"US Airways doubters eat their words"

Sunday, September 11, 2005

US Airways doubters eat their words
Shareholder vote, court approval final hurdles
By Dan Fitzpatrick
The Pittsburgh (PA) Post-Gazette


Terry Trippler, an often-quoted airline analyst, boldly predicted the end of
US Airways in December 2004, telling the traveling public to "stick a fork
in them, folks. They're done."

Nine months later, the twice-bankrupt airline is far from cooked.

"I was wrong," Trippler now admits. "I wrote them off. But this is why they
are the most determined group of survivors I have ever seen. ... This
airline deserves to succeed because they fought back."

The long-sought happy ending for US Airways could come this week, as it
seeks final approvals for a merger with the smaller, younger and more
profitable America West Airlines, in Tempe, Ariz. On Tuesday, America West
shareholders will cast their votes from Tempe, and on Thursday, the deal
will come before U.S. Bankruptcy Court Judge Stephen Mitchell in Alexandria,
Va. Mitchell has the final word on whether the merger makes sense and
whether US Airways should be allowed to exit Chapter 11 bankruptcy for the
second time in three years.

If Mitchell gives the go-ahead, the new airline -- still named US Airways --
officially would take off no later than Oct. 1. It would do so with $2.5
billion in cash, more than 40,000 employees and routes covering more than
200 cities in the United States, Mexico, Latin America, the Caribbean and
Europe.

Savings resulting from the merger -- including concessions from workers,
cuts in expenses and reductions in unprofitable flying -- are expected to
enable the airline to compete with aggressive low-cost carriers such as
Southwest Airlines and JetBlue Airways.

But it also plans to keep some of the perks of an older-line carrier, such
as airport clubs and first-class seating.

"I think we have the makings of the airline of the future," said Trippler,
the Minneapolis-based airline expert with Cheapseats.com.

It is a future that has come at a steep cost to the Pittsburgh region, the
area hardest hit by US Airways' struggle for survival.

Over the last four years, US Airways stripped Pittsburgh of its hub status
and took away 332 daily flights in four years, leaving 210. It also cut more
than 9,000 local jobs, going from a high of 12,700 before the 9/11 terrorist
attacks four years ago today -- an event that crippled the airline industry
and forced US Airways and other carriers into bankruptcy -- to a current
total of 3,460.

The best news for people still lucky enough to have their jobs is that the
airline has a partner in America West that is willing to keep people and
assets, instead of liquidating both.

But it is important to remember that the merger with America West does not
guarantee US Airways' survival, either.

Sky-high oil prices are forcing many carriers, including US Airways, to pay
more for fuel than they do for labor, typically an airline's No. 1 expense.

Fares have been going up as airlines try to pass on some of the costs, and
traffic is up, too. But as long as fuel stays this high, the new US Airways
will be hard pressed to make consistent profits, despite cutting more than
$2 billion in annual labor costs through two bankruptcies.

The new US Airways also will face intense competition up and down the East
Coast and out West from low-cost leader Southwest, the one carrier able to
withstand high energy costs due to an aggressive hedging program that
purchased fuel at cheap prices far in advance.

Southwest has major operations in Phoenix and Las Vegas, two America West
hubs, and in the last year it launched new service from US Airways
strongholds Philadelphia and Pittsburgh

It is a "very inauspicious time to be launching this merger," said Bill
Warlick, an airlines analyst with Fitch Ratings in Chicago.

US Airways was quicker than most old mainline carriers to realize the need
to get its costs down to compete with the newer, more efficient low-cost
carriers that now represent nearly a third of the industry's capacity.
Indeed, United is still months away from exiting bankruptcy, and both Delta
Air Lines and Northwest Airlines, struggling to get their costs down, have
been threatening to enter Chapter 11. Northwest has some difficult labor
issues, too: its mechanics are in the midst of a three-week-long strike.

