Dave Siegel - Potomac Officers Club

Zeus

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Feb 21, 2004
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Dave Siegel - Potomac Officers Club
Remarks of David N. Siegel
President & Chief Executive Officer, US Airways
Potomac Officers Club
February 25, 2004


Good afternoon, and thank you for that very kind introduction.

I am a relative newcomer to the greater Washington region, having moved my family to the town of Potomac almost two years ago. We are enjoying our new home, but unfortunately, most of my time has been spent in our offices in Crystal City, at the U.S. Bankruptcy Court in Alexandria, in meetings with government officials in Washington, or on the Beltway or the GW Parkway, trying to get from Potomac to one of those other places I just named. So it might be understandable for me to sometimes lose sight of the fact that this region is a dynamic, thriving business center that has lots going on that does NOT involve government regulators, lawyers, and elected officials. Getting ready for this speech and getting familiar with your group gave me a chance to do that, and reminded me of the tremendous diversity that now shape’s the region’s economy.

In December, aviation industry leaders, government officials, and thousands of aviation buffs all gathered on the dunes of Kitty Hawk, North Carolina to celebrate the 100th anniversary of the Wright Brothers first flight. When you think of the technological achievements of the 20th century, the miracle of man being able to fly clearly must be near the top of the list. Aviation has changed the way we travel and where we choose to live, how we sell and transport goods, run manufacturing plants, and fight wars, and even what we eat, by making it possible to put fish and fruits harvested today in Chile to be on our plates within a few days.

For investors in our industry, however, it is a somewhat mixed bag. Our trade group, the Air Transport Association, reports that the total net income for the commercial airline industry since the government began tracking the data after World War II is a loss of $5.4 billion. That’s right. On a cumulative basis, we have lost more than we have made over the history of our industry. Since I am speaking to a roomful of prominent executives, I don’t have to tell you that that’s not good. Heck, I’m pretty sure even my 7th grader knows enough to figure out that’s not a very good track record of success.

Now plenty of others have made money off the existence of the commercial aviation business – plaintiffs’ lawyers, aircraft manufacturers and suppliers, bankruptcy lawyers, hotels and other travel industry partners, regulatory lawyers, airport concessionaires, labor lawyers – not to mention the legal profession. But all in all, our success rate is pretty pathetic.

Now I used to be one of you. I had all the credentials. Undergrad from Brown and Harvard M.B.A. Up and comer at Bain Consulting. Venture capitalist. Somewhere along the way I went off the yellow brick road and wound up in the weeds and thorns of the airline industry. And it is there that I have spent much of the past dozen years, first at Northwest Airlines, then at Continental and Continental Express, and now here at US Airways. Having been involved in two of the most successful turnarounds in the industry at Northwest and Continental, the US Airways Board of Directors thought I had something to contribute here at US Airways. Given the fact that two years ago at this time, most of the commentary about our airline was that we would be liquidated by the end of 2002, I think we have made remarkable progress. There is still more work that needs to be done, however.

Now if you read the Washington Post story from a few weeks ago, you would be left with the impression that our restructuring plan was “falling apart.†In fact, the headline used those exact words – words that were later retracted in a small correction buried amongst many other corrections in a Saturday edition. I find it both amusing and amazing that the media can be so derelict with its choice of words, and then feel that they have repaired the damage with a “correction†that you need to hire a private investigator to locate. But the purpose of my remarks today is not to bash the media. I will leave that to Michael Jackson and his new Web site which will quote “tell the truth.â€

I am here today to tell you that the US Airways restructuring plan is working. It is just not working fast enough. And for that reason, we must step up our efforts and take more costs out of the business. While this is an exhausting exercise – emotionally, physically and intellectually – it is also an environment of tremendous energy and creative thinking. Furthermore, as difficult as this process has been, we take comfort in one critical fact: We are a company that has readily acknowledged the game-changing, mind-altering, structural changes that the airline business is undergoing. I can’t say the same for some of our competitors, like that airline based in Atlanta that starts with a “D.†Their strategy until recently was to try to drive us out of business and hope that would result in their recovery. Well guess what? We haven’t gone away, and their problems are now worse than they were two years ago. (As you can tell, I am pretty torn up about it.)

But I was told that it would be interesting for the group to hear my views on the state of the industry and where it is going, so I will take the next few minutes to talk about just that – and what US Airways hopes to accomplish within that context.

