Merger mess stalls US Airways plans, savings
Union issues leave Air West separate
Dow Jones Newswires
Published July 1, 2007
Although Doug Parker, chief executive of US Airways Group Inc., remains a strong proponent of airline industry mergers, he's still working to get his company's house in order.
The low-cost airline came out of bankruptcy in September 2005, having cut costs and shed debt. The same day, it also completed its merger with regional carrier America West.
And even though the airline is in reasonably good financial shape -- reaping more than $11 billion in revenue and $303 million in net income last year and sitting atop $3 billion in the bank -- the operations of the two companies have yet to be combined because of problems merging their union groups.
That means the merger's planned cost savings are mostly stalled, which helps to explain why the stock trades at a discount to rivals.
Shares of the Tempe, Ariz., carrier recently hit a 52-week low, trading around $30 -- less than half the stock's 12-month high of $63.27, reached in November. With a forward price-to-earnings ratio of 5 versus an industry average of about 12, shares appear to be relatively cheap.
Ray Neidl, an analyst at Calyon Securities, recently lowered his price target on US Airways' stock to $46 from $63, mainly on rising fuel costs. But he still has a "buy" rating on the shares, citing the company's relatively low costs and clean balance sheet. Analysts reporting to Thomson Financial, on average, have a "buy" rating on the shares as well.
The fifth-largest U.S. airline by passenger traffic, US Airways' stock performance is pretty much in line with the rest of the industry.
But investors are worried that domestic passenger revenue growth may be slowing, along with the U.S. economy, while fuel and labor costs keep rising. At the same time, major U.S. airlines have cut costs, becoming serious competitors to low-cost carriers like US Airways.
Added to that, US Airways has consistently ranked last in industrywide customer service surveys.
"If we don't start running a good airline, we will drive customers away," Parker told shareholders at the company's annual meeting May 15.
The airline has said it would pay for 600 new ticket-sales kiosks and hire 1,000 employees to improve overall customer service.
Yet David Stempler, head of the Air Travelers Association, a travelers' advocacy group, said customer service rankings are not a serious problem in an industry where passengers, irked by crowded airports and flight delays, routinely put airlines in the doghouse.
"The main thing is the price of the ticket -- after that, it's the convenience of flights," Stempler said.
US Airways had ambitious plans for the merger to create millions of dollars of revenue and cost synergies, initially adding revenue as it bridged complementary route systems -- with US Airways flying in the northeastern U.S. and America West in the West.
But thorny labor problems are holding back cost savings. Until pilots, flight attendants, mechanics and other ground workers ratify new contracts the airline continues to operate two parallel businesses. The unions are struggling to sort out seniority issues and mesh different work cultures.
Money is an issue. As with other airlines, US Airways employees want to share in the recent financial recovery of their company. Contract negotiations can last for years and, in the worst case, work slowdowns and strikes can cripple an airline's operations.
No one's saying that's where US Airways is headed. But, with industry pressures increasing, US Airways would have a harder time responding to a potential downturn than Delta Air Lines Inc. and Northwest Airlines Corp., both lean companies just out of bankruptcy, or Continental Airlines Corp. and AMR Corp.'s American Airlines, said Mike Boyd, head of the Boyd Group Inc., an airline consultancy.
Jim Corridore, an equity analyst with Standard & Poor's, said US Airways' merger plan hit further turbulence when management "took its eye off the ball," neglecting its core business to pursue another merger. Parker and his team fought hard in a hostile bid for the much-larger Delta. That offer, made in November, was rebuffed by Delta as it chose to fly solo upon exiting from bankruptcy.
US Airways' most significant issue came in March, with a failed plan to merge the airlines' two reservations systems. That resulted in massive flight cancellations.
"There is no question that our operation suffered in the February-March time frame, but we've made significant progress since then," Parker said in a statement. "Our on-time performance continues to improve; we're making steady progress in labor negotiations, and our employees are focused on delivering the operational performance all of us expect. Financially, we are performing much better than our competitors and we expect that to continue."
Corridore said he believes that US Airways can work out its labor problems. It's up to managers to remind labor groups that boom times in the cyclical airline business can be short-lived, he said.
But Corridore, who has a "hold" rating on US Airways' shares, cautions that the airline industry is too risky for long-term investors.
