Us Airways & Industry Analysis

[USA320Pilot]

US Airways received a lot of newsworthy attention today and I thought I would comment on a number of topics. It has come to my attention that senior management believes the Christmas “Operational Meltdown†cost the company about $8 million. In response to the increased sick calls, the company has begun terminating employees from all work groups and different cities, not just PHL FSA and F/A’s.

1. Tom Parsons, CEO of Bestfares.com, an Internet travel information site, called Delta's move a last-ditch effort to curtail the growth of low-fare airlines. "This may be the only move left to slow down the low-cost carriers," Parsons said. He added that Delta's new fares are still higher than many of its lower-cost competitors. Separately, Merrill Merrill Lynch downgraded AMR and Northwest to "neutral" from "buy." It cut both AirTran Airways and Delta to "sell" from "neutral."

AirTran, Delta's biggest competitor in Atlanta, bashed Delta's fare plan, saying it contains too many restrictions and is "nothing more than big airline pricing mumbo-jumbo." The fare program will hurt Delta's revenue. Merrill estimates it could cost the airline $600 million in 2005 revenue. Delta admits it will harm near-term revenue but said lost revenue is built into its five-year viability model.

Analyst Michael Linenberg estimates industry-wide adoption, which he thinks is likely in Delta's most competitive markets, could add up to lost revenue of $2 billion to $3 billion for the industry. "We view it as a negative for major carriers whose revenues continue to lag costs," he said in a research note. Lehman Bros. Analyst Gary Chase predicts AMR, Northwest, and Continental Airlines will be most impacted by Delta's plan to cut fare by as much as 50 percent.

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One thing is for sure from Delta's decision, analysts said: The days of paying top dollar for domestic flights are numbered as major airlines try to win back business travelers from discount carriers and fight off mounting losses. US Airways Group Inc. matched Delta's fares on select nonstop routes where they compete head-to-head, according to analysts with access to published fares. A US Airways spokesman said the carrier was already offering Delta's new maximum one-way coach fare in 29 percent of its markets.

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Estimated revenue shortfalls for major airlines in 2005, based on industrywide adoption of Delta's overhauled fare structure, which reduced some fares by as much as 50 percent. Industrywide domestic revenue totaled about $70 billion in 2004.

AMR Corp. (American Airlines) - $600 million
Continental Airlines Inc. - $250 million
Delta Air Lines Inc. - $600 million
Northwest Airlines Co. - $400 million
UAL Corp. (United Airlines) - $500 million
US Airways Group Inc. - $200 million

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USA320Pilot comments: Delta’s announcement that the company is revamping its fare structure has major implications for the Atlanta-based carrier. The Merrill Lynch revenue reduction is significant and the figures above will place enormous pressure on legacy carriers that do not have a competitive cost structure. US Airways has introduced a similar program called GoFares that exists in about 25% of its markets. In the not-so-distant future US Airways will implement its GoFares program in most of the U.S., which will further shakeup the industry.

According to AirTran, “Delta Air Lines claims to offer a simplified fare structure, in fact, the new SimpliFares has a litany of convoluted rules:

 SimpliFares require a roundtrip purchase
 SimpliFares require a one night minimum stay - in effect, Delta traded the Saturday night stay for a one night minimum stay
 SimpliFares have inconsistent advance purchase requirements
 SimpliFares offer no free standby for business traveler
 SimpliFares "nickels and dimes" customers by charging extra for reservations in person or over the phone
 SimpliFares have a litany of other convoluted rules

Some observers believe SimpliFares was announced to try and put US Airways out of business, but the program seems to target LCC’s and is a huge gamble for Delta, which could benefit US Airways long-term. US Airways is the first legacy carrier to go through the transformation process and with a competitive cost structure, plans to implement the same type of pricing strategy. The big losers? LCC’s and those legacy carriers not yet transforming.

Nonetheless, Delta’s announcement underscores the immediate requirement for US Airways to reach its cost cut targets.

2. USA320Pilot comments: Southwest’s announcement that it will begin Pittsburgh service in May 2005, but this news should not be overly concerning for those parties interested in the success of US Airways. Southwest would begin with fewer than five gates and a "modest" number of daily flights. The airline typically begins in new cities with one or two gates and 10 to 15 flights, according to the Associated Press.

