US Airways, a 'Survivor,'
Once Again Struggles to Survive
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
When US Airways Group emerged from bankruptcy-court protection nearly a year ago, it was armed with $1.9 billion in annual cost savings and $1.24 billion in new financing. Although the company was stepping out of Chapter 11 during the war with Iraq and the expansion by discount airlines, Chief Executive David Siegel boasted, "We're a survivor."
Today, the nation's seventh-largest airline is scrambling for its survival -- again. The first of the big carriers to seek protection from creditors following the 2001 terrorist attacks and the subsequent industry nose dive, US Airways made assumptions about itself and the industry that haven't materialized. For instance, it counted on a modest industry rebound, a return to 80-cent-a-gallon fuel and the failure of some of its larger competitors to match or beat the cost savings it gained in bankruptcy.
"It became pretty obvious the original plan wasn't going to work," says David Bronner, CEO of the airline's largest investor, Retirement Systems of Alabama, and nonexecutive chairman of US Airways. The company hasn't earned a dime from operations since it left court protection. "We've got to put something together fast," he says. "Red ink means problems."
The smart money has been confounded before by US Airways. Hedge-fund managers Michael Steinhardt and Julian Robertson came to grief a decade apart over their big stakes in the company. Investor Warren Buffett ultimately made money on his big US Airways bet, but not before writing off 75% of its value and calling it a "mistake." British Airways, which bought a big chunk in the early 1990s as part of a marketing tie-up, ended up writing down its investment and dumping its marketing partner three years later.
Ordinary common shareholders have fared poorly, too. US Airways' old stock was canceled when it emerged from Chapter 11, and new shares in the reorganized company have underperformed. The stock, which briefly shot up to $32 soon after it started trading in August on the over-the-counter market, moved to the Nasdaq Stock Market in October, where the share price has been languishing in the $5 range for the past few months.
Mr. Bronner, whose $24 billion pension fund has $315 million tied up in the airline and owns 37% of the equity, says US Airways' current stock price is "terrible." "When I buy a junk stock, I expect management -- and labor, in this case -- to come up with a solution and get us in the black and make progress," he says. "I'm not happy at all."
Today, US Airways' market capitalization is just $268.5 million, a fraction of the value of go-go discounter JetBlue Airways, which is valued at $2.8 billion. Goldman Sachs analysts, in a report last week, wrote of US Airways' three-year "downward spiral." Its higher costs forced it to slash capacity more severely after the Sept. 11, 2001, attacks, putting upward pressure on its unit costs, they said. That in turn created bigger losses and more shrinkage. Meanwhile, the capacity cuts have made its network less relevant and attractive, while competitors, sensing weakness, have piled into its markets.
Standard & Poor's, which recently downgraded US Airways' corporate credit rating to single-B-minus from single-B, believes an acquisition by another airline may be the best solution for the company, if it can get through its immediate troubles. Mr. Siegel himself reignited the merger idea in a Feb. 25 speech to a Washington-area civic group, when he said it is "inevitable ... that the airline industry will eventually consolidate." He later told workers consolidation isn't "imminent," but warned that the company won't survive unless it gets its costs down because discounters now control domestic pricing.
The CEO won't comment on whether US Airways has been approached by a potential buyer. He says his focus is on fixing the company on a stand-alone basis, "so we're a more attractive partner" when the "necessary, logical and inevitable" consolidation occurs.
In their report, the Goldman analysts gave the acquisition scenario a 25% probability, but only after an extended recovery by US Airways and the other big carriers. UAL's United Airline tried to buy US Airways in 2000, but the Justice Department nixed the plan. A United-US Airways match-up still makes sense, the analysts wrote. But UAL itself is in Chapter 11, and none of the big airlines will be financially strong enough to consider mergers for several years, they said.
