"US Airways to abandon hub and spoke system, fly point to point"

Wednesday, July 28, 2004

US Airways Plans a Major Overhaul of Its Flights
By MICHELINE MAYNARD
The New York (NY) Times


US Airways plans a major overhaul of the way it flies, concentrating on
direct flights to and from major airports on the East Coast and
dismantling its hub in Pittsburgh, executives said yesterday. It will
also wade into the highly competitive New York-to-Florida market, they
said.

The moves, which are meant to defend US Airways' share of traffic in its
most valuable markets, will take effect in the autumn. 

But the airline warned that the plan, and the company's solvency,
depended on cutting $800 million a year from employee wages and
benefits. It is pushing its unions to accept the cuts before Sept. 30.

Otherwise, according to Bruce R. Lakefield, the chief executive of US
Airways, the airline may be unable to fulfill obligations to its
aircraft lenders, would run the risk of defaulting on its federally
guaranteed loans, and would be in danger of falling back into Chapter 11
bankruptcy. 

The transformation plan "can only happen if we confront the difficult
issues and make the difficult choices," Mr. Lakefield said in a recorded
message to employees. "We don't want others making those choices for
us." 

Yesterday, US Airways also reported a $34 million profit for the second
quarter. The airline, which had the highest operating costs, mile for
mile, among major airlines in 2003, said it had brought them down closer
to those of its peers. It earned $13 million in the quarter last year. 

While any black ink at all is generally heartening news for the airline
industry, Mr. Lakefield said US Airways' latest performance was not good
enough. The second quarter of the year is normally its best, and the
airline depends on it to get through the rest of the year. 

Unless workers grant the concessions, he said, the airline would post
significant losses in the second half, when air travel falls off steeply
after the strong summer season and does not pick up again until
Thanksgiving. 

"These results should not fool anyone into thinking that our problems
are behind us," Mr. Lakefield said. "Unfortunately, our greatest
problems lie ahead."

In September, US Airways must comply with financial covenants in its
loan package from the Air Transportation Stabilization Board, the
centerpiece of the $1 billion refinancing plan that allowed the airline
to emerge from bankruptcy last year. Aircraft financing deals with
General Electric, Bombardier and Embraer are also due to expire then,
the airline's chief financial officer, David M. Davis, said. If the
airline has too little cash to comply with the terms of its loan
guarantees, it will have to renegotiate the aircraft financing deals on
less favorable terms, Mr. Davis said.

Still, Mr. Lakefield looked beyond the immediate challenges to outline
where he wants to take the airline, which he has led since David N.
Siegel resigned as chief executive in April.

The airline will shift away from the hub-and-spoke route system it has
used for a decade, which blankets the eastern half of the country with
flights meant to carry passengers to and from connections at its hub
airports. Instead, Mr. Lakefield told analysts that the airline would
emphasize direct flights to and from airports in Boston, New York,
Washington and Philadelphia, its busiest destination, using aircraft
freed up by the elimination of most connecting flights through
Pittsburgh. 

The move is in part a defensive measure against new low-fare
competition. Southwest Airlines began flights to Philadelphia in May,
and a start-up, Independence Air, began flying from Dulles International
near Washington in June, competing with US Airways' big operation at
Reagan National about 30 miles away.

In Pittsburgh, where US Airways has already eliminated a third of its
flights, the schedule will be adjusted to primarily serve local demand,
it said yesterday, hinting that more cuts are in store. Pittsburgh
airport officials have said that they expect US Airways to cut back and
that they are meeting with other airlines, including low-fare carriers,
about picking up some of the service that US Airways plans to drop.
Starting in September, US Airways said it would strengthen schedules
from New York to Florida, another area increasingly dominated by
low-fare carriers. 

JetBlue Airways, which now flies between Kennedy Airport and Fort
Lauderdale, Fla., plans to add flights from La Guardia in September,
bringing its total to 21 flights a day. Delta Air Lines' new low-fare
brand, Song, also flies to Florida from New York. And American Airlines,
a unit of AMR, said yesterday that it would offer round trips between
New York and Orlando, Tampa and West Palm Beach for as little as $98.

But US Airways, which is already offering $98 round-trip flights on some
Florida routes, sees more potential in the market, and hopes to exploit
it using its existing operations at La Guardia. 

Just a few months ago, US Airways tried to sell its gates there, along
with its East Coast shuttle and other assets, to raise cash.

Some analysts said they thought that move was mainly intended to push
the unions into talks on a third round of wage and benefit cuts,
following the two the airline negotiated while in bankruptcy. Since
then, US Airways has begun discussions with its pilots, flight
attendants and other workers, though the machinists' union has resisted
new talks. Yesterday, the airline said it was no longer trying to sell
the assets.

Rivals said they were not surprised at US Airways' moves. "When you're
doing something that isn't working, you have to try something else,"
said David F. Ulmer, vice president for planning at JetBlue.

Mr. Ulmer noted that US Airways served the big East Coast cities for
years before its low-fare competitors came along, and briefly tried
offering cheap flights within Florida under a failed venture called
MetroJet. "They've been there and done that," he said. Even so, he said,
"the lowest-cost producer will always have the advantage," and JetBlue's
costs are still well below those of US Airways.

A new round of concessions from the unions would probably put US Airways
in good shape to take on the low-fare carriers, said William T. Warlick,
the analyst for Fitch Investors Service. But the competition will fight
back hard, he said: "They're well prepared and ready to get into a
market share game, if that's what US Airways wants."

Attached Photo:

US Airways will emphasize direct flights to and from Boston, New York,
Washington and Philadelphia, above, its busiest destination.

usair.jpg