- Nov 9, 2003
- 16,512
- 5,865
Air Transport
US Airways, Back In Chapter 11, Sees Itself As LCC 'Hybrid'
Aviation Week & Space Technology
09/20/2004, page 39
David Bond
Washington
US Airways, as a 'hybrid low-cost carrier,' wants more from its unions and goes back to bankruptcy court
Frequent Filer
US Airways, in Chapter 11 again little more than 17 months after its 2002-03 stint, will find the going different this time--more difficult for the most part, but not entirely.
Compared with its position in August 2002, when it began its first reorganization as a debtor under bankruptcy protection, the sixth-largest U.S. network carrier faces this scenario:
*Its cash position is worse and its time is short.
*It thinks it has a much better idea of what its problems are, and how to deal with them.
*Its costs are lower but must be cut further, painfully and perhaps through the power of the court.
*And it's an election year.
On June 30, 2002, little more than a month before US Airways entered bankruptcy protection for the first time, the carrier had $602 million in cash, more than $500 million of it unrestricted. But it had then what it doesn't have now--debtor-in-possession financing, as much as $500 million to keep it liquid as it restructured.
Becoming more ambitious as its financial fortunes ebb, US Airways will try to match Southwest Airlines' low unit costs as well as its low prices.
On June 30, 2004, a bit more than two months before its current Chapter 11 filing, US Airways had $975 million in unrestricted cash, down $325 million from last Dec. 31. It has no substantial assets to pledge against new borrowing. And the terms of the government-guaranteed billion-dollar loan that took it out of bankruptcy in March 2003 required it to have at least $717.6 million, the loan's outstanding balance, on hand at the end of each month. But US Airways and its lenders--Retirement Systems of Alabama and Bank of America, plus the Air Transportation Stabilization Board, the government agency that administers loan guarantees--agreed on use of a portion of this amount as working capital in coming months, and the bankruptcy court approved the agreement.
Even so, unencumbered cash is very low. US Airways skipped a $110-million pension-fund payment due last week, preserving cash, but it will have to negotiate further leeway in its cash restrictions. The ATSB said it will "continue to work with US Airways as it seeks to restructure," but added that it will protect taxpayers' interests as well.
The 2002-03 reorganization in Chapter 11 lasted less than eight months, an uncommonly short time, but US Airways thinks this one will have to move even faster. In the absence of another big cash infusion, the only way to make it through the fall and winter, normally cash-negative for network airlines, is to get the cost reductions it seeks, and get them quickly. The carrier said it expects to submit a reorganization plan, the vehicle for getting out of Chapter 11, to the bankruptcy court by the end of the year.
The heart of US Airways' strategy is its transformation plan, by which it will try to become a "hybrid low-cost carrier" (LCC) patterned after the "best practices currently in use by America West and JetBlue." US Airways says it achieved substantially all the non-fuel cost projections for 2004 it made during its first bankruptcy reorganization, but it came up seriously short of projected revenue. In 2003, before it found out the revenue projections were faulty, it believed it needed only to get its costs in line with those of the other "legacy" carriers--American, United, Delta, Northwest and Continental. "Now, it is clear that US Airways cannot survive unless it can compete effectively against the low-cost carriers as well," US Airways said.
This means lower wages and benefits for and higher productivity from employees, plus higher utilization of aircraft and facilities. US Airways will increase point-to-point flying, reduce connecting flights and try to turn around its aircraft faster.
The most noticeable transformation changes will be in scheduling and the structure of US Airways' network. Philadelphia will remain its biggest airport and the core of its operations, but hub-and-spoke service there will be limited to smaller cities. For larger markets, the model will be point-to-point service competitive with Southwest's. The Dallas carrier's entry at Philadelphia in May and its rapid buildup there surprised US Airways, which expected a slower-paced move into Allentown, Pa., patterned after the way Southwest brackets Boston with service to Providence, R.I., and Manchester, N.H.
US Airways envisions a "reorientation" of Pittsburgh from hub to point-to-point flights, continuing a service reduction there. It will maintain Charlotte, N.C., as a hub for smaller destinations and to the Caribbean, and it will build up point-to-point flying to large and medium-sized cities, including important business markets, from Boston Logan, New York LaGuardia and Washington Reagan airports.
