05/22/2001 - Updated 12:03 AM ET
By Marilyn Adams, USA TODAY
Months after it was to have been swallowed up by United Airlines, US Airways
is facing a far different prospect: slow decline alone.
A year after the historic merger announcement, approval by the government
seems less likely than ever. In defense of the deal, US Airways Chairman
Stephen Wolf has adopted a merge-or-die stance, saying the nation's
sixth-largest airline will ultimately fail, as did Eastern Airlines, if it
isn't acquired.
Losses are mounting amid an economic stall. Shares are off 48% from their
52-week closing price of $49 a share last May 24, the day the merger was
announced. While Wolf and CEO Rakesh Gangwal publicly blame low-fare
competitors such as Southwest Airlines for US Airways' struggles, critics
inside and outside the airline are questioning the company's own business
decisions.
US Airways has been growing at a breakneck pace, while revenue per seat has
been declining. Metrojet, US Airways' low-fare weapon against Southwest, has
been cut back significantly after money-losing forays at Washington Dulles
International Airport and in other cities that critics say didn't make
sense. Pilot hiring stopped more than a year ago, and the pilots' union says
the airline lacks enough crews to fly all the costly new Airbus jets being
delivered this year.
"The pilots feel the airline is being mismanaged," says First Officer
Roy
Freundlich, spokesman for the pilots union, which supports the merger in
concept. "There's nothing really wrong with this airline except for the
dedication of the people running it."
US Airways' executives declined to be interviewed. But in a letter to USA
TODAY, the airline noted it has recently been among the best in the industry
in on-time performance, customer complaints, lost bags and bumped
passengers. As for its future, "there are only two successful platforms in
aviation today, that of a large network carrier or a low-cost carrier, and
we are neither," the letter says. "There is no place for 'neither' in
today's marketplace."
The response echoes Wolf's recent congressional testimony on the merger and
why it's US Airways' only chance. A year ago Wednesday, United agreed to pay
$4.3 billion, or $60 a share, for US Airways. When it was announced,
executives from both airlines giddily predicted the deal would win Justice
Department approval and close by the end of 2000. But antitrust enforcers at
Justice bristled at the unprecedented market domination the deal would have
given United along the East Coast.
In a bold effort to boost chances of approval, United in January brought in
arch rival American Airlines as a partner with a plan to split US Airways
between them.
But people close to the antitrust review say that may not have improved
regulators' opinions, and the way the new deal was structured - with the US
Airways Shuttle jointly run by American and United, and controls on
American's future growth - may have made things worse. United CEO James
Goodwin told shareholders last week that he still believes the deal can be
finished this summer.
Meanwhile, US Airways' health continues to suffer. It lost $269 million last
year. In this year's first quarter, its operating loss was $228 million, a
64% larger loss than a year earlier, not counting special items.
Says ING Barings analyst Ray Neidl in New York: "It's a much weaker carrier
than a year ago."
Paradoxically, recent losses have come during a period of double-digit
growth in US Airways' passenger traffic and seating capacity. US Airways'
capacity is growing in large part because of delivery of new Airbus jets
ordered in 1997, which are bigger than the aging 727s and DC-9s they
replace. But the airline has discounted its fares heavily to fill seats.
Revenue per seat for each mile flown dropped nearly 8% in the first quarter
compared with a year ago.
US Airways blamed competition and business travelers flying less or flying
on cheaper tickets.
Such relentless growth in the face of steep losses strikes some as
irresponsible. Continental Airlines CEO Gordon Bethune, a sharp critic of
the merger, cites the growth rate as evidence of a failed corporate
strategy.
"Why continue to grow like that when they're posting record losses? Holy
smokes - they're running it right off a cliff," Bethune says. US Airways is
buying more planes and selling more seats, but at fares too low to make a
profit, he says.
Bethune, who helped engineer Continental's turnaround from a bankrupt basket
case to industry leader, suggests US Airways may be pumping up losses in a
bid to help the merger win federal approval.
Some experts believe the Justice Department's antitrust staff would look
more favorably on the merger if it could be shown that US Airways would fail
in a few years without it. If it's approved, US Airways executives and other
shareholders will make a killing on the $60-a-share sales price. Gangwal
would get $19.2 million if the merger went through at $60, and Wolf, $14.7
million. Both joined UA Airways in 1996.
"It's mismanagement," says Bethune. "It's being done to sell
their shares."
In its letter to USA TODAY, US Airways says Bethune's remarks are
self-serving. Continental, which has a huge hub at Newark, also competes in
the Northeast, the letter notes.
"It is widely recognized that Continental's interests are much better
served
by competing against a weakened US Airways as compared to United and
American airlines, both of whom will become vibrant competitors in the
eastern U.S. as a result of the ... merger," US Airways said.
Low-fare competition grows
No one will dispute that US Airways faces a treacherous future alone. More
than 80% of its operations are within the congested and fiercely competitive
region east of the Mississippi. The area is a veritable minefield: Delta Air
Lines, the country's third-biggest airline, is a force in the Northeast,
Atlanta and Florida. No. 2 airline United runs a lucrative hub at Dulles
in
northern Virginia, too close for comfort to US Airways' home base at
Washington Reagan National.
