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Remarks of Dave Siegel
President & CEO, US Airways
Made to the International Aviation Club of Washington
September 17, 2002
The Airline Industry Recovery Process
Thank you, Rich. I appreciate the invitation to speak with the International Aviation Club and to allow this forum to be my Washington, DC, debut, so to speak. We are proud that we are the hometown airline of this great city. Our plan is to revitalize our position as the hometown airline so that we are a more important player moving forward. But since Leo Mullin has expressed his desire to deploy an armada to attack us and since my guess is that Continental, Delta and Northwest representatives, better known as the Nina, the Pinta and the Santa Maria, are here in the audience – I will take a pass on discussing the details.
Let me take this opportunity to say one thing, however. It is clear to us that every major network airline is struggling with how to be successful in this new operating environment. Delta’s strategy is built on one basic element: US Airways’ failure. Since that strategy appears not to be coming together as the folks in Atlanta would like, they are now scrambling to find alternatives, as they should. But it seems to me that adding Delta to the Continental-Northwest alliance introduces a whole new set of issues and complexities that will take regulators quite some time to deal with, unlike our alliance with United, which is essentially like the Continental-Northwest agreement already in place.
In any event, I want to thank Rich for reserving for me the introduction of a special guest here at the dais. I appreciate Duane Woerth and Pat Friend being here today. And as you may have noticed, many of my US Airways colleagues who are the respective leaders of our labor unions are with us as well. But the gentleman up here at the head table outranks them all in a special way.
Lou Damiano is a fleet service worker at our Orlando station. Lou joined the company on January 5, 1949 – when my mother was still in high school! He has 53 years of service and is number one on the company’s seniority list. I am very pleased that Lou could be with us here today so that I could publicly and proudly thank him for his dedicated service to US Airways. He epitomizes the loyal and talented workforce that makes up the US Airways family. And he also symbolizes the challenge that the new management team has confronted in trying to make sure that our airline is around for another 50 years, to provide career and retirement opportunities for thousands of other employees. So Lou, thanks for coming up here today. And thanks for your dedication.
You know, it seems like every speech I have made over the past three months has involved my asking for something. Wage and benefit cuts from employees. Lower lease costs from aircraft lessors. Better financing rates from creditors. Since I am here in front of the International Aviation Club, I figure to carry on in that tradition. So on behalf of all the carriers that want access to Heathrow, let me just say to the British government:
Give us some slots. If our employees can make sacrifices, so can you!
There. I feel much better…
As I sketched out my remarks today, it became clear that the most logical topic was “Steps for an Airline Recovery.” Now, all of us in the industry have been through a lot this past year. We have hit bottom, both emotionally and financially. We have taken verbal and physical abuse. So when I walk into a gathering of recovering airline industry people like this one today, it’s almost like going to a support group meeting. I feel like I should walk up to the microphone and simply say:
“Hi. I’m Dave. I’m an airline executive, and I’ve got a problem…”
But I think I’ve got a more constructive and productive opening line:
“Hi. I’m Dave. I’m an airline executive, and I’ve got a solution.”
The only hitch is that it’s not a 12-step recovery process, because we don’t have enough time. So I’ve shortened it up to reflect the need for speed. I’ll call it the Siegel 5-step recovery process. And this clearly has applicability beyond the U.S. airline industry. While we are several years ahead of the rest of the world in dealing with the cycles associated with deregulation, our international counterparts are eventually going to be confronted with the same challenges that beset U.S. carriers.
Step #1: Recognize Reality.
And the reality is that if we don’t do something to dramatically turn this industry around, many of us are going to go out of business. The reality is NOT that we are going to get smaller, or our stock price is going to remain depressed. Or that we can only give small raises next year. It’s that we are going out of business.
Mature, network airlines have been reporting record-breaking unsustainable losses. The key word here is “unsustainable,” as in: “the inability to keep in existence.”
