USA Today on UAIR

[lowecur]

Tough love article in tomorrow's USAToday.

Why isn't restructured US Airways taking off?
By Marilyn Adams and Dan Reed, USA TODAY

Almost 10 months after exiting bankruptcy court, US Airways (UAIR) is losing more money than expected. Fuel prices are 22% higher than budgeted. Other costs remain stubbornly high, and last year's revenue projections are falling short. Low-fare airlines plan to invade more of US Airways' routes than its managers ever dreamed — including from Philadelphia, US Airways' third-biggest hub. CEO David Siegel, who was taking bows in spring for whisking the airline through a quick reorganization and landing a federally guaranteed loan, has so alienated the pilots union that it wants him out.

Without bold action, more losses this quarter and next would likely thrust US Airways into default on the government's $900 million loan guarantee. If the government were to call the loan, it would be the airline's death sentence.

"The next 30 to 90 days are crucial," says Blaylock & Partners airline analyst Ray Neidl, who has followed US Airways for 20 years. "Without drastic additional cost cuts, I give them little or no chance of survival."

US Airways' recovery plan is sputtering because:

•Its fiercest competitors are discount airlines with simple business models and low costs, but US Airways remains a complex, high-cost company with three hub airports on one coast, a Northeast shuttle service, a domestic airline, international air service and multiple regional airlines.(Related story: US Airways prepares for Philly face-off)

•It's still saddled with the highest cost structure among the major airlines. Even after cutting overall costs $1.9 billion a year and shrinking its fleet about 30%, US Airways still spends more than rivals to fly one passenger one mile. Why? Its unionized workers are senior and paid top scale — the most junior pilots still working at US Airways were hired in the 1980s. Contracts limit productivity and outsourcing. US Airways mainly flies short trips within the congested eastern USA, where its routes are concentrated. That, too, drives up costs per mile.

•The short reorganization limited US Airways' opportunities to cut costs more deeply. For example, it rejected gate leases at Pittsburgh airport — one of its three hubs — but didn't reject and renegotiate leases systemwide to get better deals on airport real estate. It still flies seven types of jets, requiring buying and stockpiling different parts for each and different crew training.

"The opportunity to restructure costs was squandered," says aviation consultant Michael Roach. "US Airways was in trouble when it came out of bankruptcy."

Even Chairman David Bronner, who runs the Retirement Systems of Alabama, which has become US Airways' largest shareholder, says the reorganization may have moved too fast — although he and Siegel insist the industry shifted in unforeseeable ways. They cite discount leader Southwest (LUV) coming in May to Philadelphia, a congested airport that Southwest had avoided, and AirTran's (AAI) recent order for up to 100 jets. Last week, discounter JetBlue (JBLU) asked the government to let it start flights from New York's LaGuardia Airport, putting more pressure on US Airways.

"US Airways has made huge strides, but we're not quite there yet," Bronner said in an interview. "Could we have stayed in (reorganization) longer and demanded more from employees? We probably should have if we'd known what was coming. The world sort of tanked on us."

Nervous labor

After giving up $1 billion a year in two rounds of contract concessions, labor unions are nervous, even hostile. Last week, leaders of the pilots union voted to listen to a new business plan Siegel says he has and discuss more concessions if needed. Some airline analysts say US Airways can't survive without more efficient flight schedules and crew pay that's tied to profits.

But there's bad blood to overcome. Capt. Bill Pollock, chairman of the Air Line Pilots Association, says many pilots have lost faith in Siegel. To cut costs, the company terminated its pilots' pension plan in bankruptcy court, then went to court to try to reduce its financial liability further. A federal judge ruled against the airline.

"You wonder whether you should negotiate with him, because you're not sure you can trust him," Pollock says.

Siegel told employees recently, "We cannot fool ourselves into thinking we can simply spend money, hope the world gets better, and not take necessary steps to remain competitive."

