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US Airways’ plans shift in travel slump

Written by editor

TEMPE, Ariz. — In 2005, US Airways was going to be a low-cost carrier.
In 2007, it was going to be a global behemoth.

TEMPE, Ariz. — In 2005, US Airways was going to be a low-cost carrier.
In 2007, it was going to be a global behemoth.

Yet, in 2009, it is neither. US Airways is the nation’s sixth-biggest airline, not the biggest. It flies a conventional network of routes and has high operating costs contrary to the low-cost-carrier operating model.

Instead of remaking itself, the airline today is concentrating on surviving one of the sharpest drop-offs in air travel in history, overcoming concerns about cash liquidity, competition and an unsettled labor dispute, and eking out a profit by the end of this year.

Doug Parker, US Airways’ CEO, is nothing if not confident, however. He says much of the concerns industry analysts have about US Airways are overstated. And, he says, the airline is positioned to withstand all but a total collapse in demand for air travel.

The airline has cut the number of seats it offers by as much as 10% from a year ago in response to lower demand. It’s generating an extra $160 million a year by charging fees for services such as checking bags and choosing preferred seats.

“We think we’ve got our house in order well enough that we could still be profitable, even with a 15% drop in revenue this year,” Parker says.

Improvements tempered by concerns

US Airway has improved customer service from two years ago, when it ranked at or near the bottom in on-time arrivals, mishandled bags and complaints.

Today, it’s at or near the top in all those categories, though research, both internal and external, indicates that most consumers have yet to change their poor opinion of the carrier.

Still, the airline has worries:

•Rising liquidity concerns. Despite raising $700 million from the credit markets in the fourth quarter of last year, US Airways’ cash balance at year’s end — $1.3 billion — was virtually unchanged from its cash balance on Sept. 30. Accordingly, investors are pricing the company’s shares — which have lost 93% of their value in the last two years, vs. the industry’s average stock value decline of 70% — as if they expect it to start running tight on cash by fall.

•Continued route encroachment by Southwest Airlines. Five years after launching service at Philadelphia, a US Airways hub, Southwest is up to nearly 15% of the domestic market there. That’s enough to have a profound effect on US Airways’ ability to raise fares and increase revenue.

Plus, Southwest this summer will launch service — albeit just eight flights a day, and only three flights a day on routes important to US Airways — at New York’s LaGuardia Airport, where US Airways’ Shuttle is a big player.

•Potential undermining of US Airways’ position within the Star Alliance global airline network. Continental Airlines just got tentative government approval to join the Star Alliance. Continental got it with a grant of antitrust immunity that would allow it to work with United Airlines and Lufthansa Airlines, Star’s dominant members, on international routes as if they are a single company. US Airways is a Star member but lacks antitrust immunity, raising questions of whether US Airways could be relegated to stepchild status.

•Ongoing labor disputes that date to the merger of the former America West Airlines and US Airways in 2005.

For instance, the 5,000 pilots from the two carriers are headed to court to settle the battle over how their two very different and unequal seniority lists will be merged. For pilots, seniority is key because it determines who gets the best-paying flight assignments. Pilots from the old US Airways all have more seniority than all but a handful of the former America West pilots.

Until labor disputes are resolved, “US Airways is, for all practical purposes, two different airlines operating under the same name,” says veteran airline analyst Aaron Gellman, a professor at Northwestern University’s Transportation Center. “They’ll eventually get there (a single, unified operation), but Lord knows how long it’ll take them.”

Dashed ambitions

It was after the merger — in which the airline kept the better-known name of US Airways — that the airline planned to fashion itself as a low-cost airline, like Southwest. It even adopted LCC as its stock symbol to emphasize that it was going to be a “low-cost carrier.”

The plan failed to materialize, and today, US Airways has among the highest costs in the industry.

According to a January study by aviation consulting firm Oliver Wyman, US Airways’ cost per available seat mile of 14.21 cents is 46% higher than Southwest’s 9.74 cents in the third quarter of last year, after adjusting for aircraft and route network differences..

Two years ago, the plan was to create a big airline that could compete internationally, and Parker made a surprise bid for the much larger Delta Air Lines. That failed. Instead, Delta merged with Northwest Airlines last year to form the world’s biggest carrier.

Parker remains committed to the idea of controlling costs. And he’s an unabashed advocate of consolidation to reduce the industry’s chronic overcapacity and hypercompetition that make it hard for airlines to post consistent profits.

But for now, he admits, he has no control over the cost of fuel and little control over costs driven by US Airways’ unsettled labor situation. Nor is there much chance in the current economic environment that mergers can get negotiated, approved and financed.

So he and his senior executives are focusing on more immediate concerns: positioning the airline so it can weather the travel downturn with an eye toward a profit.