The events of September 11 shocked the airline industry. Furthermore, advances in technology and the economic recession of the previous several years combined with the impact of September 11 to dramatically accelerate the rate of structural change that the industry is still grappling with. Conference calls and teleconferences routinely replace face to face meetings. Businesses have learned to make do with less travel – or at least less costly travel. Business travelers plan their trips in advance to save money. The days of lots of people paying $2000 fares to the west coast are a distant memory – placed in the same time capsule with the NASDAQ 5000.

The Internet has also provided all of you with perfect price information. You don’t have to rely on the travel agent or the airline reservations agent to determine the best price or schedule. You can shop for yourself, find the bargains, and use those prices as a reference point when you purchase air travel.

All of these changes are good for the bottom line. Yours, specifically. But it has really whacked the heck out of our ability to generate revenue.

It used to be that you could draw a direct correlation between airline industry revenue and the nation’s GDP. That number since the industry was deregulated in 1979 was about zero-point-seven-five (0.75) percent – or 75 basis points – of GDP. And as the nation’s economy grew, so did the industry. But the structural changes I just discussed have turned that correlation on its head. After 9/11, two things have happened. First, industry revenues as a percent of total GDP have hovered at about 50 basis points. More recently, and perhaps more disturbing, the linkage between industry revenue and GDP appears to be broken. In the third quarter of 2003, for example, the GDP grew robustly but total industry revenue actually dropped. Pretty sobering stuff for airline executives. Essentially, while we were still hunched over from the kick in the gut delivered by 9/11, we were put in a headlock by the new realities of the business.

In the airline business, we measure our unit costs by a metric we refer to as CASM. That stands for “cost per available seat mile,†– or the cost of flying a seat one mile – and we generally exclude fuel costs because it is so variable and fuel costs impact the industry pretty much the same. Before our bankruptcy reorganization, our CASM was north of 12 cents per mile. Now it is about 10 cents. That's a pretty good improvement. The problem is that the airlines that are making money – like Southwest and JetBlue – have CASMs in the 6 cent range.

It used to be that the legacy carriers – as we like to now call ourselves – could command a premium. Our position with key real estate assets, known as hub cities, enabled us to enjoy pricing premiums. So we could have higher costs since people were willing to pay more to fly us. But the number of passengers willing to do that is dwindling. Some would even say they are vaporizing. Customers are willing to drive to BWI for the lower fares. Sometimes it isn’t even necessarily for lower fares. JetBlue gets people to drive out to Dulles because they offer what is perceived to be a better product, with leather seats and in-flight television.

We are referred to as legacy carriers in part because we are burdened by the legacy of a cost structure that reflects more than 50 years of commercial aviation history. Most notably, high labor costs. Remember that 4 cent difference in the cost per mile between JetBlue and US Airways? More than half of it is labor costs. JetBlue doesn’t offer retiree health benefits. They don’t offer expensive pension plans. The JetBlue pilot contract is about 60 pages. Ours is close to 1,000 pages, with antiquated, complicated and inefficient work rules that drive up the cost of doing business.

But airlines like JetBlue, AirTran – and soon, Independence Air out here at Dulles – are building a new paradigm in the airline business. And it is one that US Airways and our colleagues at the other legacy airlines need to deal with. For airlines to be successful, everything we do – pricing, distribution, operations, scheduling – must be built around what the customer wants. For too long, dating back to our days as a regulated industry, our business proposition was built around what our internal constituencies wanted. So we signed labor contracts that were uneconomic, and then we simply went to the old Civil Aeronautics Board and got the government’s approval to raise fares to cover our costs. Along those lines, we flew to airports and scheduled flights because of the preferences of elected officials. We still have members of Congress who remember those good old days, and are quite unhappy that we don’t have a nonstop 6 pm flight on Thursdays to their home state or district – so that they can hop on and get home when Congress adjourns for the week.

Well those days are over. Passengers are not willing to pay for our inefficiencies. They want safe, reliable and comfortable air service. But now they also want it to be inexpensive. They want their pilots to be proficient and well trained – but they don’t board the flight, find out we have a generous pension plan for our pilots, and send us an additional $100 to help cover that cost. And we can’t afford to schedule flights where the only passengers are a powerful Senator and his wife and staff assistant.