IN FURTHER IMITATION of the LCCs, US Airways intends to reduce and simplify fares, eliminating restrictions and matching competitors' prices along the lines of the GoFares it introduced in Philadelphia and Washington during the spring. It will improve its web site, add self-service kiosks and gate readers at airports, reconfigure seats on aircraft, "refresh" facilities at its Philadelphia terminal and--a la JetBlue--"install state-of-the-art in-flight entertainment systems."
Commenting that it will "lose even more money than it is losing now" if it makes these improvements without further cost reductions, US Airways made clear that its realistic choice is between more labor concessions and liquidation. The carrier will keep negotiating with its unions in search of "largely consensual" cuts, but it intends to gain its objectives one way or another. In Chapter 11, it is possible for a company to win court approval of a labor agreement that employees haven't negotiated or agreed to.
"There is only one viable strategy," the carrier told the court. "US Airways must lower all of its costs, but especially its labor costs."
As part of what it termed an "audacious plan," US Airways said all its labor groups will have to cough up savings in pay, benefits and productivity "on a fair and equitable basis," substantially matching what the same workers get at the LCCs. Salaried and management workers would accept LCC pay and benefit scales: "No employee groups will be forced to subsidize another group's uncompetitiveness." Employees at LCCs "are already providing service at these net levels," and this is what US Airways employees would be offered--at the lowest seniority levels--if US Airways folded and its workers looked for new jobs.
US Airways' re-entry into Chapter 11 takes on a political tint from the national election campaign, in which jobs are a significant factor and more than 14,000 of the carrier's roughly 34,000 employees work in the hotly contested state of Pennsylvania. After announcing the bankruptcy filing Sept. 12 and appearing in court Sept. 13, US Airways CEO Bruce Lakefield met Sept. 14 with Pennsylvania's supportive senators, Arlen Specter and Rick Santorum, both Republicans.
THE CARRIER ALSO noted in a court filing that the ATSB and the bankruptcy court were just as wrong as anyone else in the first bankruptcy reorganization. "The growth of [LCCs] over the past 18 months, and their increase in pricing power in the domestic market, have had a profound structural impact on the airline industry," US Airways said. "US Airways did not accurately anticipate the magnitude of this structural shift. For that matter, neither did its major financial partners, including the ATSB, Bank of America, Retirement Systems of Alabama, GE and the other stakeholders that all carefully vetted US Airways' financial projections. Similarly, all of the other legacy carriers failed to anticipate this shift and have continued to lose money . . . . All published revenue projections for all legacy carriers made during the period of US Airways' prior Chapter 11 case have turned out to be wrong."
US AIRWAYS' BIGGEST UNSECURED CLAIMS
($ millions)
Embraer 1,465.20
Bombardier 948
Total GE 336.3
GE Capital 149.8
GE Engine Services 129.4
GE Aircraft Engines 57.1
AVSA (Airbus purchases) 88
EDS 16.4
Sabre 6.5
Worldspan 4.1
Philadelphia Int'l Airport 4.1
Amadeus USA 3.3
Rolls-Royce 3
Source: US Airways
THEN AND NOW AT US AIRWAYS
2Q01 2Q02 2Q03 2Q04
Operating revenues ($M) 2,493 1,903 1,777 1,957
Operating costs ($M) 2,473 2,078 1,890 1,874
Personnel 959 878 722 627
Fuel 311 189 203 263
All other 1,203 1,011 965 984
Capacity* 18,265 14,606 14,621 15,529
Mainline PRASM** 10.98 9.84 9.88 10.16
Mainline CASM*** 12.13 12.25 12.2 11.18
Fuel cost per gallon (cents) 88.12 69.28 84.87 106.87
*In millions of available seat miles
**Passenger revenue per available seat mile, in cents
***Cost per available seat mile, in cents
Costs exclude government payments and special items; unit costs include them
Data from company reports.
This table shows selected US Airways financial and operating statistics for four fiscal quarters--the second quarter of 2001, the last full quarter before the Sept. 11, 2001, terrorist attacks and the first quarter in which industrywide yield erosion was evident; the second quarter of 2002, the last full quarter before US Airways' first Chapter 11 filing; the second quarter of 2003, the first quarter following its emergence from Chapter 11; and the second quarter of 2004, the last quarter before its second Chapter 11 filing.
