USAir tries to steer a course away from financial storms

January 20, 1991|By John H. Gormley Jr.

USAir's 1989 annual report depicts on its cover a scene at Baltimore-Washington International Airport: In the foreground, a USAir employee dressed in a bright-red blazer assists a passenger, the two of them bathed in natural light filtering down from a bright blue sky through the airport's distinctive skylight walls.

If that photograph indicates USAir's sense of the importance of its BWI operations, it's fair to say BWI identifies even more strongly with USAir, by far the dominant airline in Baltimore with almost three-quarters of all the commercial flights and more than two-thirds of the passengers.

In the last 18 months, that alliance has begun to take on some worrisome overtones. Despite a history of consistent profitability, USAir Group Inc., based in Arlington, Va., suddenly began to bleed profusely, losing tens of millions of dollars each quarter. The flow has gotten steadily worse, with no sign it will be staunched soon.

The financial condition of USAir, the nation's sixth-largest airline, has people wondering what will happen next, especially since two major airlines -- Continental and Pan Am -- have filed for Chapter 11 bankruptcy protection since the beginning of December.

The inevitable question arises: Will USAir be next?

Although the entire airline industry is in the throes of a financial crisis precipitated by high fuel costs and a weakening national economy, the consensus of people who follow the airline seems to be that USAir is unlikely to file for bankruptcy any time soon. Despite the losses, which are expected to continue, USAir has a sound balance sheet that should allow it to weather the storm, provided the gulf war doesn't drive fuel prices out of sight and the recession is not a long one.

"They're not a bankruptcy candidate. They're really not," said Candice E. Browning, with Merrill Lynch & Co.

"The prospects for the first quarter remain pretty bleak," she said of the airline industry as a whole. But if the war is a short one and the economy begins to recover, "the situation should get much better," she said.

Though USAir is not in as good shape as American, Delta or United, neither is USAir in the same category as Midway Airlines or the ones that have already filed for bankruptcy. USAir, she said, is "not on the heavy casualty list."

Lee Howard, the head of Airline Economics Inc., a Washington-based airline consulting firm, agreed. "The carrier has an awful lot of staying power left," he said.

One reason is that USAir has a relatively healthy debt-to-equity ratio. That puts the airline in the position of a homeowner who has paid off much of his mortgage and can take out a loan, using equity in the house as collateral. Similarly, USAir can borrow money against its assets to cover its operating losses.

The second reason for optimism is the value of its aircraft, which could readily be converted to cash. USAir has historically been an owner rather than a renter of aircraft. And the market value of an aircraft is usually much higher than the book value, making the company wealthier than its balance sheet might indicate at first glance.

"They have an appreciable reserve there," Mr. Howard said. "They can sell those airplanes at good prices and lease them back."

John V. Pincavage, a partner the Transportation Group Ltd., a New York airline investment bank, observed that companies generally file for bankruptcy when they run out of ways to raise cash.

USAir doesn't seem to have that problem. "They don't have to be a Chapter 11 candidate," he said.

Borrowing money or selling airplanes, however, is only a short-term solution. Eventually, it has to be able pay back the loans and meet the lease payments. That means becoming profitable again.

Since 1979, the company had been just that, steadily growing and making money. That unblemished record seemed to be in no danger through the first half of 1989, when the company posted record profits.

That summer saw the culmination of its acquisition of Piedmont Airlines. The merger propelled USAir into the major leagues of airlines, but it also helped produce a major league

loss, $180 million in the last six months of 1989 and a net loss of $63 million for the year.

Just when USAir seemed to be getting the Piedmont merger under control, the national economy began to falter. Jet fuel prices soared in the aftermath of the invasion of Kuwait.

For each quarter of 1990, the losses grew. On Jan. 9, the company said that in the last quarter alone, it expected to post a loss of as much as $4 a common share, about $180 million. Losses for the year could approach $10 a share, or $448 million, about seven times the 1989 loss.

Nor is there any relief on the horizon. "The current outlook for 1991 does not indicate any significant improvements," Edwin I. Colodny, president of the airline's parent, USAir Group, said in a prepared statement issued to The Sun on Wednesday.

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