Low-fare giant Southwest competes head to head with US Airways at
Baltimore-Washington International, north to New England and south to
Florida. Low-fare rising stars AirTran and JetBlue are making inroads in the
Northeast, stealing passengers with cheap fares that are hard to match
profitably. AirTran has even announced plans to fly between Pittsburgh and
Philadelphia, a route that is now a US Airways monopoly on which a 3-day
advance-purchase fare runs about $500 round-trip.
Because US Airways is so regionalized, a minority of flights serve cities
outside the East or outside the USA, which limits its appeal to many
business fliers.
"I don't think US Airways has much of a future," says Neidl, the Wall
Street
analyst. "Its cost structure is too high. It's in no position to be paying
such high salaries and benefits."
The pay rates for US Airways employees are competitive with American, United
and Delta. But because most of its flights are fairly short, its labor costs
and overall costs per mile are higher than at those airlines, which have
many more long flights. Its disadvantage against low-fare carriers is even
greater. US Airways spends almost 13 cents to fly one seat a mile, while
Southwest, for example, spends less than 8 cents.
Yet US Airways holds many of the Northeast's jewels. It's the largest
carrier at the Northeast's pre-eminent business airports - Boston's Logan,
New York's LaGuardia and Washington's Reagan National - and it virtually
owns Philadelphia, where it has a hub.
It operates giant hubs at Pittsburgh and Charlotte, N.C.; it owns
Baltimore-based Metrojet and four regional airlines. US Airways, Metrojet
and its regionals serve the USA, Canada, Mexico, the Bahamas, the United
Kingdom and western Europe. The company has more than $1 billion in the
bank.
But in the past few years as earnings have soured, some of US Airways' moves
have baffled many in the industry. Three years ago, eyeing a dot-com buildup
near Dulles airport, US Airways decided to establish a mini-hub there to
leverage its Washington strength. Dulles was a United stronghold, and
AirTran was offering low-fare service there.
Starting early last year, however, US Airways began dismantling or cutting
back its Dulles flights. Dulles service to Boston, LaGuardia and Orlando -
all of which competed against United - was sharply reduced, according to an
analysis for USA TODAY by Back Aviation Solutions. Metrojet flights to
Atlanta, Hartford, Conn., and Miami, which competed against AirTran and
United, were scrapped between May and September last year.
Given the timing, the pullback looked to some as if US Airways was pulling
punches against its future partner. People familiar with the Dulles
initiative say it was losing money, and many observers agree.
"I don't know why they built up there to begin with," says Neidl.
"United
wasn't going to let them take market share. I think they just realized they
made a mistake."
What's the plan?
Metrojet's overall strategy has come under considerable criticism. Launched
in 1998, the low-fare airline-within-an-airline was born of a pilots' union
concession allowing lower pay for Metrojet pilots. The original concept made
sense: operating cheap flights from Baltimore/Washington to match Southwest.
But Metrojet didn't stop there; it branched out to Dulles and several
destinations - including Milwaukee, Birmingham, Ala., and St. Louis - that
either lacked low-fare competition or didn't fit the profile of
leisure-travel, low-fare routes. Consultant Jon Ash of Global Aviation in
Washington calls Metrojet's seemingly scattered approach a "disaster."
"They were cannibalizing themselves," Ash says. "They were doing
things like
Dulles-to-Milwaukee. How do you make that work?"
When Metrojet went into certain markets also raises questions of strategic
intent. Back Aviation's analysis shows many Metrojet routes were launched
after another low-fare carrier started flying there. But the data show that
Metrojet entered some markets - supplanting US Airways and dropping fares -
before low-fare competition existed.
Metrojet began service from Hartford to Tampa in 1998, for example,
replacing the US Airways main line and driving down fares. Metrojet left the
market the following year. Neither Southwest nor Delta Express, Delta's
low-fare division, began service until this year.
Baltimore-to-West Palm Beach, Fla., followed a similar pattern. Metrojet
entered in 1999, replacing US Airways, 2 years before Southwest arrived.
On Atlanta-to-Baltimore/Washington, Metrojet entered in 1999 and is still
the only low-fare carrier between those airports, though AirTran serves
Atlanta-Washington Dulles.
US Airways declined to answer questions about Metrojet, whose financial and
operational results aren't reported separately.
As the busy summer season begins, US Airways' expansion continues. In the
first quarter, capacity grew 13% from first quarter 2000, and passenger
traffic jumped 17%. On average, the airline is taking delivery of one new
Airbus jet every other week this year.
Strain is starting to show. Early last year, the airline suspended pilot
hiring, telling the pilots union that staffing needs were met. The last
training class started in April 2000, a month before the merger
announcement.
Last month, the airline preemptively canceled 73 flights scheduled April 15
through April 30 for lack of pilots, especially on its new Airbus planes,
according to the Air Line Pilots Association. Two weeks ago, the union says,
US Airways appealed for volunteers to postpone their June vacation plans and
fly planes instead.
It says the freeze on pilot hiring is one example of how the company has
stopped long-term planning because it expected the merger to have closed by
now.
The airline declined comment on pilot staffing and wouldn't confirm related
flight cancellations.
In the space of a year, employee morale has undergone a dramatic shift, says
First Officer Freundlich. "We've gone from a sense of security about the
future," he says, "to an intense sense of insecurity."
© Copyright 2001 USA TODAY, a division of Gannett Co. Inc.
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