US Airways trying to fly out of danger

Costs: They are very, very high and they are the mountain that the new chief executive must conquer if he is to save US Airways.

April 14, 2002|By Paul Adams | Paul Adams,SUN STAFF

US Airways' recent exit from Pier D at Baltimore-Washington International Airport is symbolic of the challenges facing Chief Executive Officer David N. Siegel as he tries to bring the nation's seventh-largest airline back from the brink before it runs out of cash.

Pier D is where the Arlington, Va.-based carrier launched its MetroJet division in 1998 and made its stand against budget airlines flooding the East Coast with low fares. Hamstrung by higher operating costs than the competition, the Metro- Jet strategy proved to be a money loser as Dallas-based Southwest Airlines and others systematically attacked US Airways where it was most vulnerable.

MetroJet was grounded for good in December and Pier D is being transformed to make room for Southwest, AirTran Airways Inc. and other carriers to grow.

Unless Siegel can bring the airline's high operating costs down, analysts say, the low-cost competitors that have made BWI's crowded piers a launching pad for growth will continue their assault on US Airways in the Northeast.

"This airline is going to shrink regardless because on the East Coast they are going to get their butts kicked," said Darryl Jenkins, executive director of the Aviation Institute at George Washington University. "And you know why? Because their butts are kickable. When your costs are this much higher than everyone else's, what are your defensive strategies?"

Siegel declined to be interviewed, but US Airways' annual report spells out his difficulties in black and white. The airline's unit cost - the average cost to fly one airplane seat one mile - was 12.46 cents in 2001, a year in which it lost a record $2 billion. By contrast, Delta Air Lines' unit cost was 10.14 cents and Southwest's was 7.54 cents.

Although measured in cents, those extra pennies will add up to another substantial loss when US Airways reports its first-quarter results this week, airline officials warned in a Securities and Exchange Commission filing. Even before the Sept. 11 attacks, the airline was on its way to posting a billion-dollar loss in 2001.

To close the gap, analysts say, Siegel, who took over in March, will need to persuade skeptical unions to loosen work rules and do their part to cut labor costs - a request that labor leaders have heard before.

In exchange for certain incentives, pilots accepted wage concessions in 1997 to help MetroJet keep costs down. And thousands of other US Airways employees went seven years without pay raises in the 1990s, when the airline was recovering from severe losses.

Siegel will have to tackle the labor issue while finishing the restructuring job started last fall by his predecessors.

"They got rid of all the dead wood and what's left is at its core a solid system, but it needs the right cost structure to work," said Ray Neidl, an aviation analyst in New York.

Formerly chief executive of Avis Rent A Car, Siegel has inherited a smaller airline than the one that claimed the top spot at BWI for much of the 1990s before falling to second behind Southwest.

Wolf and former CEO Rakesh Gangwal began a sweeping restructuring plan after the Sept. 11 attacks that included cutting capacity by about 23 percent and eliminating 11,400 of the airline's employees. Three high-cost aircraft types - including the entire MetroJet fleet of 55 Boeing 737-200s - have been eliminated or are in the process of being phased out and sold.

Flights to certain cities have been canceled or replaced with service on smaller planes; ticket reservation centers in three cities have been closed; many city ticket offices have been shuttered; and everything from meals to airport clubs for premium customers have been scaled back or eliminated.

It's in stark contrast with the strategy Wolf adopted two years ago when he attempted to merge the airline with UAL's United Airlines in a deal that would have created the world's largest carrier. The merger fell apart when federal regulators raised antitrust concerns, leaving the struggling carrier with few options other than to restructure.

"One can make the argument that they're moving forward in a process and moving toward a goal of getting rid of the stuff that's clearly draining cash," said Stuart Klaskin of Klaskin, Kushner and Co., a Miami-area aviation consulting firm.

But high labor costs continue to give competitors an edge. Part of the problem is demographics, experts said. Growing airlines such as Southwest are constantly hiring new, young pilots who are paid less than their more experienced colleagues. By contrast, US Airways has experienced little growth in recent years, and it targeted more than 1,000 pilots for furlough because of the Sept. 11 attacks. Those who remain are highly experienced and paid top scale.

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