One of the Dave''s talk


Feb 12, 2003
Remarks of David Siegel
President & Chief Executive Officer, US Airways
To the Morgan Stanley Debt Investors Conference
New York, NY
May 1, 2003

Good afternoon. Thank you for that nice introduction and for the invitation to speak with you here today.

I don’t have to tell anyone in this room that these are extraordinary times in the airline industry, but for emphasis, let me just say that these are extraordinary times in the airline industry. When I first joined with Northwest Airlines back in 1991, I had a senior manager pull me aside one day to tell me: “This is an unprecedented time for the industry. Never before had we had the confluence of an economic downturn, overcapacity, high fuel prices, an industry liquidity crisis, high labor costs, war and fears of terrorism. Take it all in,†he told me, “because you will never see anything like this again.â€

I only wish he would have been wrong. Or at least half wrong. Because a dozen years later, the airline industry is grappling with the same set of circumstances – magnified – and now we have the SARS epidemic too.

So when I came to US Airways a little more than a year ago, it was with the full knowledge that we had a steep mountain to climb. And beyond the lousy set of circumstances in our operating environment, the world of commercial aviation has changed forever – especially for business travel, which has always been the cornerstone of our profitability. Business travel buying and behavior patterns are part of this new world that is forever changed. Just as the NASDAQ at 5,000 and the 28-year-old dot-com millionaires are a faint memory, so too, are the corporate travel budgets that had no limits.

Business travelers now shop with price in mind. Not to the extent of Aunt Martha who will only fly when the fare falls below $200, but they are now bargain shoppers nonetheless. They stay over a Saturday night. They book their travel 21 days in advance. They do all kinds of things to save money that they would not have done in the go-go days of the ‘90s. And, they are assisted by perfect price information that is now available to each and every one of us via the Internet.

At US Airways, our restructuring strategy recognized these and other factors of this new world of commercial aviation. At the core was the requirement that we reduce our costs, because airline revenues will likely never be generated at the rates they once were. We have to be able to compete with all airlines – large network carriers and small niche operators, full-service and low-fare airlines alike – and we have to be able to do so profitably. So lowering our cost structure was critical.

With the help and support of our employees, we have been able to do just that. Overall, we have reduced our costs almost $2 billion on an average, annualized basis over the next seven years. That includes more than $1 billion per year in reduced labor costs that were reached through consensual negotiations, as well as reduced fleet, vendor, and other operating costs.

Our strategy was also based on building a business plan, articulating it to our important constituencies, and sticking to it. We looked at our strengths and weaknesses, and devised a way to leverage our strengths and turn our weaknesses into assets. Some looked at our route network and criticized us for being too concentrated in the east and too focused on smaller cities.

We, on the other hand, looked at our network and saw something else:
The major carrier east of the Mississippi, where 60 percent of the nation’s population and wealth reside.
Strong positions in the major business markets of Boston, New York and Washington, with excellent facilities and slot holdings at the preferred airports of Logan, LaGuardia and Reagan National, respectively.
A network of nearly 200 communities. We are the only carrier at 40 of them, and the number one or number two carrier at two-thirds of them.
An active frequent flyer base of 4.5 million customers.
A growing route network to the Caribbean and an excellent transatlantic gateway at Philadelphia, both which play off our strength on the east coast.
And most importantly, tremendously resourceful and loyal employees fully dedicated to customer service.
Consequently, our business plan is built on a platform that seeks to leverage these strengths:

We have maintained service to all but a handful of the communities we serve.
We are going to deploy more than 300 regional jets to better serve the small to medium-sized cities of our network, and give us the ability to open new markets.
We have entered into an alliance with United Airlines, who’s strong Midwest, West Coast and Asian presence complements our network in the east.
We have revamped our hubs at Charlotte, Philadelphia and Pittsburgh to improve their operations and focus.
We have begun to rebuild our operations at Boston, New York and Washington, and will continue to recapture the market positions that we gave up due to our cost structure, and the focus on our proposed merger with United which limited our ability to compete.
Our entire restructuring – as you would expect – was designed for success. And from the beginning, we stated very clearly to our stakeholders that we must restructure the company, and that if we complete the process on a voluntary basis, we would do it through bankruptcy. So filing for bankruptcy was not seen by us as a failure. Rather it was an alternative path to execute the restructuring.

So, when we did file for Chapter 11 protection, it wasn’t a great shock to our customers or employees. We did not lose market share during this restructuring – in fact, we actually recaptured market share once we filed for bankruptcy protection, after experiencing a small decline last May when we first uttered the possibility of the “B†word. And, according to the Department of Transportation monthly consumer reports, our employees have delivered the most consistent customer service over the past two years, and we’ve even led the industry during most of this restructuring period.