Union issues leave Air West separate
Dow Jones Newswires
Published July 1, 2007
Although Doug Parker, chief executive of US Airways Group Inc., remains a strong proponent of airline industry mergers, he's still working to get his company's house in order.
The low-cost airline came out of bankruptcy in September 2005, having cut costs and shed debt. The same day, it also completed its merger with regional carrier America West.
And even though the airline is in reasonably good financial shape -- reaping more than $11 billion in revenue and $303 million in net income last year and sitting atop $3 billion in the bank -- the operations of the two companies have yet to be combined because of problems merging their union groups.
That means the merger's planned cost savings are mostly stalled, which helps to explain why the stock trades at a discount to rivals.
Shares of the Tempe, Ariz., carrier recently hit a 52-week low, trading around $30 -- less than half the stock's 12-month high of $63.27, reached in November. With a forward price-to-earnings ratio of 5 versus an industry average of about 12, shares appear to be relatively cheap.
Ray Neidl, an analyst at Calyon Securities, recently lowered his price target on US Airways' stock to $46 from $63, mainly on rising fuel costs. But he still has a "buy" rating on the shares, citing the company's relatively low costs and clean balance sheet. Analysts reporting to Thomson Financial, on average, have a "buy" rating on the shares as well.
The fifth-largest U.S. airline by passenger traffic, US Airways' stock performance is pretty much in line with the rest of the industry.
But investors are worried that domestic passenger revenue growth may be slowing, along with the U.S. economy, while fuel and labor costs keep rising. At the same time, major U.S. airlines have cut costs, becoming serious competitors to low-cost carriers like US Airways.
Added to that, US Airways has consistently ranked last in industrywide customer service surveys.
"If we don't start running a good airline, we will drive customers away," Parker told shareholders at the company's annual meeting May 15.
The airline has said it would pay for 600 new ticket-sales kiosks and hire 1,000 employees to improve overall customer service.
Yet David Stempler, head of the Air Travelers Association, a travelers' advocacy group, said customer service rankings are not a serious problem in an industry where passengers, irked by crowded airports and flight delays, routinely put airlines in the doghouse.
"The main thing is the price of the ticket -- after that, it's the convenience of flights," Stempler said.
US Airways had ambitious plans for the merger to create millions of dollars of revenue and cost synergies, initially adding revenue as it bridged complementary route systems -- with US Airways flying in the northeastern U.S. and America West in the West.
But thorny labor problems are holding back cost savings. Until pilots, flight attendants, mechanics and other ground workers ratify new contracts the airline continues to operate two parallel businesses. The unions are struggling to sort out seniority issues and mesh different work cultures.
Money is an issue. As with other airlines, US Airways employees want to share in the recent financial recovery of their company. Contract negotiations can last for years and, in the worst case, work slowdowns and strikes can cripple an airline's operations.
No one's saying that's where US Airways is headed. But, with industry pressures increasing, US Airways would have a harder time responding to a potential downturn than Delta Air Lines Inc. and Northwest Airlines Corp., both lean companies just out of bankruptcy, or Continental Airlines Corp. and AMR Corp.'s American Airlines, said Mike Boyd, head of the Boyd Group Inc., an airline consultancy.
Jim Corridore, an equity analyst with Standard & Poor's, said US Airways' merger plan hit further turbulence when management "took its eye off the ball," neglecting its core business to pursue another merger. Parker and his team fought hard in a hostile bid for the much-larger Delta. That offer, made in November, was rebuffed by Delta as it chose to fly solo upon exiting from bankruptcy.
US Airways' most significant issue came in March, with a failed plan to merge the airlines' two reservations systems. That resulted in massive flight cancellations.
"There is no question that our operation suffered in the February-March time frame, but we've made significant progress since then," Parker said in a statement. "Our on-time performance continues to improve; we're making steady progress in labor negotiations, and our employees are focused on delivering the operational performance all of us expect. Financially, we are performing much better than our competitors and we expect that to continue."
Corridore said he believes that US Airways can work out its labor problems. It's up to managers to remind labor groups that boom times in the cyclical airline business can be short-lived, he said.
But Corridore, who has a "hold" rating on US Airways' shares, cautions that the airline industry is too risky for long-term investors.
