lowecur
Well-known member
- Joined
- Sep 14, 2003
- Posts
- 2,317
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."
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."