the governor's proposal. But privately,
some express concern that the airline is biding its time before announcing
the inevitable.


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