Beleaguered USAir is laid low by its high costs, fare wars Will they Survive

March 13, 1994|By Suzanne Wooton | Suzanne Wooton,Sun Staff Writer

*TC Not long ago, before the flying public discovered it could get there for practically nothing, USAir thrived. It flew places everyone went, like Boston and the Bahamas, and spots practically no airline did, like Buffalo and Binghamton. It charged what it needed to make a handsome profit.

No longer.

Discount carriers are crisscrossing USAir's East Coast territory, spelling good news for passengers but wreaking havoc for the airline that has long depended on high fares to cover its high costs.

Fare wars -- now seemingly a permanent fixture on the aviation landscape -- are torpedoing USAir's efforts to recover from staggering losses of nearly $2.5 billion over the past five years.

Indeed, even while other struggling carriers started to rebound from the lingering recession last year, USAir stalled. And the airline that once possessed the keys to the East Coast kingdom faces a critical juncture that could determine whether it remains a major player in the U.S. airline industry.

"You cannot lose money quarter after quarter. Either it's going to be Chapter 11 [bankruptcy] or a very substantial cost restructuring," said Chris Fotos, a consultant with Avmark Inc., an Arlington, Va., aviation consulting business.

Because of fare-cutting and harsh weather, USAir, the largest carrier and economic linchpin at Baltimore-Washington International Airport, already is predicting pretax losses of $200 million in the first quarter, triple the loss of the same quarter a year ago, and total pretax losses for 1994 exceeding last year's $350 million.

Reinforcing USAir's precarious situation was a strong message its well-heeled partner, British Airways, sent last week: It will withhold its critical investment unless USAir quickly gets spiraling costs under control.

That prompted Arlington, Va.-based USAir to return to its labor unions seeking pay cuts, a move analysts say the carrier should have made long ago. But it faces tough going and might have to give the employees an ownership share to gain concessions, as United and other airlines have done.

With access to nearly $1 billion in cash and credit, USAir says it can get through the year without pay cuts. But the airline is running out of time.

"It's got to be done this year," said Patricia A. Goldman, a former senior vice president who retired from USAir in January. "We can't go on like this."

But returning to profitability hinges on a tricky combination: cutting costs while giving passengers the low fares they expect.

"It's a problem for United, Delta and American. It's a crisis for USAir," said Jon Ash, managing director of Global Aviation Associates, a Washington, D.C.-based airline consulting firm.

Nothing has worked for USAir.

Since 1990, the airline has laid off nearly 16,000 people, shed unprofitable flights, abandoned California markets, closed its Dayton hub, franchised its commuter operation to independent carriers and delayed orders for new planes.

"I have never seen anybody put on the brakes and take a turn the way they did," said Rose Ann Tortora, an airline analyst with Donaldson, Lufkin and Jenrette of New York. "They were headed for bankruptcy court."

"But the underlying fundamental difficulties are still there," she said. "It's a high-cost airline in low-fare environment."

On top of that, the airline is drowning in debt, largely because of its $1.6 billion acquisition of Piedmont Airlines in 1989. Its credit rating has been reduced to junk bond status, and financial institutions are growing uneasy.

Because of its work rules, wages and short-haul route structure, USAir's costs are higher than those of other major airlines and far higher than those of discount carriers such as Southwest and Continental Airlines.

For years, USAir dominated the East Coast markets, which account for 37 percent of U.S. air travel; it kept pricing high enough to offset its cost structure.

"Now, people like Southwest and Continental, with a much lower cost structure, are controlling it," Mr. Ash said. "And that puts pressure right square on USAir."

USAir spends 11.4 cents to fly a seat one mile. Continental spends 7.8 cents and Southwest, 7.1 cents. "At the end of the day, that's too big a spread," Mr. Ash said.

Overall, 17 percent of USAir's revenues -- nearly twice as high a proportion as for most other domestic airlines -- is exposed to potential competition from low-cost carriers, according to a study by Kidder, Peabody & Co. of New York.

That has forced USAir to launch Project High Ground, short-haul flights patterned on Southwest Airline's highly successful, quick-turn around strategy and to dramatically lower fares on roughly a quarter of its routes.

Project High Ground is designed to make more money using the same number of workers and planes. By gaining productivity, USAir hopes to narrow the gap that makes it so vulnerable to competition from Southwest and other low-cost carriers.

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