Fly:
Fly, it's no secret that our two companies continue to integrate and we see it on the front line. I'll write more about this in a minute, but economics and the marketplace are driving events between our two companies.
US Airways chief executive officer Dave Siegel and Jeffrey Stanley, manager of economic analysis and regulatory affairs at United, both made comments last week regarding consolidation -- indicating the only true way to obtain enough cost cuts for our two companies to survive by creating economies of scale and significant additional incremental revenue. The cost gap between legacy carriers and the LCC's is to great to compete, unless something dramatic occurs because cuts in labor expense cannot do it alone.
United had a net loss over $300 million last quarter, which was the largest loss in the industry, and US Airways was not much better at $90 million. Both companies continue to lose money and are facing problems going forward, unless something changes.
Let me give you an example of how economies of scale are currently being implemented between our companies, which could provide enormous savings going forward.
On October 1 US Airways moved its operation from Seattle's South Terminal to the North Terminal where United is located. US Airways took custody of two of United's gates, N10 and N11. The logistic benefits are visibily evident, but one of the keys is that United lowered its Seattle lease expense by divesting of two of its gates to US Airways.
With consolidation, you could have millions of dollars in cost cuts (like the one just implemented in Seattle), improved productivity, and a better passenger experience.
In addition, United's EF&A department conducted an analysis prior to the last merger attempt and said the combined business entity would generate between $1.6 to $1.9 billion per year in additional revenue. Post September 11 and in today's environment that number would be lower, but it could easily be $1.2 billion.
Will something occur? I believe so, but before it does United's pension problem must be addressed, the UCT airport municipal bond litigation must be resolved, United must reach agreement on or reject aircraft EETC's, and the Dulles/ACA/Mesa fiasco must be resolved. In addition, US Airways must maintain a minimum cash balance to satisfy the ATSB, which holds a gun to the head of the loan guarantee recipients to force airlines to perform -- one way or another.
Fly, we are in a New World and both of our companies are at risk.
That's why Siegel told the Washington Aero Club last week that there may be corporate combinations between network airlines. "Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations," Siegel said.
Interestingly, a few days later Stanley in a speech said, "If things stay the way the are now, there will be several (not one or two, but several) Chapter 7 (bankruptcy liquidations) down the road, and that's not good for anyone. The most feasible solution to the situation is consolidation in the domestic airline industry," he said.
Considering US Airways and United are considered the two weakest legacy carriers and the only ones to file for bankruptcy, whom do you think Stanley was referring to when he talked about liquidations?
Regards,
Chip
