USAir-United accord shaken

Risk: United Airlines' bankruptcy filing could weaken a ticket-sharing deal with struggling US Airways.

December 16, 2002|By Paul Adams | Paul Adams,SUN STAFF

Last summer, a bankrupt US Airways Group Inc. wowed airline analysts with a recovery plan that seemed likely to lift the troubled carrier out of a financial hole made deeper by its failed merger with United Airlines and the Sept. 11 terrorist attacks.

But recent setbacks suggest elements of the Arlington, Va.-based airline's bankruptcy recovery plan may be in trouble as travelers book fewer trips.

United's own bankruptcy, filed just last week, could shrink the benefits of a code-share alliance between the two carriers that was supposed to net US Airways $150 million in additional revenue annually.

United's filing came right after US Airways' main financial backer demanded more concessions because revenue has fallen short of expectations.

"To the extent that their plan calls for scores of millions of revenue benefit from United, it's a problem," said Kevin Mitchell, chairman of the Business Travel Coalition, a group that represents corporate traveler buyers. Mitchell said United management will be too distracted by the bankruptcy proceedings to properly implement an alliance with US Airways.

"I don't think they'll get what they thought was there and they will probably miss it by a long shot," he said.

The depth of the revenue problem became apparent when David G. Bronner, head of the Retirement Systems of Alabama, said the fund may withdraw its financial support for US Airways unless the company's unions agree to another $200 million in concessions.

The retirement fund has given the airline $240 million in aid and has pledged another $500 million in so-called debtor-in-possession financing in exchange for partial ownership and seats on the board when the carrier emerges from bankruptcy proceedings.

US Airways, which has already trimmed annual costs by $1.2 billion, is trying to cut another $400 million to win final approval for a $900 million federal loan guarantee. Half of the $400 million is to come from non-labor cost reductions.

The airline's pilots have tentatively agreed to additional concessions that are worth about $101 million annually. The airline is negotiating with its other unions to obtain another $100 million in cuts.

Analysts say the aggressive cost reductions won't mean much if US Airways can't bring in more cash.

The alliance with United has been touted as a way for both carriers to extend their reach and fill more seats without having to spend big money. The deal was considered the best option after the carriers' proposed $12.3 billion merger fell apart last year amid antitrust concerns.

Though the airlines remain independent, partners in a code-share can book seats on each other's planes as if they were their own. Customers earn frequent-flyer miles with both carriers and can fly to destinations served by both without having to buy two tickets or check luggage twice. The airlines win by attracting new customers and splitting the extra revenue.

The deal was praised by industry experts when it was announced in July - before the carriers' bankruptcy filings, a move that inevitably scares some passengers away.

"Bankruptcy historically makes people think twice about flying a carrier," said Steven Morrison, an economics professor at Northeastern University who studies airlines.

The stigma associated with Chapter 11 has diminished over the years, he said, but it's still a factor for many travelers, especially those who are booking far in advance and worry that their flight might be canceled.

United has said it will shrink significantly as it cuts unprofitable routes, sells assets and trims staff.

US Airways has done the same - parking some planes and eliminating more than 16,000 employees over the past year. That means the code-share partners ultimately will have fewer flights to offer each other's customers.

Travel agents also may be less likely to steer customers to bankrupt carriers out of concern that flights might be canceled as part of a restructuring.

"There is a risk of having your plans disrupted if the carrier terminates service," said Paul Ruden, senior vice president of legal and industry affairs for the American Society of Travel Agents. "They [United] are going to contract their system and you don't know where that's going to happen or how quickly, so there's some exposure."

The US Airways-United alliance could face further difficulties if federal regulators approve a similar alliance among Delta Air Lines, Continental Airlines and Northwest Airlines. The three carriers proposed the deal in part to compete against the matchup between US Airways and United.

"I'm not sure a code-share alliance between bankrupt carriers is one everyone would be clamoring to mimic," said Robert Mann, an airline consultant with R.W. Mann & Co. in Port Washington, N.Y. "The real issue for US Airways is that the lift they presumably would have gotten by associating with a nonbankrupt airline suddenly just became a bigger albatross around their neck."

US Airways said it still expects to profit from its code-share with United.

"Certainly there will be benefits," said David Castelvetter, a spokesman for the airline. "It's yet to be seen what the schedule at United will be."

The alliance is just one of many steps the airline is taking to increase revenue, he said. In addition to new policies on refunds, the airline is fielding more regional jets to help feed passengers to its main hubs in Charlotte, N.C., Pittsburgh and Philadelphia.

Analysts continue to credit the airline's new management team for its savvy handling of the crisis gripping the industry.

"US Airways is a well-run company," said Michael Boyd, an Evergreen, Colo., aviation consultant. "[The United alliance] could still be hugely successful for them."

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