The harshness of it all is hard to accept. Especially for our veteran employees, who remember when working in the airline industry was a glamorous, well-paying profession. Even with pay cuts secured during the restructuring process, we pay our telephone reservations agents a base pay of about $21 per hour, plus a very generous benefits package. Now I don’t begrudge them that pay, and I certainly admire their ability to support a family on those wages. But JetBlue is paying their telephone agents $9 per hour with modest benefits. And applicants are lining up around the block to get those jobs. The same can be said for other work groups as well.

Our employees are victims of the difficult reality that employees at other airlines are willing to work more hours for lower pay, less benefits and better work rules.

So what does the future of the airline industry look like?

Well, since the customer is king, consumer buying habits, demands and preferences are the overwhelming force. We have seen this movie before. For railroads, the steel industry, textile manufacturing, the auto industry, and retailing – lower costs and market efficiencies will always determine the winner. Whether it is powerful hubs like Chicago or Atlanta, slots and gates and crowded airports like Boston, LaGuardia or Washington Reagan, or privileged international landing rights at London or Tokyo, it is only a matter of time before the force of the free market determines the winners and losers. And we know that in the long run, in a commodity business like ours, lower costs are always better than higher costs.

It is also inevitable – just like in railroads, steel, autos, and other mature industries – that the airline industry will eventually consolidate. I see a world where there are three strong hub-and-spoke carriers providing international service and broad networks that connect small, medium and large markets, and then a swarm of low-cost carriers battling it out in high density markets. But either way, the airlines that survive and thrive will be the ones that find a way to offer customers what they want, at prices they are willing to pay, and at costs lower than those prices. Pretty simple stuff.

On a parochial level, that raises the question “What does all this mean for US Airways?†And for the greater Washington region?

I will take the latter part of that rhetorical question first.

I think that the aviation market in the greater Washington region will only benefit from the changes taking place in the industry. The local economy is strong, dynamic and diverse. There are a variety of choices amongst airports and airlines and that will remain so. Those last vestiges of high fares will not be around forever. One way or another, low-cost carriers will eventually operate assets like the Shuttle to New York and Boston. As the growth of low fares raises expectations, customers will eventually demand $69 or $89 fares to New York, rather than $200 fares that are commonplace today. But as we have discussed here today, the only way to make money charging $69 or $89 fares to New York is to have costs low enough that those prices are above the cost to provide the service.

As CEO of US Airways, my goal is to make sure that our airline continues to utilize those assets. That is why we are confronting our next round of cost cutting and restructuring. The bar keeps getting raised – or in this case, lowered – with regard to low costs, efficiencies, and customer-friendly pricing and policies. Our customers flying out of Reagan National and other important US Airways cities will soon have these lower, simplified fares. The painful question we are trying to answer is whether they will be served by our employees, or by another airline that has competitive costs. We certainly hope that we get there with our employees.

Furthermore, when the inevitable forces of consolidation kick in, it is equally important that we have a competitive cost structure. Otherwise, we will be the awkward teenager at the school dance, hoping someone will come talk to us, but going home disappointed and lonely.

This is a brutally competitive industry. In fact it’s a daily battle for survival. That is why I frequently cite the comments of Charles Darwin, who in his classic book “The Origin of the Species†wrote:

“It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.â€

Change in this business is inevitable. My job is to bring along all of our stakeholders so that they participate. It is not a pretty process, so as you watch it from afar – or through the filter of the news media – I hope you will keep all of this in mind.

Thank you for your kind attention, and more importantly, thanks for flying US Airways.
 
"consolidation is inevitable","only three hub and spoke carriers will remain"
hmmmmmmmm very interesting <_<
 
makes me wonder if u is going to be one of those three strong hub and spoke carriers remaining or will u be united with one of those three. no pun intended. <_<
 
Again, once US Airways stabilizes itself it will then be involved in a corporate transaction, which dependent upon industry events could be a UCT, ICT, KLM-AF type of agreement, or a true merger.

Last Friday the Charlotte Observer reported US Airways chairman David Bronner commented on several other future scenarios for US Airways.

He said it's too early to tell whether the airline will sell assets after retaining investment banker Morgan Stanley to seek offers. But to maintain credibility with Morgan Stanley and bidders, it's important to make a decision within a few months, he said. "If you stay in the red, you sell assets," he said. "Once you get in the black, it's a new game."