US Airways, Back In Chapter 11, Sees Itself As LCC 'Hybrid'
Aviation Week & Space Technology
09/20/2004, page 39
David Bond
Washington
US Airways, as a 'hybrid low-cost carrier,' wants more from its unions and goes back to bankruptcy court
Frequent Filer
US Airways, in Chapter 11 again little more than 17 months after its 2002-03 stint, will find the going different this time--more difficult for the most part, but not entirely.
Compared with its position in August 2002, when it began its first reorganization as a debtor under bankruptcy protection, the sixth-largest U.S. network carrier faces this scenario:
*Its cash position is worse and its time is short.
*It thinks it has a much better idea of what its problems are, and how to deal with them.
*Its costs are lower but must be cut further, painfully and perhaps through the power of the court.
*And it's an election year.
On June 30, 2002, little more than a month before US Airways entered bankruptcy protection for the first time, the carrier had $602 million in cash, more than $500 million of it unrestricted. But it had then what it doesn't have now--debtor-in-possession financing, as much as $500 million to keep it liquid as it restructured.
Becoming more ambitious as its financial fortunes ebb, US Airways will try to match Southwest Airlines' low unit costs as well as its low prices.
On June 30, 2004, a bit more than two months before its current Chapter 11 filing, US Airways had $975 million in unrestricted cash, down $325 million from last Dec. 31. It has no substantial assets to pledge against new borrowing. And the terms of the government-guaranteed billion-dollar loan that took it out of bankruptcy in March 2003 required it to have at least $717.6 million, the loan's outstanding balance, on hand at the end of each month. But US Airways and its lenders--Retirement Systems of Alabama and Bank of America, plus the Air Transportation Stabilization Board, the government agency that administers loan guarantees--agreed on use of a portion of this amount as working capital in coming months, and the bankruptcy court approved the agreement.
Even so, unencumbered cash is very low. US Airways skipped a $110-million pension-fund payment due last week, preserving cash, but it will have to negotiate further leeway in its cash restrictions. The ATSB said it will "continue to work with US Airways as it seeks to restructure," but added that it will protect taxpayers' interests as well.
The 2002-03 reorganization in Chapter 11 lasted less than eight months, an uncommonly short time, but US Airways thinks this one will have to move even faster. In the absence of another big cash infusion, the only way to make it through the fall and winter, normally cash-negative for network airlines, is to get the cost reductions it seeks, and get them quickly. The carrier said it expects to submit a reorganization plan, the vehicle for getting out of Chapter 11, to the bankruptcy court by the end of the year.
The heart of US Airways' strategy is its transformation plan, by which it will try to become a "hybrid low-cost carrier" (LCC) patterned after the "best practices currently in use by America West and JetBlue." US Airways says it achieved substantially all the non-fuel cost projections for 2004 it made during its first bankruptcy reorganization, but it came up seriously short of projected revenue. In 2003, before it found out the revenue projections were faulty, it believed it needed only to get its costs in line with those of the other "legacy" carriers--American, United, Delta, Northwest and Continental. "Now, it is clear that US Airways cannot survive unless it can compete effectively against the low-cost carriers as well," US Airways said.
This means lower wages and benefits for and higher productivity from employees, plus higher utilization of aircraft and facilities. US Airways will increase point-to-point flying, reduce connecting flights and try to turn around its aircraft faster.
The most noticeable transformation changes will be in scheduling and the structure of US Airways' network. Philadelphia will remain its biggest airport and the core of its operations, but hub-and-spoke service there will be limited to smaller cities. For larger markets, the model will be point-to-point service competitive with Southwest's. The Dallas carrier's entry at Philadelphia in May and its rapid buildup there surprised US Airways, which expected a slower-paced move into Allentown, Pa., patterned after the way Southwest brackets Boston with service to Providence, R.I., and Manchester, N.H.
US Airways envisions a "reorientation" of Pittsburgh from hub to point-to-point flights, continuing a service reduction there. It will maintain Charlotte, N.C., as a hub for smaller destinations and to the Caribbean, and it will build up point-to-point flying to large and medium-sized cities, including important business markets, from Boston Logan, New York LaGuardia and Washington Reagan airports.
