Flying different routes, carriers land in court... US Plan Wins Praise


Aug 27, 2002
Posted on Tue, Dec. 10, 2002

Flying different routes, carriers land in court
US Airways'' plan wins praise; United has painful cuts ahead
Staff Writer
Two years ago, United Airlines and US Airways were on course to merge into the world''s best positioned-airline.
Now, they are partners of a different sort.
United filed for bankruptcy court protection in Chicago on Monday, four months after US Airways filed in Alexandria, Va. Both succumbed to similar combinations of high costs and a reduced demand for airline travel.
The two airlines also remain joined in a code-share agreement that will allow them to sell tickets on one another''s flights, starting next month. Already, they share frequent flier mileage programs and airport clubs.
Despite the links, however, the two followed substantially different paths into bankruptcy court.
US Airways basically did it the right way, said Ray Neidl, airline analyst for Blaylock & Partners investment bankers, which does not hold airline stocks or bonds. They were prepared for bankruptcy, they knew how much cost cutting they had to do, and they have been moving swiftly through bankruptcy.
United hasn''t seemed to have a plan, he said.
Added Daryl Jenkins, head of George Washington University''s Aviation Institute: United has not really shown the same understanding (as US Airways) of their problems. They''ve been very mishandled for a long time.
US Airways is the principal carrier at Charlotte/Douglas International Airport, offering 462 daily flights and carrying about 95 percent of the passengers. United offers a half dozen daily flights to its Chicago hub and carries 1.3 percent of the passengers.
United''s bankruptcy filing was triggered by last week''s rejection of its request for a $1.8 billion federal loan guarantee.
The Air Transportation Stabilization Board issued a caustically worded rejection, declaring: The board believes that the business plan submitted by the company is not financially sound. The plan does not support the conclusion that there is a reasonable assurance of repayment.
The board criticized both United''s revenue projections and its efforts to cut costs. It called the revenue projections unreasonably optimistic and said that even with reasonable projections and with all of United''s proposed cost cuts, United''s revenues and costs still would not be aligned.
By contrast, US Airways won conditional approval for $900 million in loan guarantees in July. The board sent US Airways chief David Siegel a letter saying it appreciated the airline''s disciplined approach to restructuring. It reaffirmed its commitment in August, when US Airways filed in bankruptcy court.
Approval of the loan guarantees came three months after Siegel unveiled a restructuring plan intended to slash annual costs by $1.3 billion, then began negotiating with unions, lessors and vendors to reduce costs.
In its initial round of cuts, US Airways slashed $840 million a year from its labor expenses. By contrast, United''s plan foresaw labor savings of $5.8 billion over 5 1/2 years, roughly the same target as US Airways, which is far smaller than United.
While United 8,800 pilots agreed to $400 million in annual cuts, US Airways'' approximately 4,000 pilots initially agreed to $465 million in cuts -- and are discussing additional cuts this week.
Analysts attribute some of United''s problems to its 55 percent employee ownership. The arrangement has given unions veto power over management appointments and made it difficult to negotiate contract agreements.
In 2000, seeking to assure its pilots would not block the proposed merger with US Airways, United gave pilots pay hikes of 22 percent to 29 percent, the richest contract in the airline industry.
The following year began with an economic downturn. Airlines were already projecting $2 billion in annual losses in July, when federal regulators rejected the merger. Then came the Sept. 11 attacks, which hastened the falloff in air travel and led to a $7.7 billion industry loss for the year.
This past summer, with the merger plans discarded, United and US Airways agreed to implement portions of it: frequent flier reciprocity, airport
club reciprocity and code-sharing. The first two phases are in place, and code-sharing is set to start in January.
Code-sharing was expected to add about $150 million annually to US Airways revenues, and about $300 million annually to United revenues.
Jenkins said he believes US Airways, has contingency plans and at a certain point, depending on what the restructuring looks like, will probably dump (United) and go someplace else. Clearly, if United were to sell off a part of its global route system, it would be less attractive as a partner. But a US Airways spokesman said Monday the deal will be implemented as scheduled.
Because it is operating under bankruptcy court protection and working to shed even more costs, US Airways is not considered a likely buyer of United assets. Additionally, because there is little overlap of the two airline''s route systems, US Airways is not considered likely to benefit from passenger spillover.