And the evidence is pretty compelling:
Most major carriers are burning cash at rates that were once unthinkable.
The market share for low cost competitors has grown from 3 percent to 20 percent over the past ten years.
Labor costs have grown from 44 percent of passenger revenue in 1991 to 56 percent of passenger revenue in 2001.
While labor costs at the majors are growing, employment is migrating to the low cost carriers, where employees are willing to take jobs at drastically lower wages, with little if any pension, and fewer benefits.
Full fare passenger revenue has declined an alarming 59 percent over the last two years.
I think US Airways completed Step #1 pretty quickly, along with our unions’ leadership. It helped us tremendously that we were not debating reality, or the need to do something industry-leading. We were forced to think big thoughts, and our unions thought along with us. It wasn’t easy. In fact, it was downright painful. And we had some difficult negotiations. But ultimately, we were able to get there because all parties had a common definition of reality, and all parties wanted to see US Airways survive.
Step #2: Accept the Implications and Limitations.
The first implication was the basis for building our restructuring plan. To succeed, we needed to permanently restructure our company. No concessions with snapbacks. No short-term aircraft lease rate cuts that would get us over the hump, only to come back to haunt us later. No putting off the hard decisions for later.
Our choice was stark, yet simple: restructure or liquidate.
Would we become the next Eastern, Pan Am or TWA, or would we become the next Continental?
So as we sought to get our costs under control, we confronted the major issues an airline must face.
On the fleet side, we said we would not pay overmarket rates for aircraft. The world had changed, and paying $300,000 per month for a 15-year-old 737 was not reasonable. Some lessors didn’t believe us and simply refused to negotiate with us on more reasonable rates.
Guess what? They are getting their planes back in the first round of aircraft returns. I think that other lessors now recognize we mean business. The days of hoping we wouldn’t notice that we were paying too much for aircraft in a depressed market are over. We are not going to threaten or bluff. We are going to negotiate reasonable rates for aircraft and other services. And if we can’t achieve them, we’ll look at the alternatives.
(continued...)
President & CEO, US Airways
Made to the International Aviation Club of Washington
September 17, 2002
The Airline Industry Recovery Process
Thank you, Rich. I appreciate the invitation to speak with the International Aviation Club and to allow this forum to be my Washington, DC, debut, so to speak. We are proud that we are the hometown airline of this great city. Our plan is to revitalize our position as the hometown airline so that we are a more important player moving forward. But since Leo Mullin has expressed his desire to deploy an armada to attack us and since my guess is that Continental, Delta and Northwest representatives, better known as the Nina, the Pinta and the Santa Maria, are here in the audience – I will take a pass on discussing the details.
Let me take this opportunity to say one thing, however. It is clear to us that every major network airline is struggling with how to be successful in this new operating environment. Delta’s strategy is built on one basic element: US Airways’ failure. Since that strategy appears not to be coming together as the folks in Atlanta would like, they are now scrambling to find alternatives, as they should. But it seems to me that adding Delta to the Continental-Northwest alliance introduces a whole new set of issues and complexities that will take regulators quite some time to deal with, unlike our alliance with United, which is essentially like the Continental-Northwest agreement already in place.
In any event, I want to thank Rich for reserving for me the introduction of a special guest here at the dais. I appreciate Duane Woerth and Pat Friend being here today. And as you may have noticed, many of my US Airways colleagues who are the respective leaders of our labor unions are with us as well. But the gentleman up here at the head table outranks them all in a special way.
Lou Damiano is a fleet service worker at our Orlando station. Lou joined the company on January 5, 1949 – when my mother was still in high school! He has 53 years of service and is number one on the company’s seniority list. I am very pleased that Lou could be with us here today so that I could publicly and proudly thank him for his dedicated service to US Airways. He epitomizes the loyal and talented workforce that makes up the US Airways family. And he also symbolizes the challenge that the new management team has confronted in trying to make sure that our airline is around for another 50 years, to provide career and retirement opportunities for thousands of other employees. So Lou, thanks for coming up here today. And thanks for your dedication.