IN FURTHER IMITATION of the LCCs, US Airways intends to reduce and simplify fares, eliminating restrictions and matching competitors' prices along the lines of the GoFares it introduced in Philadelphia and Washington during the spring. It will improve its web site, add self-service kiosks and gate readers at airports, reconfigure seats on aircraft, "refresh" facilities at its Philadelphia terminal and--a la JetBlue--"install state-of-the-art in-flight entertainment systems."
Commenting that it will "lose even more money than it is losing now" if it makes these improvements without further cost reductions, US Airways made clear that its realistic choice is between more labor concessions and liquidation. The carrier will keep negotiating with its unions in search of "largely consensual" cuts, but it intends to gain its objectives one way or another. In Chapter 11, it is possible for a company to win court approval of a labor agreement that employees haven't negotiated or agreed to.
"There is only one viable strategy," the carrier told the court. "US Airways must lower all of its costs, but especially its labor costs."
As part of what it termed an "audacious plan," US Airways said all its labor groups will have to cough up savings in pay, benefits and productivity "on a fair and equitable basis," substantially matching what the same workers get at the LCCs. Salaried and management workers would accept LCC pay and benefit scales: "No employee groups will be forced to subsidize another group's uncompetitiveness." Employees at LCCs "are already providing service at these net levels," and this is what US Airways employees would be offered--at the lowest seniority levels--if US Airways folded and its workers looked for new jobs.
US Airways' re-entry into Chapter 11 takes on a political tint from the national election campaign, in which jobs are a significant factor and more than 14,000 of the carrier's roughly 34,000 employees work in the hotly contested state of Pennsylvania. After announcing the bankruptcy filing Sept. 12 and appearing in court Sept. 13, US Airways CEO Bruce Lakefield met Sept. 14 with Pennsylvania's supportive senators, Arlen Specter and Rick Santorum, both Republicans.
THE CARRIER ALSO noted in a court filing that the ATSB and the bankruptcy court were just as wrong as anyone else in the first bankruptcy reorganization. "The growth of [LCCs] over the past 18 months, and their increase in pricing power in the domestic market, have had a profound structural impact on the airline industry," US Airways said. "US Airways did not accurately anticipate the magnitude of this structural shift. For that matter, neither did its major financial partners, including the ATSB, Bank of America, Retirement Systems of Alabama, GE and the other stakeholders that all carefully vetted US Airways' financial projections. Similarly, all of the other legacy carriers failed to anticipate this shift and have continued to lose money . . . . All published revenue projections for all legacy carriers made during the period of US Airways' prior Chapter 11 case have turned out to be wrong."
US AIRWAYS' BIGGEST UNSECURED CLAIMS
($ millions)
Embraer 1,465.20
Bombardier 948
Total GE 336.3
GE Capital 149.8
GE Engine Services 129.4
GE Aircraft Engines 57.1
AVSA (Airbus purchases) 88
EDS 16.4
Sabre 6.5
Worldspan 4.1
Philadelphia Int'l Airport 4.1
Amadeus USA 3.3
Rolls-Royce 3
Source: US Airways
THEN AND NOW AT US AIRWAYS
2Q01 2Q02 2Q03 2Q04
Operating revenues ($M) 2,493 1,903 1,777 1,957
Operating costs ($M) 2,473 2,078 1,890 1,874
Personnel 959 878 722 627
Fuel 311 189 203 263
All other 1,203 1,011 965 984
Capacity* 18,265 14,606 14,621 15,529
Mainline PRASM** 10.98 9.84 9.88 10.16
Mainline CASM*** 12.13 12.25 12.2 11.18
Fuel cost per gallon (cents) 88.12 69.28 84.87 106.87
*In millions of available seat miles
**Passenger revenue per available seat mile, in cents
***Cost per available seat mile, in cents
Costs exclude government payments and special items; unit costs include them
Data from company reports.
This table shows selected US Airways financial and operating statistics for four fiscal quarters--the second quarter of 2001, the last full quarter before the Sept. 11, 2001, terrorist attacks and the first quarter in which industrywide yield erosion was evident; the second quarter of 2002, the last full quarter before US Airways' first Chapter 11 filing; the second quarter of 2003, the first quarter following its emergence from Chapter 11; and the second quarter of 2004, the last quarter before its second Chapter 11 filing.
