United, US Airways form major alliance

Deal to honor tickets is expected fill key gaps in USAir's destinations

July 26, 2002|By Paul Adams | Paul Adams,SUN STAFF

Six months ago, many airline analysts saw little hope for US Airways.

The nation's seventh-largest airline was rapidly burning through its cash reserves and seemed to have little chance of slashing labor and operating costs fast enough to avoid bankruptcy.

But in just a few months, the airline has fielded a new management team, cut tentative deals with two major unions and won preliminary approval for a $900 million government loan guarantee deemed critical to keeping the lights on.

The carrier achieved another coup Wednesday by completing a marketing alliance with United Airlines that will allow passengers to fly on both carriers' planes with the same ticket.

The "code-share" agreement will allow the two struggling airlines to share passengers and boost revenue as the industry recovers from a slowdown in air travel.

More important, it might give US Airways added credibility as it tries to persuade anxious creditors to give it more time to restructure outside of Chapter 11. Airline executives have said that a bankruptcy filing is still possible.

"I think there are people in the industry who are really surprised they've accomplished as much as they have," said Jon Ash, a principal with Global Aviation Associates in Washington. "The new team has taken a pretty ugly situation and put it into a posture where it has a chance."

US Airways, based in Arlington, Va., offers 23 daily departures at Baltimore-Washington International Airport and 39 a day using US Airways Express affiliates, making it the second-biggest carrier at the airport. United offers 17 daily departures at BWI.

After cutting labor costs and using more small regional jets, the code-share alliance is an important element in making US Airways' new business model work, analysts said.

"This is only one part," said Ray Neidl, a New York aviation analyst. "The big part is cost, cost, cost."

In another cost-related move, US Airways said yesterday that its managers and officers will take immediate pay cuts to help the carrier save $1.3 billion.

David N. Siegel, president and chief executive, will take a 20 percent salary cut; company vice presidents will take 13.5 percent cuts; senior and executive officers will take 17 percent cuts; and board members will get 20 percent cuts.

Other nonunion managers for the airline also will take pay cuts, and no pay raises will be given until at least 2004, the airline said. Bonus and long-term incentive pay also will be suspended for at least this year and next, and some vacation and sick pay benefits will be trimmed.

Primarily an East Coast airline, US Airways has long suffered from a lack of connections to markets in the western United States, Asia and Europe. United, the second-largest U.S. airline, addresses those concerns by offering US Airways passengers access to Europe, Asia, Latin America and Hawaii.

At the same time, US Airways will give United passengers better access to the East Coast, where United has a weaker presence. No money will change hands in the deal and the two airlines will remain independent competitors.

"Basically, it fills in the gaps in both systems," said David S. Stempler, president of the Air Travelers Association. Stempler praised the deal, saying it will give travelers more options while helping to preserve two major carriers.

Once the deal is implemented, passengers will be able to purchase a ticket with either airline and reach cities served by both without having to buy two tickets or worry about transferring luggage. Similarly, passengers will be able to redeem frequent flyer miles with both airlines.

The agreement was reached a year after a proposed $12.3 billion merger between US Airways and United fell apart amid antitrust concerns raised by federal regulators.

Since then, both airlines have been battered by recession and the effects of the Sept. 11 terrorist attacks. Each is seeking a federal loan guarantee in hopes of avoiding bankruptcy, though United has yet to win tentative approval.

Unlike the failed merger attempt, a code-share alliance does not require regulatory approval. Antitrust experts said the two airlines are unlikely to run into any opposition.

"I don't think in the current environment anybody is going to ask too many questions," said Sam Peltzman, a professor of economics and regulatory expert at the University of Chicago Graduate School of Business.

Analysts differ on how much either airline will benefit from the alliance.

A similar pact between Northwest Airlines and Continental Airlines is worth a few hundred million dollars in added revenue, analysts estimate.

US Airways and United could realize a similar benefit, depending on how many routes are included in the code-share deal. Those details have not been made public by either airline.

"It's probably more beneficial for US Airways because they get things which they would never have had whatsoever," said Darryl Jenkins, director of the Aviation Institute at George Washington University.

The deal could trigger a fierce battle for passengers on the East Coast. Delta Air Lines Inc., which competes with US Airways for East Coast passengers, stands to lose as US Airways and United draw more passengers to their alliance, Jenkins said.

Delta Chief Executive Officer Leo F. Mullin said this month that Delta might retaliate against a US Airways-United alliance by finding a domestic partner.

"We will consider all available options in response to the announced code-share between United and US Airways," said Delta spokeswoman Peggy Estes said.

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