US Airways' fourth-quarter results, to be announced soon, could further darken the carrier's prospects. There are no official Wall Street forecasts for US Airways' earnings, but Neidl's rough estimate points to a loss of about $125 million, following a $90 million net loss in the third quarter. US Airways was burning $2 million a day in cash before the Chapter 11 but was slightly cash positive at year's end, in part because of a security reimbursement from the government that all airlines received in the third quarter.

The airline's share price hovers around $5, its lowest since emerging from Chapter 11.

To forestall a default, the airline hired Morgan Stanley to explore a sale of assets, such as one or more of the regional carriers or the shuttle serving Washington, New York and Boston. Bronner wants Morgan Stanley's report next month.

By June, US Airways' financial performance must meet strict requirements of the federal Air Transportation Stabilization Board (ATSB), which guaranteed the exit loan, or US Airways could be declared in default. US Airways cannot, for example, lose more money in the first half of 2004 than the loan covenants allow.

If nothing changes, default on the loan "appears to be all too possible given their current rate of loss," says Standard & Poor's airline analystPhil Baggaley.

S&P just downgraded US Airways' credit to B-. Another rating cut would jeopardize financing the airline has lined up to replace slow, unpopular turboprops with new small jets that the company says are critical to its survival. US Airways says it needs them to profitably serve smaller communities.

United Airlines, still in Chapter 11, also has reason for concern. The prospect of a US Airways loan default might discourage the ATSB from guaranteeing a loan for United, which seeks a loan twice the size of US Airways' loan. United also had counted on $200 million a year in revenue from its deal with US Airways to market flights on each other's planes.

US Airways hub-airport communities are bracing, too. Assets at one of US Airways' hub airports — Pittsburgh, Philadelphia or Charlotte — could be sold. Pittsburgh airport, once US Airways' home base, now has long-term contracts with the airline for only 10 gates, while 40 others are leased to it on a month-to-month basis.

"A year ago, the question was whether we'd keep the hub," says Allegheny County Chief Executive Dan Onorato, in Pittsburgh. "Today, the question is whether US Airways will still be a going concern. I have serious doubts they will survive. Their unions have given back a billion dollars a year, and the company still doesn't have its house in order. We want them to stay, but we have to prepare for a scenario in which they disappear."

Once home to 12,000 US Airways workers, greater Pittsburgh now has about 7,800. Of equal concern are US Airways' 105 direct daily flights to the city. A study for the county found daily direct flights could drop to 40 if the hub closes and another airline enters. That would make it much harder to sell Pittsburgh to businesses.

Employees stand to lose most if US Airways shrinks more or disappears. "There are pilots who are alarmed, who are planning other careers," says Pollock. "Most pilots are getting schizophrenic because it's been such a long roller-coaster ride."

Series of unpleasant stops

This crisis is the latest stop in a long, hard trip for the airline. For a decade, US Airways under previous CEOs flitted from vision to vision, even as the low-fare airline revolution was creeping across its system. Four years ago, US Airways agreed to be acquired by United Airlines in a deal ultimately blocked by the government.

Meanwhile, Southwest was methodically gaining strength in former US Airways strongholds in California, Baltimore and Florida.

US Airways could find itself selling assets to the enemy — the low-fare airlines that have hastened its decline. Both discounters and traditional airlines are said to be eyeing US Airways assets or parts of them, but only profitable, low-cost discounters such as Southwest, AirTran and JetBlue might be able to make money with those assets now.

"It's so indicative of how the industry has changed that the people with deep pockets are low-fare carriers," says Washington-based aviation consultant Mo Garfinkle.

The potential buyers may be different, but news that US Airways is considering selling assets once considered jewels of the industry seems reminiscent of the final years of Pan Am, TWA and Eastern Airlines. Eastern once flew the same shuttle that US Airways is considering selling.

All three airlines found that selling pieces of themselves didn't restore their health. It reduced the revenue they could generate, forcing more sales and more shrinkage, until they were gone.

"We don't want this to be another Eastern Airlines," says Capt. Jack Stephan, spokesman for the pilots union. "We have our lives invested in this company. We want to be here long after these (management) guys are gone."