Retirement Systems of Alabama, which gained control of the airline during its bankruptcy, won't put more money into US Airways now. "You never want to throw good money after bad ... to save something that's bleeding," he said.

But if the airline turns profitable, it could invest in acquiring more assets.

Bronner emphasized that he is not a typical corporate investor who is "in to get anything and everything we can."

USA320Pilot comments: This is the fourth time Bronner has publicly commented on assets being purchased for US Airways.

Regards,

USA320Pilot
 
a320pilot why did i know that you would be on this thread. as much as i hate saying this but it seems like your merger or transaction rumors may be coming true. alot of people may not like it . but when you have a ceo of a company making remarks like dave did today . it sure makes you wonder what the furure holds for us. <_<
 
Zeus said:
[Now plenty of others have made money off the existence of the commercial aviation business – plaintiffs’ lawyers, aircraft manufacturers and suppliers, bankruptcy lawyers, hotels and other travel industry partners, regulatory lawyers, airport concessionaires, labor lawyers – not to mention the legal profession. But all in all, our success rate is pretty pathetic.
Sorta left carpetbagger CEO's like Wolf and Gangwhal off his list, yes?
 
Zeus said:
[We are referred to as legacy carriers in part because we are burdened by the legacy of a cost structure that reflects more than 50 years of commercial aviation history. Most notably, high labor costs. Remember that 4 cent difference in the cost per mile between JetBlue and US Airways? More than half of it is labor costs. JetBlue doesn’t offer retiree health benefits. They don’t offer expensive pension plans. The JetBlue pilot contract is about 60 pages. Ours is close to 1,000 pages, with antiquated, complicated and inefficient work rules that drive up the cost of doing business.
Strange, no mention of the costs incurred by an inferior business plan - you know, the one that has multiple fleet types instead of one, three hubs too close together, irrational fare structure, etc.
 
We are referred to as legacy carriers in part because we are burdened by the legacy of a cost structure that reflects more than 50 years of commercial aviation history. Most notably, high labor costs. Remember that 4 cent difference in the cost per mile between JetBlue and US Airways? More than half of it is labor costs. JetBlue doesn’t offer retiree health benefits. They don’t offer expensive pension plans. The JetBlue pilot contract is about 60 pages. Ours is close to 1,000 pages, with antiquated, complicated and inefficient work rules that drive up the cost of doing business.

But airlines like JetBlue, AirTran – and soon, Independence Air out here at Dulles – are building a new paradigm in the airline business. And it is one that US Airways and our colleagues at the other legacy airlines need to deal with. For airlines to be successful, everything we do – pricing, distribution, operations, scheduling – must be built around what the customer wants. For too long, dating back to our days as a regulated industry, our business proposition was built around what our internal constituencies wanted. So we signed labor contracts that were uneconomic, and then we simply went to the old Civil Aeronautics Board and got the government’s approval to raise fares to cover our costs. Along those lines, we flew to airports and scheduled flights because of the preferences of elected officials. We still have members of Congress who remember those good old days, and are quite unhappy that we don’t have a nonstop 6 pm flight on Thursdays to their home state or district – so that they can hop on and get home when Congress adjourns for the week.

Well those days are over. Passengers are not willing to pay for our inefficiencies. They want safe, reliable and comfortable air service. But now they also want it to be inexpensive. They want their pilots to be proficient and well trained – but they don’t board the flight, find out we have a generous pension plan for our pilots, and send us an additional $100 to help cover that cost. And we can’t afford to schedule flights where the only passengers are a powerful Senator and his wife and staff assistant.

The harshness of it all is hard to accept. Especially for our veteran employees, who remember when working in the airline industry was a glamorous, well-paying profession. Even with pay cuts secured during the restructuring process, we pay our telephone reservations agents a base pay of about $21 per hour, plus a very generous benefits package. Now I don’t begrudge them that pay, and I certainly admire their ability to support a family on those wages. But JetBlue is paying their telephone agents $9 per hour with modest benefits. And applicants are lining up around the block to get those jobs. The same can be said for other work groups as well.

Our employees are victims of the difficult reality that employees at other airlines are willing to work more hours for lower pay, less benefits and better work rules.
------------------------------------------------------------------------------------------------

oh, ok, tell you what. If we 'me too' the WN contract, is all forgiven?
 
