With Wall Street ready to cut its losses, with CEO David Siegel hinting to his 28,700 employees at "strategic alternatives" to remain in business, these are grim times for US Airways.
There was much talk in the wake of Sept. 11 that a major U.S. airline would vanish, and industry watchers now wonder if US Airways is the one.
After all, the airline hired Morgan Stanley to evaluate its assets and look for buyers. Spokesman David Castelveter noted the investment firm will conduct "an exploratory process" that will "identify where the assets are in the company."
Employees and creditors are still awaiting solid details as to how, after bankruptcy and facing a $1 billion debt obligation this summer, the Arlington, Va.-based carrier can keep itself in the air.
"I think it's doubtful that they can survive," said Helane Becker, who tracks airlines for The Benchmark Company in New York.
It would not be the first time the airline faced liquidation. In December 2002, while bargaining with labor unions, chairman David Bronner suggested it might happen. But many new hints of impending fiscal doom have surfaced recently:
- Bronner has indicated the company is likely to sell assets, though Castelveter said "it hasn’t made any decision" on any sale. A sell-off could slim the airline to a profitable size, but the loss of valuable pieces -- such as the airline's East Coast shuttle service -- would take big chunks out of revenues and leave large gaps in the route network.
- The airline faces a June 30 deadline on its loan obligations, $900 million of which are guaranteed by the Air Transportation Stabilization Board. Though the ATSB might provide some leeway, investors aren't optimistic about US Airways' ability to meet the deadline. Standard & Poor's dropped its ratings for the airline even deeper into junk status last Friday. Analyst Philip Baggeley cited "rising competition" from low-cost carriers and the possibility of default. The airline put up some of its most lucrative gate slots to secure the financing.
- Its Pittsburgh hub apparently is shrinking, down from 50 gates on long-term leases to just 10. At the same time, its Philadelphia hub is about to come under attack from low-cost competitor Southwest, which begins service there in May.
- It owns just three of nine operators that form its US Airways Express regional service. It announced Wednesday it would merge two of the three -- Allegheny and Piedmont Airlines -- into a single turboprop operation. Even if it sells those holdings, routes to many of the 143 towns and cities in its regional network have little value unless mainline service continues from all three of its hubs.
- To that end, Mesa Air CEO Jonathan Ornstein -- whose planes fly many US Airways Express routes -- said this week he might buy up some pieces. He told Dow Jones Newswires he wanted US Airways to stay in business, but his move spoke volumes. Mesa could move US Airways regional aircraft and crews into its own regional networks throughout the United States.
- Labor relations hit a new low in the past month. Unions accepted restructuring deals during the airline's bankruptcy, but now feel the terms aren't being honored. The head of the US Airways' pilots union called for Siegel's resignation last month. Flight attendants sued the airline over its plans to furlough 552 workers and won in arbitration Wednesday.
- Four of its vice presidents announced their resignations Thursday, all headed for other companies. Their duties are being taken on by three VPs currently with the airline. It was unclear whether they were asked to leave or sought out new jobs.
'We haven't seen any plan'
CEO Siegel sought to quash speculation about the airline's future last week, but he also left the door open for major changes. "If there are some ways to improve our balance sheet, we must consider those options," he said in a letter to employees Friday. "If there are some strategic partnerships that would enhance our financial standing, we must consider those as well."
Those comments -- and a postponement of employee meetings to discuss the airline's revamping -- heightened workers' concerns that, with major financial decisions coming, they are being kept in a holding pattern.
The airline has no plans to reschedule the meetings, Castelveter said, though it is willing to hold employee talks about cost-cutting: "Mr. Siegel's been open to having those discussions all along." But the airline wants to meet with the unions first, he said.
But Capt. Jack Stephan, spokesman for the pilots union, said the airline has not yet asked for new talks. His members have asked for reorganization details since last April, when the airline emerged from bankruptcy, but have to see a strategy on paper, he said.
"We've heard a lot of talk and a lot of rumors, but we haven't seen any plan," he said. "One day, David Siegel's got to wake up and he's got to go to work."
Few good options
The airline has a number of restructuring options, all with potential drawbacks. It could revamp or trim its route structure; the Pittsburgh changes and the new market pressure in Philadelphia might prompt that anyway. Its regional operations, which serve dozens of small East Coast markets like Massena, N.Y., and Beckley, W.V., currently require significant overhead. But with nine regional partners, any big changes beyond the turboprop consolidation will be difficult to implement.