 

[blzr]

SOLUTION.......

New management payscale.

Dave Seagull's new pay........ 5th year capt pay... 100hr/mo max

Top execs......... 3rd year capt pay... 100hr/hr max

middle management.......... 5th year f/o pay........80hr/mo max

secretaries, mailroom, support emp flight attendant pay..

Make 'em go to the office for 12 hours and only pay them for 5 hours.

Feed them crew meals in the cafeteria.

I think this would work.

 

[SWA/FO]

"US Airways has made huge strides, but we're not quite there yet," Bronner said in an interview. "Could we have stayed in (reorganization) longer and demanded more from employees? We probably should have if we'd known what was coming. The world sort of tanked on us."


Demanded more from the employees??? How about every employee bring your checkbook to work? They stole the Pilot retirement, what more could they take?

 

[FDJ2]

Cutting costs is not always the right answer just ask USAirways.

Editor's Note: In September, our resident US Airways' Analyst-in-Residence (AIR) and I addressed US Airways' CEO David Seigel's comments that Seigel had made in response to a column that ran here in PBB in August. In that column, the overriding question I posed to the airline's management was this: Okay Dave, where is your plan for restructuring and repositioning of the airline which will make it a profitable entity? It was pretty apparent that there was none.

As I said then in September, it was becoming increasingly clear that with no restructured plan of action in place -- a plan that would address the serious revenue issues the airline faces -- it seemed only a matter of time before the airline once again began to talk about "cutting costs." Particularly labor costs.

Over the last two weeks, this is exactly what has happened.

As a result, this week yet another PBB subscriber comments on the US Airways' situation, as he takes a look at post-bankruptcy US Airways, and examines the issue of costs at the airline, as compared to Southwest Airlines.

The added benefit of this analysis is the application of many of his comments to a discussion of costs at other legacy carriers vis-à-vis a low-cost competitor.

I thank our subscriber for taking the time from his busy schedule to share his take with us. His background? He has been an active investor in US Airways for many years, has managed investment funds which contained shares of US Airways, has worked for the airline, and I think has a credible take on the airline's financial situation.

Introduction

Six months since exiting bankruptcy protection, US Airways is still operating by all measures at the bottom of its peer group. CEO David Siegel's restructuring plan was, and continues to be, singularly focused on cost reduction. This report examines post-bankrupt US Airways' costs to determine where the lack of sustainable profits originates, what airline management is now doing about it, and what the prospects are for management's ongoing efforts.

CASM -- The Fallacy

Because all passenger airlines seemingly sell a commodity product, a passenger seat from point A to point B, it would seem rational to compare one airline's Cost per Available Seat Mile (CASM) with another airline's CASM to determine which airline has a cost advantage.

For the third quarter 2003, US Airways' CASM was $0.110 and for Southwest Airlines it was $0.075. Without any further information, one can conclude that Southwest enjoys a 32% unit-cost advantage over US Airways. However, this is where the story just begins.

Aggregate Cost is Apples to Oranges

Last Wednesday, in a speech given at the Citigroup/Smith Barney airline investment conference in New York, CEO Siegel stated that for US Airways to compete with low-cost carriers, it needs to reduce costs by another $200 million to $300 million. He has been quoted as saying, "If only we had [X] airline's labor cost, we would be profitable." Such a statement indicates that Siegel believes all the airlines' products and their costs are directly comparable. This is not correct.

Based upon US Airways' 21% cost disadvantage to Southwest, it would seem reasonable to conclude that US Airways must further reduce their unit costs in order to effectively and profitably compete. However, this conclusion completely disregards the revenue side of the equation.

There are two distinct different business models that distinguish US Airways and its toughest competitors like Southwest Airlines.

US Airways operates a hub and spoke system to the nation's primary airports. In doing so, there is a higher cost of operation to offset the revenue premium of operating out of these airports in this kind of system. Southwest Airlines operates a point-to-point system, primarily into secondary airports. In doing so, there is a lower cost of operation, but too, they are comparatively working at a revenue disadvantage.