USA320Pilot said:
USA320Pilot comments: This is the fourth time Bronner has publicly commented on assets being purchased for US Airways.
And he's actually hired an auctioneer (Morgan Stanley) to sell assets, and reaffirmed the fact that he will do that if things don't turn around, as opposed to perhaps purchasing assets if the airline becomes profitable.

In other words, as I have said for months, he will not throw good money after bad. Unfortunately for those at US with aspirations for the left seat of a UA 777, UA will be out of bankruptcy long before US becomes profitable, and because UA has spent the requisite amount of time in Chapter 11 (as opposed to the druken run across Harvard Green that US took thru bankruptcy), it stand to reason that Bronner might just sell those US assets to UA in order to recover his investment.

Reality at 11.

As a side note, I would not necessarily put any faith in Little Dave's vision of the industry--this guy could not adequately forecast his own costs and revenues 10 months out. So much for strategic vision--if he had any, Dave-o would not be beating on his employees again for concessions.
 
Trader Jake and others,

I have another added take on his speech besides those mentioned by others...

Refering to your post yesterday regarding Socialism and unions...

From two exerpts from Siegel's presentation above:
1. It is also inevitable – just like in railroads, steel, autos, and other mature industries – that the airline industry will eventually consolidate.

2. Furthermore, when the inevitable forces of consolidation kick in, it is equally important that we have a competitive cost structure. Otherwise, we will be the awkward teenager at the school dance, hoping someone will come talk to us, but going home disappointed and lonely.

This is a brutally competitive industry. In fact it’s a daily battle for survival. That is why I frequently cite the comments of <span style='font-size:14pt;line-height:100%'>Charles Darwin</span>, who in his classic book “The Origin of the Species” wrote:

“It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change
.”

Now, please tell me again who is actually talking the talk and walking the walk when it comes to socialism and communism and Fascism???? It sure ain't unions talk'en that S%$# as you accused. Its none other than the CEO of U. Is this to be sublimial messages of true socialism of controling the wealth and consolidation?From Darwin's lips...to Seigel's mouth!

PS: And this CEO had the gall to call me a socialist and a true believer some many months back??? Like it was a bad thing in his eyes...

Talk about "control".
 
Our CEO speaks above to the high cost of defined pension Plans at U??? There are only two groups with defined pensions left on this property and the liability is so insignficant tht U can't even put it in a catagory of 'distress" to terminate if it begged the PBGC.

Another sublimial message to labor?
 
USA320Pilot said:
USA320Pilot comments: This is the fourth time Bronner has publicly commented on assets being purchased for US Airways.

Regards,

USA320Pilot
And your point, what are you saying, what do you want, why the constant mantra, is there something bothering you?


No different the the yahoo days when boof lived.....
 
USA320Pilot said:
Again, once US Airways stabilizes itself it will then be involved in a corporate transaction, which dependent upon industry events could be a UCT, ICT, KLM-AF type of agreement, or a true merger.
Seriously, don't you mean "if US Airways stabilizes itself"? IMHO, it's still an open question.

USA320Pilot said:
But if the airline turns profitable, it could invest in acquiring more assets.
But doesn't this statement lack any credibility whatsoever given that your union (ALPA) is currently negotiating with US Airways management to further eviserate your scope language to allow the sale of PSA and/or a merged Allegheny-Piedmont, with some (if not all) of the 70-seat flying then going to affiliated carriers like Mesa? Moreover, wasn't Morgan Stanley hired to investigate the possibility of selling various US Airways assets, such as gates, slots or a hub?

So, even if US Airways is financially able to buy a few assets at some point in the future, who do you expect the willing asset-seller to be? If you plan to answer United, remember (as Clue pointed out) that United will almost certainly have long since emerged from Chapter 11 by the time US Airways is in any position to be buying assets. Thus, US Airways (and Bronner/RSA) won't have any leverage to be buying anything that United doesn't want to sell, and I suspect that United won't be selling anything at all after getting itself straightened out during bankruptcy. If anything, United will be doing the buying, although I'm not sure there is much of US Airways that they would want to buy.

The reality that I believe you don't want to face is that, if there is indeed some corporate transaction that will take place in the future, neither US Airways nor Bronner/RSA will be in the driver's seat controlling it. And thus, should US Airways go down that road, you probably won't like the results. JMHO.