Meantime, competitors are buzzing that US Airways is headed back into Chapter 11. If it does, a new cast of shareholders could be as badly burned as their predecessors. In an interview, Mr. Siegel declines to provide his earlier assurance that he doesn't see another bankruptcy filing "in any kind of relevant time horizon." Instead, he says the company has good liquidity but needs to get its costs down quickly while it still has cash and a customer base.
But feeding the bankruptcy rumors are these harsh facts: US Airways this summer could breach important covenants attached to a $1 billion loan largely backed by the government; it has hired Morgan Stanley to help it peddle assets if necessary, although Mr. Siegel says that "is not our first choice"; and the company is in danger of losing regional-jet financing from General Electric.
"Everything is on the table," says Mr. Bronner, the nonexecutive chairman. "I've got to get into the black. If we're dying from a thousand cuts, we can't get into a war with Southwest and win," referring to rival Southwest Airlines. Mr. Bronner maintains that the carrier must resolve its problems in the next 90 days, although he says he doesn't expect US Airways will "go from ugly duckling to swan" overnight.
Although it cut its sky-high expenses during its reorganization, US Airways remains a high-cost producer, spending nearly 10 cents to fly a seat a mile, excluding fuel, compared with six cents a mile for the discounters. Now Mr. Siegel wants to lower costs by at least 25% more; he has warned that much of those savings are going to have to come from workers, in the form of wage and benefit reductions and higher productivity.
But US Airways employees already served up more than $1 billion in annual cost savings in two rounds of concessions during Chapter 11. Pressure for further cuts could spark "a showdown with labor that turns ugly," says S&P analyst Philip Baggaley. Recently Mr. Bronner met with leaders of the unions representing pilots and flight attendants to soften them up for more givebacks. "If you want to save yourselves," he says he told them, "you can't act like old-line unions. You have to help us get up to a level of productivity so we can compete and grow."
Pilots responded favorably, and agreed to negotiate. Flight attendants were cooler, saying they want a complete business plan and a proposal about their role before they will talk. A third big union, the machinists, is slated to meet with company executives this week despite being at war with US Airways over its plans to outsource heavy maintenance of some planes. Mr. Siegel says he "absolutely" believes he can get a deal with labor in 90 days. "If they don't want to do it in 90 days, we'll look at alternatives," he says.
The triage now under way revolves around talks with the federal board that provided $900 million of guarantees to back the $1 billion bankruptcy-exit loan. US Airways is hoping to restructure the deal so it can stay in compliance with covenants that will be measured on June 30. "We'll do anything to comply with the loan," says Mr. Siegel. That could involve paying down some of the principal early with cash on hand or with proceeds from assets sales. The loan board declined to comment.
The company also has approached GE's GE Capital Aviation Services unit about cutting the number of regional jets it has on order to ease its cash-flow burden and reduce GE's exposure to the airline. GE is providing much of the lease financing for 170 small jets. A spokesman for GE declines to comment on its discussions with the airline.
Meanwhile, Mr. Siegel is trying to fashion a revised business plan that will pair labor concessions with increased efficiency and improved marketing, so the carrier can offer more flights out of its core East Coast cities and continue building service to Europe and the Caribbean. Part of the plan includes urgent efforts in Philadelphia, US Airways' largest hub, which is coming under assault by low-fare king Southwest.
Southwest will touch down there in early May with 14 daily flights to six cities. Budget carrier Frontier Airlines also plans to start serving Philadelphia from Denver and Los Angeles later that month. Bracing for this competition, US Airways is boosting its schedule and will start matching the newcomers' much lower fares. It also hopes to leverage its big-airline attributes -- assigned seating, first-class cabins, international routes, more destinations and a robust frequent-flier plan -- to hang onto its customers.
S&P's Mr. Baggaley says flooding the market with capacity is a classic defense tactic by hub-and-spoke airlines, aimed at minimizing market-share loss. For US Airways, it is akin to putting a finger in the dike while it tries to pare costs. Longer term, he says, "the best approach is to fix it and sell it. But they're doing it under battlefield conditions."