For example, US Airways can command a higher price for its seat out of Washington National Airport than Southwest can command for a seat out of BWI to the same destination. For many Washington-area travelers, traveling to National Airport from home or work is a short ride on the city's Metro. Conversely, the drive to BWI takes over an hour in the morning rush, not to mention the cost of driving, parking, and the greater risk of personal injury from traveling in dense traffic rather than simply taking the Metro. Washington passengers are willing to pay more to fly out of DCA for its convenience. However, the price is definitely elastic. At some price, the consumer is willing to drive to BWI to obtain a lower fare because their time and personal welfare is worth a limited amount.

To better illustrate the revenue premium model, US Airways' first morning flight from National to Albany, N.Y. sells for $994.50 round-trip. Southwest's first flight out of BWI to Albany sells for $146 round-trip.

As a result, never again let anyone try to convince you that an airline seat is a commodity product, for if they were, you could go to BWI and purchase seats for $146, take them to National and sell them for $994.50.

On this one flight, US Airways enjoys a 681% revenue premium! So while on average Southwest enjoys a 32% cost advantage compared to US Airways, it must be recognized that US Airways enjoys an average 23.7% revenue advantage over Southwest, system-wide. Clearly, a US Airways seat is no more comparable to a Southwest seat than a Mercedes Benz is to a Ford Taurus.

They are two different products, albeit performing the same basic function. However, with a 32% cost disadvantage being offset by a 23.7% revenue advantage, it is clear as to why Southwest's business model generates more profits than US Airways'.

It is the two factors of both cost and revenue that must be calculated in order to make an accurate comparison between two airlines, each offering different products through different business models. In the end, it is profits that matter, not by which business model or aggregate unit cost those profits are generated.

Therefore, the only way an accurate comparison of costs between airlines can be made is not on a per-unit basis as Siegel repeatedly suggests, but rather on the basis of revenue generated.

Costs Accurately Compared

Costs as a Percentage of Revenue (Q3-03)

UAIR SWA UAIR(dis)Advantage

Maintenance 5.4% 6.9% 1.5%

Labor 37.0 38.7 1.7

Depreciation 3.0 6.3 3.3

Landing Fees/Rentals 6.3 6.0 (0.3)

Aircraft Rentals 5.9 3.0 (2.9)

Commissions/Selling 5.7 .9 (4.8)

Fuel 13.9 7.8 (6.1)

Other 27.0 16.2 (10.8)

Total 102.1 90.8 (11.3)


This table depicts each airline's costs as a percentage of revenue. This is, in fact, the only measure by which costs of dissimilar products can be accurately compared, in my opinion.

To be continued.........

 

[FDJ2]

Through the bankruptcy process, US Airways restructured their labor agreements to a point where they now enjoy a labor cost advantage to Southwest Airlines. The increased productivity from renegotiated labor contracts with their mechanics now provides US Airways a maintenance cost advantage to Southwest Airlines as well. Landing fees and aircraft rentals were also renegotiated in bankruptcy to a point where they are now only a slight cost disadvantage to Southwest Airlines.

This is where the cost similarities end, however. US Airways pays significantly more than Southwest Airlines to sell their product. Southwest embeds much of their selling cost into the "Other" category and breaks out commissions. US Airways largely does not pay commissions, but breaks out selling costs from the other category. Regardless, it is clear that US Airways is paying out a significantly larger amount to sell their product than Southwest Airlines.

Both airlines burn a similar amount of fuel in dollars. However, Southwest flies more for less: More aircraft, more miles.

Bottom line: US Airways is comparatively, mismanaging their fuel expense. In October, US Airways flew 3.2 million RPMs and Southwest Airlines flew 3.9 million RPMs, or nearly 22% more miles for the same fuel expense. This makes the difference in fuel costs even more dramatic than as a percentage of revenues. Volume discounts and cost management through the use of derivative hedging is how Southwest maintains this significant cost advantage. It is but one example of how Southwest is better managing its costs than US Airways.

