US Airways, Pittsburgh Airport Face Uncertainty

January 8, 2004
Pittsburgh Business Times, PA

US Airways, Airport Face Uncertainty
Lease expires Jan. 4, but staying 'high priority' for airline

As the commercial aviation industry continues through a difficult 
restructuring, brought on by increased low-fare competition and an uncertain 
economy, US Airways also has grappled with the additional challenge of 
finalizing a new Pittsburgh lease agreement. 

The issue is one that the Arlington, Va.-based airline, which operates its 
second-largest hub here, admits it would rather not have had to deal with at a 
time when its very survival often appears to be in question. 

"It certainly has been a distraction, and it's been costly to us," said David 
Castelveter, a company spokesman. "We've had a lot of people spend a lot of 
time on this issue, at a time when we face other great challenges." 

The fate of US Airways, Pittsburgh's dominant carrier, is of key interest to 
Western Pennsylvania. The airline, with nearly 380 daily flights, accounts for 
much of Pittsburgh International Airport's traffic, as well as the bulk of its 
$673 million debt obligation. It also employs more than 7,300 people in the 
region. 

Like its peers, US Airways is trying to become more efficient to compete 
against low-fare carriers, such as Southwest Airlines, that continue to lure 
away customers and eat away at key routes. US Airways is also working to launch 
its new Pittsburgh-based regional airline, MidAtlantic Airways, to better 
compete with those carriers on short-haul routes. 

It's dramatically slashed flight schedules and payroll and president and CEO 
David Siegel has said the airline is looking to cut as much as $300 million 
from its annual expenses in 2004. That's in addition to the more than $1 
billion in wage and benefit concessions the airline wrested from employees as 
it laid out its successful Chapter 11 bankruptcy emergence in 2003. 

The airline reported a third-quarter 2003 net loss of $90 million, which was 
down significantly from the $335 million loss it reported for the same quarter 
in 2002, but still a disappointment. 

And, late last month, US Airways' largest employee union, the Air Line Pilots 
Association, called for Mr. Siegel to step down. Mr. Siegel has the support of 
board chairman David Bronner. 

With all of the challenges US Airways faces, the airline's future is uncertain, 
said Jim Corridore, a New York-based transportation industry analyst with 
Standard & Poor's. 

"At this point, US Airways is neither a low-cost carrier or a high-end 
(carrier), it's somewhere in between," Mr. Corridore said. "They've made some 
progress, but they certainly have some financial choices ahead. 

"There's a lot of low-fare competition. They need to get their costs down. That 
might involve pain for all parties." 

Mr. Corridore, however, said he envisions an upturn for the airline industry 
this year and into 2005, in terms of increased traffic and revenue. "There's 
some pent-up travel demand," he said. "I think we're starting to see some 
improvement for the airline industry." 

As for business travel fares, a consistent and lucrative revenue source in the 
go-go 1990s, Mr. Corridore said he believes they will continue to remain low 
due to the prevalence of low-fare carriers and the economy. 

"I don't see them going back to where they were ... ever," Mr. Corridore said. 

Michael Boyd, an Evergreen, Colo.-based airline industry analyst and president 
of The Boyd Group Inc., said he believes US Airways is heading in the right 
direction. He said the Southwest business model is based on locating in cities 
and markets that can attract customers in large numbers, and the remaining 
number of those types of markets is dwindling. 

"I don't think they're as deep in the forest as some might say," Mr. Boyd said. 
"The current management picked up wreckage. The last three years of the (former 
chairman and CEO) Stephen Wolf era were a disaster." 

He said Mr. Siegel has been up-front about the cost-savings he plans to seek 
this year and has implemented strategic initiatives designed to return the 
airline to profitability. 

"That says to me you've got long-term thinkers," Mr. Boyd said. "They focused 
on the Caribbean; they've focused on places where they can make money. I think 
long-term, you've got an airline that's going to be around. I think US Airways 
can pull this off." 

How large a role Pittsburgh International Airport will play in that turnaround 
is unclear. As US Airways and the rest of the industry restructures, hub 
airports such as Pittsburgh could find themselves on the outside looking in. 

"In '92, they opened the perfect airport for the future," Mr. Boyd said of 
Pittsburgh. "Unfortunately, the future changed." 

Allegheny County Airport Authority executive director Kent George agreed with 
Mr. Boyd that the future of commercial aviation has changed, but said 
Pittsburgh International has "the flexibility to roll with the punches." 

"The negative thing is the paradigm for the way airlines do business has 
shifted. Everything's changed," Mr. George said. "However, we have facilities 
here that are world-renowned... Any airline can come in here and have 
facilities that meet their needs, just by walking in the door." 

About 23 of the Airside terminal's 75 gates have been modified to accommodate 
new regional jets many airlines are introducing. And the airport has more than 
two-dozen gates on Concourse E to accommodate commuter planes, as well, he 
said. 

"We probably have too many gates," Mr. George said. 

He said the Airport Authority has been working to attract more low-fare 
carriers to Pittsburgh. AirTran, America West, ATA and USA 3000 all have been 
added to the roster of low-fare options here. 

Mr. George said the authority also has sought out relationships with Southwest, 
JetBlue and Frontier airlines. 

"We have talked with all three of them, and we are ready to meet their needs," 
Mr. George said. He said the three are probably waiting to see what US Airways 
does with its Pittsburgh hub before they would make a commitment to Pittsburgh 
International. 

US Airways, which accounts for the bulk of Pittsburgh International's traffic 
and its debt obligation, has been pushing for the Allegheny County Airport 
Authority to slash the airport's $673 million in outstanding debt by $500 
million. 

US Airways canceled its Pittsburgh leases and threatened to reduce or eliminate 
its local hub, as well as move Mid-Atlantic Airways, depending on whether it 
could achieve its debt reduction goals 

Now, it faces millions in additional costs here because the Airport Authority 
rejected its request to extend the old lease for a year, in exchange for a 
promise to keep its hub at the airport during that period. So, after Jan. 4, 
the airline's self-imposed deadline, U.S. Airways will have to pay a 20 percent 
premium on top of regular lease and landing fees unless it reaches a new 
agreement. The premium is assessed on all airlines operating at Pittsburgh 
International that are not covered by its residual operating agreement. 

Leading up to the deadline, Mr. Castelveter was confident that US Airways and 
Pittsburgh would be able to come to a new agreement. 

"From the beginning we have said we want to stay in Pittsburgh," he said. "It's 
one of the highest priorities in the company. 

"We had hoped to be able to find a solution to reduce the debt and we would not 
have been in the situation we are in now, but we believe we will be able to 
strike a deal." 


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