The airline's biggest routes, such as those to Florida, are in highly competitive markets targeted by low-cost carriers. It has few new markets it can enter. Even trickier, analysts note, it has little ability to trim service without repercussions: Any big reductions to its route map -- especially at its Philadelphia or Charlotte, N.C., hubs -- could be devastating.
"They cut, they're out of business," said Ray Neidl, airline analyst at Blaylock & Partners.
Part of the problem: While many airlines have handled bankruptcy by selling off lucrative routes and slots, US Airways has few assets of value to other carriers. Gate leases at a few airports, such as LaGuardia in New York, would be highly prized, but there is little demand for the remaining Pittsburgh slots. And though US Airways insists it will stay and fight, pressure from Southwest could force US Airways to abandon the city as a hub, potentially devastating its network.
"If they sell off Philadelphia, that’s it," Becker said. "That’s the heart and soul of the company."
The pilots union also said Siegel and other US Airways executives haven't yet fully implemented changes to rules that govern how long and how often crews fly, and that many aircraft are grounded during flight cycles when they could be flown.
"He can fly the airplanes longer, he can fly the pilots and the flight attendants more," Stephan said.
But overcapacity in air travel makes it unlikely more flights will bring more revenue. And given US Airways' extensive route structure, it would be difficult to fly aircraft for more hours each day without changing the network map and cutting some destinations. The airline has not disclosed how much it is willing to shrink, if at all.
"It's too early to make those kind of conclusions," Castelveter said.
‘The void would be filled’
It might instead put further emphasis on cost-cutting. Operating expenses were down over 13 percent in the third quarter of fiscal 2003. But its cost per available seat mile was 9.52 cents, while rivals like Southwest and JetBlue operate well under 8 cents. With that sort of financial pressure, analysts believe US Airways’ only option may be to reformulate in a low-cost structure, which would essentially end its role as a major carrier. Its few remaining international routes would almost certainly be abandoned.
At the same time, competitors have plenty of reason to move in on US Airways’ remaining routes and the 41 million passengers it flew last year. Many US Airways pilots and flight crews could easily be hired to fly under a different logo.
“US Airways could go away tomorrow and the void would be filled almost immediately by low-cost carriers,” Neidl said.
Sales of assets are likely to be difficult, too, outside of a few plums like the Boston-New York-Washington shuttle, which American Airlines has sought in the past.
Most of US Airways’ regional network is operated by independent companies, such as Indianapolis-based Chautauqua Airlines and Wichita, Kan.-based Air Midwest Airlines, though that network loses value if US Airways’ mainline service is cut back.
Of the three regionals controlled by the airline, Allegheny and Piedmont will become a single turboprop operator, and company officials say they are moving away from the slower aircraft in favor of regional jets. US Airways’ one wholly owned small jet operator, PSA Airlines, could be sold off or run as a point-to-point regional carrier and has orders for at least 170 more Embraer and Canadair jets.
Whatever it does, the beleaguered carrier must maintain $1 billion in cash and boost earnings by the ATSB’s June 30 deadline. Fourth-quarter results will be available Feb. 6, but after losing $1 million per day last quarter, a remarkable turnaround would be needed to show positive cash flow. Pilots say they might accept more concessions; the pilots union chief reportedly met with Siegel this week, but they are waiting for a specific business plan. Relations with flight attendants have been strained by the furlough lawsuit. And unions argue the airline now pays less than Southwest in labor costs, while other costs have not diminished.
“We’ve given them a labor cost advantage over Southwest,” said Dawn Deeks, spokeswoman for the airline's flight attendants union. “The fundamental restructuring happened in the labor contracts and nowhere else.”
Asset sales must be approved by the ATSB, which is set to meet with US Airways executives in March to review progress in advance of the June deadline, which could be stretched two weeks. Default would force the airline and its creditors, such as Retirement Systems of Alabama, the pension fund of which Bronner is CEO, to repay most of the loan well before it comes due in 2009.
As such, Siegel and his management team have six months and an ever-shrinking array of options.
“They have until July 15 to make this work,” Becker said. “If they don’t, they’re dead.”