The Devil is in the Details

Never have such words been more apropos than when used to describe US Airways' significant cost of "other." What is "other" --paperclips and rubber bands, perhaps? Chartered jets and limos? Maybe it's the company Christmas party that makes this expense so high. Maybe it's the extravagant corporate offices, a.k.a. the Crystal Palace? Or, is it the cost of hundreds of gates at the relatively expensive primary airports that get used but a few times each day versus a relatively small number of gates Southwest leases at secondary airports but which get used consistently throughout the day?

Regardless, these likely manageable fixed costs are where US Airways encounters their most significant cost disadvantage to Southwest Airlines, much of which is inherent in the hub and spoke business model, and likely as with their fuel expense, much of which is simply a product of poor management.

Siegel's Plan B

David Siegel would like you to ignore the differences between the two business models and concentrate instead on unit costs in a vacuum. By doing so, post-bankruptcy restructured US Airways under his reign still operates with higher unit labor costs than Southwest. Given his limited focus primarily on costs, given that he has already stretched creditors to their limit, and given that he has not demonstrated any ability to further reduce manageable costs such as fuel and "other" any better than he is now doing, the only avenue left open to further reduce costs is by once again attacking his already demoralized and disenfranchised labor group.

This approach begs two questions. First, with hourly pay rates similar to Southwest, why does US Airways still operate with a labor unit-cost disadvantage? Second, will Siegel be effective at producing profits by further reducing labor costs?

In making the comparison of costs as a percentage of revenue for US Airways versus Southwest, labor costs are, in fact, similar. In addition, US Airways' pilot hourly wages are now, post-bankruptcy, similar to Southwest. However, according to CEO Siegel, Southwest still enjoys a productivity advantage from its pilots when compared to the US Airways pilots, as he routinely likes to use the non-comparable unit cost comparison to focus attention on the issue.

But making such a comparison is unreasonable and akin to measuring the number of cars produced per employee per hour at the Mercedes plant to the number of cars per employee per hour at the Taurus plant. They are two different products, produced for two different markets.

By operating point to point through primarily secondary airports, Southwest avoids scheduling flights into and out of competitors' hubs during peak operation times. This produces a level of productivity that the hub and spoke carriers can't possibly match.

When a Southwest crew picks up an airplane for their daily sequence in the morning, that airplane will fly between 11 and 12 hours per day. That crew will fly near the maximum eight-flight-hour shift allowed by the FAA. The turn around times for flights are dramatically lower than the hub and spoke carriers because they are not connecting passengers and they are not competing with hub and spoke carriers for taxiway, runway, and airspace.

A hub and spoke carrier has much less efficiency inherent in their business model. Their airplanes fly less each day, because their time on the ground is much longer. There are connecting passengers and no passenger wants a long layover for their connection. So the hubs work in huge peaks and valleys throughout the day.

Instead of three baggage handlers working relatively constantly to serve the continuous flow of one airplane at a time, arriving and departing... the Southwest model... the US Airways model requires 50 baggage handlers that are either working hard, or sitting on their butts watching today's episode of "All My Children" in the break room, while they wait for the next "bank" of flights to arrive.

No more efficient are the flight crews in a hub and spoke system. Because the airplanes cannot be turned as fast, the flight crews for hub and spoke carriers end up working much longer duty days, for less flight pay time. On paper, it appears that the US Airways pilots are less productive because they get paid for sitting. In reality, the Southwest pilots would get equal pay for unproductive sitting time. However, because the point-to-point business model does not inherently create idle sitting/connecting time, they aren't paid for nearly as much unproductive sitting time at Southwest.

Ask any pilot if he'd rather be in the cockpit flying a flight, getting paid one hour for every hour flown, or if he'd rather be sitting in the crew room in Philadelphia waiting three and a half hours for his next flight, while getting paid one hour of flight pay. Pilots want to fly and get paid for flying. It is inherent in the hub and spoke system that they end up unproductively getting paid for sitting.

To further illustrate; a hub and spoke airline must run on time to be successful so that passengers can make their connections. Hub and spoke carriers must build inefficiencies into their schedule so that connections will be made.