Write to Susan Carey at [email protected]
Updated March 10, 2004
Once Again Struggles to Survive
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
When US Airways Group emerged from bankruptcy-court protection nearly a year ago, it was armed with $1.9 billion in annual cost savings and $1.24 billion in new financing. Although the company was stepping out of Chapter 11 during the war with Iraq and the expansion by discount airlines, Chief Executive David Siegel boasted, "We're a survivor."
Today, the nation's seventh-largest airline is scrambling for its survival -- again. The first of the big carriers to seek protection from creditors following the 2001 terrorist attacks and the subsequent industry nose dive, US Airways made assumptions about itself and the industry that haven't materialized. For instance, it counted on a modest industry rebound, a return to 80-cent-a-gallon fuel and the failure of some of its larger competitors to match or beat the cost savings it gained in bankruptcy.
"It became pretty obvious the original plan wasn't going to work," says David Bronner, CEO of the airline's largest investor, Retirement Systems of Alabama, and nonexecutive chairman of US Airways. The company hasn't earned a dime from operations since it left court protection. "We've got to put something together fast," he says. "Red ink means problems."
The smart money has been confounded before by US Airways. Hedge-fund managers Michael Steinhardt and Julian Robertson came to grief a decade apart over their big stakes in the company. Investor Warren Buffett ultimately made money on his big US Airways bet, but not before writing off 75% of its value and calling it a "mistake." British Airways, which bought a big chunk in the early 1990s as part of a marketing tie-up, ended up writing down its investment and dumping its marketing partner three years later.
Ordinary common shareholders have fared poorly, too. US Airways' old stock was canceled when it emerged from Chapter 11, and new shares in the reorganized company have underperformed. The stock, which briefly shot up to $32 soon after it started trading in August on the over-the-counter market, moved to the Nasdaq Stock Market in October, where the share price has been languishing in the $5 range for the past few months.
Mr. Bronner, whose $24 billion pension fund has $315 million tied up in the airline and owns 37% of the equity, says US Airways' current stock price is "terrible." "When I buy a junk stock, I expect management -- and labor, in this case -- to come up with a solution and get us in the black and make progress," he says. "I'm not happy at all."
Today, US Airways' market capitalization is just $268.5 million, a fraction of the value of go-go discounter JetBlue Airways, which is valued at $2.8 billion. Goldman Sachs analysts, in a report last week, wrote of US Airways' three-year "downward spiral." Its higher costs forced it to slash capacity more severely after the Sept. 11, 2001, attacks, putting upward pressure on its unit costs, they said. That in turn created bigger losses and more shrinkage. Meanwhile, the capacity cuts have made its network less relevant and attractive, while competitors, sensing weakness, have piled into its markets.
Standard & Poor's, which recently downgraded US Airways' corporate credit rating to single-B-minus from single-B, believes an acquisition by another airline may be the best solution for the company, if it can get through its immediate troubles. Mr. Siegel himself reignited the merger idea in a Feb. 25 speech to a Washington-area civic group, when he said it is "inevitable ... that the airline industry will eventually consolidate." He later told workers consolidation isn't "imminent," but warned that the company won't survive unless it gets its costs down because discounters now control domestic pricing.
The CEO won't comment on whether US Airways has been approached by a potential buyer. He says his focus is on fixing the company on a stand-alone basis, "so we're a more attractive partner" when the "necessary, logical and inevitable" consolidation occurs.
In their report, the Goldman analysts gave the acquisition scenario a 25% probability, but only after an extended recovery by US Airways and the other big carriers. UAL's United Airline tried to buy US Airways in 2000, but the Justice Department nixed the plan. A United-US Airways match-up still makes sense, the analysts wrote. But UAL itself is in Chapter 11, and none of the big airlines will be financially strong enough to consider mergers for several years, they said.
Meantime, competitors are buzzing that US Airways is headed back into Chapter 11. If it does, a new cast of shareholders could be as badly burned as their predecessors. In an interview, Mr. Siegel declines to provide his earlier assurance that he doesn't see another bankruptcy filing "in any kind of relevant time horizon." Instead, he says the company has good liquidity but needs to get its costs down quickly while it still has cash and a customer base.