Throughout this process, we maintained a consistent message and vision, and stuck to our plan built around lowering costs, increasing revenues and improving liquidity. When we came to the conclusion that we had to execute our plan with a Chapter 11 filing, we jumped in the pool to swim some laps, got in shape, and then got out. We didn’t fall or get pushed in by accident, only to flail around searching for a way out. And while we had some challenges along the way, we remained on track. With some minor tweaks, the plan of reorganization confirmed by the court is pretty much the same plan that we articulated to our employees last spring.

For your benefit, however, I thought it would be useful to share with you some of my thoughts on why we were successful in this sprint through bankruptcy. According to, our case was the fastest-ever successful bankruptcy organization of a large, publicly-traded company, but that’s probably why we faced some doubters when we filed on August 11 and announced our fast-track ambitions.

The fact was that we had little choice. Ultimately, the target date was decided for us because the agreement with the bank that handled all of our VISA and MasterCard transactions was set to expire last December 31, and they would only extend the agreement until March 31. Since we could not replace the credit card processor until after emergence, it was a deadline that was pretty simply understood. So everything we did and every decision we made was done within the context of the overall question, “Does this allow us to stay on track with our March 31 deadline?â€

If you will indulge me, let me now share with you Siegel’s Seven Suggestions for Success, Speed and Sanity in managing a Chapter 11 process.

First, I remembered something my mentor, Gordon Bethune of Continental Airlines taught me: “The sickest patients need the best doctors.†So we hired the very best restructuring advisers in the country. That meant hiring John Luth and the Seabury Group who have a proven track record of success, and have since taken their well-earned reputation across the border to help Air Canada with its current restructuring.

Second, we set up a team-oriented process that involved all of our senior management and completely integrated our lead financial and legal advisers into the team. The company’s executive committee plus advisers started each day with a restructuring meeting in which the events and accomplishments of the previous day, the priorities for that day, and the issues and potential problems for the future were identified and discussed. Early on we even met twice a day – in the morning, and again in the afternoon. Our various departments did not operate in silos from which people made independent decisions or were kept out of the loop. Marketing, labor relations, operations, finance, legal and public relations leaders of the company came together each day and participated in finding solutions. Everyone understood the tasks. And the effort was enhanced from the collective wisdom, experience and skills that were brought to my conference room each morning.

Third, we went into bankruptcy with exit financing already lined up. The federal loan guarantee program established after September 11 provided us with the first tranche. The promise of that $1 billion loan then gave us leverage to find both a DIP lender and equity plan sponsor – originally a $200 million equity investment by Texas Pacific Group, later replaced by the $240 million investment from the Retirement Systems of Alabama – both with a $500 million DIP facility as part of the package. But the initial involvement of TPG – the premier private equity firm in aviation – brought us expert advice and instant credibility in the marketplace.

Fourth, we communicated consistently, constantly and clearly to all stakeholders. We didn’t tell employees one thing, and elected officials something else. Our legal filings didn’t contradict what we told the news media. Our marketing communications complemented what we told our creditors committee. Now I’m not saying that everyone heard the same thing, because that is something we can’t always control. But we did not create crises by springing surprises or delivering conflicting or inconsistent messages.

Fifth, we purposely interlocked various milestones in the case to force discipline on the process. Our draws on the DIP were tied to the federal loan guarantee process. Our negotiations with labor were governed by deadlines in the court process. There was no room for error, so we built an air-tight process that didn’t let anyone think that a deadline could be changed. It made for some very long nights and a few rough mornings, but ultimately, it kept us on track.

Sixth, we put a human face on the company. It was our bankruptcy counsel Jack Butler’s wise advice that the senior management team actively participate in the legal proceedings. So we were at every court hearing. And we attended every creditors'' committee meeting. Not just me. Or not just our CFO or General Counsel. But the entire senior management team in various combinations was in the courtroom and at the creditors’ committee meetings. It didn’t convince anyone who otherwise was a skeptic. But it did demonstrate that the management team was actively engaged and fully committed to a successful restructuring.

And finally, we kept our eyes on the prize. Every time someone raised the possibility of staying in bankruptcy longer and looking for some way to extend the March 31 date, we ended up in the same place: only after we emerged could we access the $1 billion federal loan and the $240 million of new equity. There was a $1.24 billion pot of gold at the end of the rainbow, but it was only available after bankruptcy. Ultimately, that was the absolute right call. With the rest of the industry scrambling to deal with the impact of war, we now have a cleaned up balance sheet, permanent cost reductions, and access to cash that our competitors don’t.

All things being equal, reporting to you on what we have achieved is the easy part, despite the grueling tasks we faced the last 12 months. The real trick is to try and predict where the industry goes from here. Our restructuring was just the tip of the iceberg. Every other major U.S. airline is struggling to develop and implement its own plan to lower costs and define its future in the industry. Ultimately, it is in our interest to have a healthy industry, in which supply, demand and price, labor and other costs are all in balance. But we’re a ways off from the industry being there.