For example, Southwest's first flight of the morning from BWI to Albany is scheduled for one hour five minutes. US Airways' first flight from National to Albany, is scheduled for one hour 28 minutes. This extra 23 minutes of flying time is 23 minutes more flight pay for each of the US Airways pilots and each of the flight attendants... multiplied by 3,300 flights per day.

Don't for a second think that this extra 15 to 30 minutes per flight for taxi time and air traffic delays at the congested hub and spoke airports US Airways flies to and from doesn't add up to much. It is THE difference between the efficiency of Southwest pilots versus US Airways pilots. Think of it as the difference between how many more man-hours it takes to build a Mercedes-Benz compared to a Taurus. However, if the Mercedes can command a higher price to offset the higher cost, then the fact it takes more man-hours to build is irrelevant to producing a profit.

To be continued..........

 

[FDJ2]

Will Siegel's Vision Work?



Before the US Airways-Piedmont merger, Piedmont had been going through a period of unprecedented growth, profits and success in the industry. Part of this success was achieved by building a product in Florida called the Florida Shuttle. They used Fokker F-28s and flew point to point throughout the state of Florida. No F-28 on the shuttle ever... EVER flew outside of Florida.

The flights were all on time, having never to negotiate any of the weather or traffic delays of the northern airports. People loved the service and the whole thing was a huge success. Then came along USAir and they broke the business model that didn't need to be fixed. The F-28s were now flown throughout the USAir system with no dedicated aircraft to the Florida Shuttle.

They closed the Miami flight crew base and rotated aircraft and crews through flights that made up the Florida Shuttle. Two things happened. The flights never ran on time any longer, and the cost of operation was higher than the revenue the service generated.

How could Piedmont be successful and USAir a failure on the very same routes? Instead of an F-28 flying between Miami and Tampa all day long, on time, USAir now routed a 737 from Pittsburgh to Philadelphia to Charlotte to Miami to Tampa. The Miami to Tampa segment was still the Florida Shuttle. But the airplane was never on time, after building delays all day operating through hub cities.

The efficiency was gone.

The pilots now had to face long sit-times through hubs instead of strapping themselves into an F-28 and flying it all day long with no unproductive penalty to the company. It was a classic example of ruining a perfectly good low-cost point-to-point model by inserting the high-cost aspects of a hub and spoke system into the system. It didn't work and soon thereafter, the Florida Shuttle was dismantled, leaving open the opportunity for a major competitor and their regional partner to move into that lost profit-making division.

On Nov. 10, 2003, US Airways announced they were going to start flying direct to Orlando from a few non-hub cities in the Northeast. Such a move is similar to the one USAir tried with the Piedmont Florida Shuttle many years ago, and likely will be met with similar unsuccessful results. Combining the inherent inefficiencies of a hub and spoke system with a relatively few low-revenue generating point to point flights will be a losing proposition for Siegel and US Airways. It appears that he wishes to retain the high-revenue generating markets he now serves, but he is trying to squeeze costs down to the level of the more efficient point-to-point model. Effectively, he wants it both ways.

Meanwhile, Southwest recently announced new service to one of US Airways' high-revenue strongholds, Philadelphia. David Siegel has vowed to fight Southwest and told his employees that this will be the fight of their life.

Likely, Southwest will come into Philadelphia with flights to relatively low-revenue cities in Florida, sharply undercutting US Airways' current revenue premium on these routes. Southwest's costs of operation out of Philadelphia will be much higher than at other airports they serve. However, they will have the balance of their low-cost, high-profit system to offset these higher costs. US Airways, on the other hand, will likely match Southwest's low fares, further eroding their revenue premium, with the balance of their system currently high-cost, high-revenue, but unprofitable as a backdrop to this fight.

What can Siegel hope to achieve in his fight with Southwest? It is irrational to think that Southwest will pull back from Philadelphia, beaten by US Airways. Rather, Southwest has all to gain, and US Airways, all to lose.