US Airways claims it needs the merger to achieve a position of strength it
could not have achieved on its own. The combination will spread the
airline's costs over a wider revenue base -- $10 billion -- and result in a
closing of US Airways' Arlington, Va., headquarters and reductions in
unprofitable flights and older planes. But analysts are split on whether the
US Airways-America West merger and its faster action on costs will make
things much better for the new airline.

Warlick, while crediting US Airways for doing "a better job of anticipating
changes that were under way," is pessimistic because the new carrier is
still relying on "markets under tremendous pressure from low-cost carriers."

Marshall, Va., airline consultant Darryl Jenkins is even more doubtful that
this merger -- or others that observers speculate will occur -- would solve
the problems of US Airways or the rest of the industry.

Airline mergers, he noted, "have no record of reducing costs. If they do
reduce their costs, it would be like the first time ever. The airline
industry has this awful record of mergers, but people still want to do
them."

Nonetheless, the US Airways-America West merger "has as good a chance of any
I have ever seen."

Unlike past airline mergers that often took the best of labor contracts to
win peace and get combinations through, the US Airways-America West merger
comes as both carriers pared work forces and capacity following 9/11 and, in
the case of US Airways, slashed pay and benefits prior to the merger.

"As long as investors are willing to stay on board, this company could have
enough cash to make a go of it for a while," Warlick said.

Many analysts are predicting that the US Airways-America West union will be
the first of many as the airline industry looks for ways to survive the high
oil prices and make money again.

Some possible combinations:

Delta and Northwest. The nation's No. 3 and No. 4 carriers are near
bankruptcy and both need to lower their costs to compete. They also
complement each other well, with Northwest strongest going east-west in the
United States and then across the Pacific Ocean while Delta is strongest
going north-south in the United States and then across the Atlantic Ocean.

"It would be a hell of an airline," Trippler said.

United Airlines and Continental Airlines. United, the No. 2 domestic
carrier, has the strongest network in the West but lacks a dominant presence
in the East. It has been in bankruptcy for three years and now claims it
will re-emerge in February. No. 5 carrier Continental, which has a large
operation in New York, could complement United nicely.

"Those two could make sense," Warlick said. "The problem is, who has the
balance sheet and the financing to pull that off."

Added Trippler: "Does Continental want to buy United? I don't know. I don't
see it."

American Airlines and Northwest. American, the No. 1 carrier, has lots of
cash -- $4 billion to be exact. A union of American and Northwest has been
talked about within the industry, Trippler said, but "no two airlines hate
each other more than American and Northwest." American once made a bid for
Northwest, but Northwest rejected it.

Also, American had a bad experience merging with TWA in 2001. It may not
want to take on another challenge so soon.

The names involved may change, but many expect the airline industry to
eventually shrink down to three super-large carriers, via mergers or
liquidations. Delta and Northwest are the most vulnerable at the moment,
along with United.

"I think some of these carriers can still make it," Trippler said, as long
as they act aggressively to mimic the best practices of low-cost
competitors. Delta did that last week when it announced 1,000 more job cuts,
a reduction of service at its Cincinnati hub and the sale of 11 older jets.

"You are seeing things happening you never saw before," Trippler said. Older
carriers "are now starting to take a page out of the success of low-cost
carriers. Forget market share. If a plane or route is not making money, 'we
will pull it.' "

US Airways was among the first to embrace that strategy and put it into
practice, starting with its first bankruptcy in 2002.

But experts had problems believing it would pull through. Back in December
2004, when the airline scrambled to recover from a Christmas holiday
meltdown across its system, especially at Philadelphia International
Airport, "I would have bet the rent they were done," Trippler said.

He felt comfortable enough at the time to say: "Stick a fork in them,
folks." The comment was printed in newspapers around the world

A few months later, when it appeared that US Airways would make it, US
Airways senior vice president Chris Chiames sent Trippler a plastic fork and
attached a note: "Here is something you can use to eat your words."

Trippler had the fork framed -- it now hangs on the wall of his Minneapolis
office.

"Smarter people would have quit a long time ago," he said. "The people of US
Airways deserve to succeed through this merger. They earned it."

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