But feeding the bankruptcy rumors are these harsh facts: US Airways this summer could breach important covenants attached to a $1 billion loan largely backed by the government; it has hired Morgan Stanley to help it peddle assets if necessary, although Mr. Siegel says that "is not our first choice"; and the company is in danger of losing regional-jet financing from General Electric.
"Everything is on the table," says Mr. Bronner, the nonexecutive chairman. "I've got to get into the black. If we're dying from a thousand cuts, we can't get into a war with Southwest and win," referring to rival Southwest Airlines. Mr. Bronner maintains that the carrier must resolve its problems in the next 90 days, although he says he doesn't expect US Airways will "go from ugly duckling to swan" overnight.
Although it cut its sky-high expenses during its reorganization, US Airways remains a high-cost producer, spending nearly 10 cents to fly a seat a mile, excluding fuel, compared with six cents a mile for the discounters. Now Mr. Siegel wants to lower costs by at least 25% more; he has warned that much of those savings are going to have to come from workers, in the form of wage and benefit reductions and higher productivity.
But US Airways employees already served up more than $1 billion in annual cost savings in two rounds of concessions during Chapter 11. Pressure for further cuts could spark "a showdown with labor that turns ugly," says S&P analyst Philip Baggaley. Recently Mr. Bronner met with leaders of the unions representing pilots and flight attendants to soften them up for more givebacks. "If you want to save yourselves," he says he told them, "you can't act like old-line unions. You have to help us get up to a level of productivity so we can compete and grow."
Pilots responded favorably, and agreed to negotiate. Flight attendants were cooler, saying they want a complete business plan and a proposal about their role before they will talk. A third big union, the machinists, is slated to meet with company executives this week despite being at war with US Airways over its plans to outsource heavy maintenance of some planes. Mr. Siegel says he "absolutely" believes he can get a deal with labor in 90 days. "If they don't want to do it in 90 days, we'll look at alternatives," he says.
The triage now under way revolves around talks with the federal board that provided $900 million of guarantees to back the $1 billion bankruptcy-exit loan. US Airways is hoping to restructure the deal so it can stay in compliance with covenants that will be measured on June 30. "We'll do anything to comply with the loan," says Mr. Siegel. That could involve paying down some of the principal early with cash on hand or with proceeds from assets sales. The loan board declined to comment.
The company also has approached GE's GE Capital Aviation Services unit about cutting the number of regional jets it has on order to ease its cash-flow burden and reduce GE's exposure to the airline. GE is providing much of the lease financing for 170 small jets. A spokesman for GE declines to comment on its discussions with the airline.
Meanwhile, Mr. Siegel is trying to fashion a revised business plan that will pair labor concessions with increased efficiency and improved marketing, so the carrier can offer more flights out of its core East Coast cities and continue building service to Europe and the Caribbean. Part of the plan includes urgent efforts in Philadelphia, US Airways' largest hub, which is coming under assault by low-fare king Southwest.
Southwest will touch down there in early May with 14 daily flights to six cities. Budget carrier Frontier Airlines also plans to start serving Philadelphia from Denver and Los Angeles later that month. Bracing for this competition, US Airways is boosting its schedule and will start matching the newcomers' much lower fares. It also hopes to leverage its big-airline attributes -- assigned seating, first-class cabins, international routes, more destinations and a robust frequent-flier plan -- to hang onto its customers.
S&P's Mr. Baggaley says flooding the market with capacity is a classic defense tactic by hub-and-spoke airlines, aimed at minimizing market-share loss. For US Airways, it is akin to putting a finger in the dike while it tries to pare costs. Longer term, he says, "the best approach is to fix it and sell it. But they're doing it under battlefield conditions."
Write to Susan Carey at [email protected]
Updated March 10, 2004