Conclusion

It is irrational to believe that David Siegel can continue to generate a revenue premium while reducing his unit labor costs to levels comparable to the low-cost model. It would be akin to Mercedes Benz demanding an equal amount of labor to produce its automobile as it takes Ford to build a Taurus.

The end result would be that the consumer would no longer pay a premium for a Mercedes, the premium brand would be tarnished and its revenue premium would cease to exist. Therefore, saddled with higher materials costs than for a Taurus, Mercedes would become a consistent money-losing product.

Siegel may be able to extract another $300 million from his labor groups. However, he will do so at the expense of his already inferior product. Yet his cost of production from the higher cost airports will remain intact, further reducing his profit margin as his revenue premium erodes ever more. Of course the next question then becomes how much more will Siegel be asking from his employees when Richard Branson starts service with his new low-cost carrier out of Boston, another one of US Airways' strongholds?

I have no doubt that going forward the airline is going to face one fight after another -- in one market after another. Fights that will do nothing but erode the airline's revenue premium.

As a result, Siegel and US Airways do not need to be asking its employees for more cuts.

What they need to be doing is figuring out what kind of airline US Airways needs to be to reach profitability. Or, as Holly has written, where is the plan to reach profitability?

Let's look at two options the airline has.

One, if US Airways wishes to compete with the likes of Southwest and JetBlue, it will have to give up its revenue premium by operating out of the primary high-cost airports and move into the secondary markets like the competitors the airline wishes to emulate.

At that point, the airline would be able to realize the cost advantage of this type of operation and his labor group would, overnight, become equally efficient and productive. Further labor cost reductions would not be necessary and further labor disenchantment with management would not materialize -- which would have the benefit of an enhanced product for the consumer.

Simply put, David Siegel cannot have the costs of Southwest while retaining the revenue premium he currently commands.

On the other hand, if he wants to disregard the low-cost carriers and make a full commitment to the high revenue marketplace -- then what should he do?

First, low-revenue markets should be abandoned while high-revenue markets should be exploited. America West is leading the industry in ferreting out high-revenue markets and redeploying their assets into these markets.

Now, don't misunderstand me. Siegel cannot compete on fares out of his high-cost primary airports and shouldn't attempt to do so. But rather, if he embraces the high-revenue market, do so by increasing the value and convenience his operation provides over the low-cost model at the secondary airports. His efforts at cutting costs should be redirected towards better managing his fuel and "other" expenses, recognizing that as a percentage of revenue, his labor costs are now in parity with the profit leaders in the business.

But to simply stand still, and make no significant change to the airline's existing revenue structure, in either direction, is a losing proposition.

Why?

The industry has changed as consumers have shown a willingness to drive their automobiles hours to reach a secondary airport where they can enjoy a low-priced fare. As the consumer has gradually made this choice, the revenue premium enjoyed by the legacy carriers has eroded to a point where they are no longer profitable using the hub and spoke, primary airport model.

As a result, for US Airways to simply retain this model in hopes of a better day is, at best, wishful thinking. At worst, a reflection of poor management.

To retain this model and put the inherent cost burden of such a system on the backs of frontline employees will further erode profit margins. To retain this model and try to compete on fares with the low-cost carriers is also not reasonable, as pay-rates for employees would have to be half of pay-rates enjoyed by low-cost carriers in order to bring unit labor costs into parity. This would then lead to a comparably poor product for the consumer.

One thing is clear. David Siegel and the current management at US Airways will not be any more successful than his predecessors were at trying to combine the elements of both business models into one operation. Southwest's announcement to move into Philadelphia has simply increased the speed by which Siegel's "want it all" plan will fail.

 

[Intruder One]

FDJ2.............Well said,maybe you should send this to Siegal he must not have a clue.

 

[General Lee]

That is a good article, worth the long read.

Bye Bye--General Lee

 

[iaflyer]

FDJ2:

I apologize if I missed it, but I looked through the article, and didn't catch where it was from, other than "PBB". I was just curious who/what kind of place would write a detailed writeup like that.

Thanks - Alex