You know, it seems like every speech I have made over the past three months has involved my asking for something. Wage and benefit cuts from employees. Lower lease costs from aircraft lessors. Better financing rates from creditors. Since I am here in front of the International Aviation Club, I figure to carry on in that tradition. So on behalf of all the carriers that want access to Heathrow, let me just say to the British government:
Give us some slots. If our employees can make sacrifices, so can you!
There. I feel much better…
As I sketched out my remarks today, it became clear that the most logical topic was “Steps for an Airline Recovery.” Now, all of us in the industry have been through a lot this past year. We have hit bottom, both emotionally and financially. We have taken verbal and physical abuse. So when I walk into a gathering of recovering airline industry people like this one today, it’s almost like going to a support group meeting. I feel like I should walk up to the microphone and simply say:
“Hi. I’m Dave. I’m an airline executive, and I’ve got a problem…”
But I think I’ve got a more constructive and productive opening line:
“Hi. I’m Dave. I’m an airline executive, and I’ve got a solution.”
The only hitch is that it’s not a 12-step recovery process, because we don’t have enough time. So I’ve shortened it up to reflect the need for speed. I’ll call it the Siegel 5-step recovery process. And this clearly has applicability beyond the U.S. airline industry. While we are several years ahead of the rest of the world in dealing with the cycles associated with deregulation, our international counterparts are eventually going to be confronted with the same challenges that beset U.S. carriers.
Step #1: Recognize Reality.
And the reality is that if we don’t do something to dramatically turn this industry around, many of us are going to go out of business. The reality is NOT that we are going to get smaller, or our stock price is going to remain depressed. Or that we can only give small raises next year. It’s that we are going out of business.
Mature, network airlines have been reporting record-breaking unsustainable losses. The key word here is “unsustainable,” as in: “the inability to keep in existence.”
And the evidence is pretty compelling:
Most major carriers are burning cash at rates that were once unthinkable.
The market share for low cost competitors has grown from 3 percent to 20 percent over the past ten years.
Labor costs have grown from 44 percent of passenger revenue in 1991 to 56 percent of passenger revenue in 2001.
While labor costs at the majors are growing, employment is migrating to the low cost carriers, where employees are willing to take jobs at drastically lower wages, with little if any pension, and fewer benefits.
Full fare passenger revenue has declined an alarming 59 percent over the last two years.
I think US Airways completed Step #1 pretty quickly, along with our unions’ leadership. It helped us tremendously that we were not debating reality, or the need to do something industry-leading. We were forced to think big thoughts, and our unions thought along with us. It wasn’t easy. In fact, it was downright painful. And we had some difficult negotiations. But ultimately, we were able to get there because all parties had a common definition of reality, and all parties wanted to see US Airways survive.
Step #2: Accept the Implications and Limitations.
The first implication was the basis for building our restructuring plan. To succeed, we needed to permanently restructure our company. No concessions with snapbacks. No short-term aircraft lease rate cuts that would get us over the hump, only to come back to haunt us later. No putting off the hard decisions for later.
Our choice was stark, yet simple: restructure or liquidate.
Would we become the next Eastern, Pan Am or TWA, or would we become the next Continental?
So as we sought to get our costs under control, we confronted the major issues an airline must face.
On the fleet side, we said we would not pay overmarket rates for aircraft. The world had changed, and paying $300,000 per month for a 15-year-old 737 was not reasonable. Some lessors didn’t believe us and simply refused to negotiate with us on more reasonable rates.
Guess what? They are getting their planes back in the first round of aircraft returns. I think that other lessors now recognize we mean business. The days of hoping we wouldn’t notice that we were paying too much for aircraft in a depressed market are over. We are not going to threaten or bluff. We are going to negotiate reasonable rates for aircraft and other services. And if we can’t achieve them, we’ll look at the alternatives.
(continued...)