This year marks the 25th anniversary of the Airline Deregulation Act. Consumers have clearly benefited from an open market, through lower prices, better service and more competition. I can’t say that airline investors have fared as well.

But one of the more interesting aspects of the past decade is the impact of low-cost carriers on the industry. The Southwests, JetBlues and AirTrans of the world have grown from niche players to market leaders. And in the process, they have had a radical impact on all aspects of the business, forcing numerous changes and efficiencies on the rest of the industry. Think about it:

Low cost carriers – with their low fares – are the pricing leaders in the industry.
Simplified fleets of similar planes are now the standard, having replaced the literally dozen or so aircraft types that we and most major airlines typically flew.
Distribution costs have been drastically reduced through the development and growth of ticketless travel and the Internet.
Traditional network carriers struggle to achieve the labor costs and work rule efficiencies to be competitive with the upstart carriers.
From your perspective as debt investors, there is also another important wrinkle that you should be watching as you follow this industry. Specifically, the public debt associated with airport financing. For I predict that airport costs are part of the next wave of aviation industry restructuring. The seemingly insatiable public appetite for air travel led to the development of too many planes and too many hubs chasing too few passengers. Furthermore, airports and airlines built very expensive and elaborate facilities that transformed airports into destinations unto themselves. And in the process, we lost sight of the fact that above all else, passengers want airports that are efficient, convenient, and affordable, contributing to the overall desire for low-cost air transportation.

So just as airlines expanded too much in the last decade, so too have airports. And the debt is coming home to roost, so to speak. My mentor Gordon also used to say “You can’t win a horse race with a 300 pound jockey.†Well, at our hub at Pittsburgh, it costs us close to $9 for each passenger who uses that airport. And $8 of that $9 per passenger cost goes directly service the $675 million debt of that facility.

Now Pittsburgh is a great airport. But as impressive as it is, and as much as people like connecting there to shop the stores of the airport mall, not one passenger is willing to pay us extra for the privilege of connecting at our Pittsburgh hub. So when we look at comparable-sized cities and hub airports like Charlotte, St. Louis or Cincinnati, the high debt load for Pittsburgh International Airport really makes it an uncompetitive place to do business.

Prior to our emerging from bankruptcy, we rejected our Pittsburgh facility leases, effective next January, with the goal of renegotiating those leases and lowering our costs. I believe that the issues at play at Pittsburgh will soon confront other airport and other airlines as the industry continues to restructure. And as we have stressed to the Pittsburgh community political and business leadership, it is really in the region’s interest to work with us to find a solution. Whether it be to maintain our hub at Pittsburgh, or to attract other airlines to serve or expand at the airport, making it a cost-competitive place to do business is going to be critical for the future of Pittsburgh. And moving forward, investors are going to need to carefully scrutinize plans for airport growth and development to make sure they are based on the cost efficiencies that airline consumers now demand.

Thank you.
" perfect price information that is now available to each and every one of us via the Internet"

Dave is only speaking the truth. Heck I''ll bet everyone here has used the internet to price-shop an item.

I''ve said it before -- do you pay hundreds over the sticker price of a new car just because you want those auto companies'' workers to continue enjoying unlimited health care?

Also, those elected officials in PIT should be very very worried right now....
"Dave" is proving to be much like the famous "Chainsaw Al Dunlap" who was brought in by the BOD''s to slash costs and employee''s and then moves on to his next corporate client. I would not be supprised to see Dave leaving USAirways and replaced by someone who now wishes to run the company.
Dave is only speaking the truth. Heck I''ll bet everyone here has used the internet to price-shop an item.

I''ve said it before -- do you pay hundreds over the sticker price of a new car just because you want those auto companies'' workers to continue enjoying unlimited health care?

Also, those elected officials in PIT should be very very worried right now....

They don''t need to worry, they have jobs as long as they want them because they will be voted in until death. The working men and women of the Burgh who work at U are the ones who are and have been worrying since the day they started at U with its continuous instability. Maybe now that Dave has arrived that will change and the employees left can actually count on some kind of future beyond next week. Did Dave rock the boat, he sure did, but the previous leaders were throwing boulders of terrible decisions which were about to break open the bow and sink the entire ship. At least the people affected have some extra help in the unemployment lines that was not available pre 9/11. The people remaining and complaining about Dave’s ego are still working with a much better future than a year ago, aren’t they.
On 5/2/2003 10:05:44 AM A&P Tech wrote:

"Dave" is proving to be much like the famous "Chainsaw Al Dunlap" who was brought in by the BOD''s to slash costs and employee''s and then moves on to his next corporate client. I would not be supprised to see Dave leaving USAirways and replaced by someone who now wishes to run the company.

I have been saying that all along....he got the costs in let''s go back to Wolf''s vision of being a Global Carrier and not a small regional. Someone has to fly "there" why can''t we? United is global..American is too. Many say they are too big. Well, we don''t have to be that big just global.

P.S. That is the only vision we won''t of Wolf''s