David Castelveter, a spokesman for US Airways, said the growth of low-cost service was not surprising in Pittsburgh "and further underscores the importance of us establishing a cost structure comparable to that of our low-cost competitors."

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USA320Pilot continues: Pittsburgh is a relatively high cost airport with abysmal revenue and O&D traffic. Yes the airport has great facilities, but very little local traffic. US Airways effectively shifted its Pittsburgh flying to Ft. Lauderdale where costs are relatively low and international yields are expected to be much higher than in Pittsburgh. LCC’s have over 500 aircraft on order and in the future, US Airways must be cost competitive in the new world and must be able to compete with Southwest or any other carrier, for that matter.

3. US Airways has reached a pair of financing agreements that allow it to take delivery of six regional jets.The agreements allow the airline to acquire three jets from Embraer and three from Bombardier, through an arrangement with DVB Bank. The two agreements, disclosed in court filings late Monday, allow deliveries to continue. "We've certainly worked very hard with US Airways. They're a great customer," said Embraer spokesman Doug Oliver. "We want to see them survive and prosper."

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4. US Airways Group finalized a deal to change lenders on its term loan guaranteed by the Air Transportation Stabilization Board, according to a regulatory filing Tuesday. The company finalized the change, which reassigned a tranche of the loan to a Citigroup affiliate from Bank of America, on Dec. 28. The term loan has a value of about $645 million, and US Airways has said changing lenders would head off an interest-rate increase triggered by the company's September bankruptcy filing.

USA320Pilot comments: The single most important factor on why I believe US Airways will survive, provided there is fully labor participation in the new business plan, is that the financial community still supports the company. GE, Embraer, Bombardier, Citigroup, the PBGC, and the ATSB all support the airline, which means they believe the company can be successfully restructured, or they would not put their money at risk.

5. US Airways announced that its City Ticket Offices in Boston, Washington (K Street), New York and Pittsburgh will close for customer business as of Friday, Jan. 21. The expansion of the Internet and other means of searching for and buying travel brought with them changing business and purchasing trends.

6. In a cost-cutting move, Independence Air plans to eliminate 150 of its 560 daily flights -- most in and out of Dulles International Airport -- at the end of this month.

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USA320Pilot comments: The Independence crisis and down sizing will have a positive effect on US Airways in the Washington market.

7. Aviation consultant Philip Roberts, vice president and managing principal of the aviation arm of consulting firm Unisys R2A, said the time is now for the IAM and US Airways to strike a deal.

"We are in the 11th hour," he said. "It is vital that the mechanics join the pilots and the other union employees and create a contract that is acceptable to both sides. For US Airways to make money at the price level customers are willing to pay, they need a new cost base. Without it, they can’t compete."

Roberts, who once worked in management positions for Delta and United Airlines, said US Airways did the right thing by bringing in extra staff last weekend to guard against another holiday-weekend meltdown.

"When I worked for Delta years ago, we were told that when a customer has a problem, you have the opportunity to make a customer for life by helping them," he said. "I think that is still true and US Airways did a good job this past weekend of showing its commitment to its customers."

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IAM-FSA Negotiations Update - January 5, 2005

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IAM-M Negotiations Update – January 5, 2005

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8. In its latest court filing, US Airways asked Mitchell to prohibit a walkout by the machinists if he allows the airline to terminate its contract. Under the Railway Labor Act, which covers airlines, employees are prohibited from striking before negotiations overseen by the National Mediation Board have been exhausted. Union officials say the act's strike prohibition applies as long as a contract is in effect. But if Mitchell nullifies the machinists' contract, the union said, it would no longer be bound by the federal rule.

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USA320Pilot comments: If tentative agreements are not reached between the 3 IAM unions and US Airways and “imposition†occurs, I believe Judge Mitchell would have a very difficult time not granting the company’s injunction to prevent “self helpâ€.

9. Earlier today US Airways reached a cost cutting deal on retiree health care, which will lower the company’s costs.

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10. US Airways' first full-fledged foray into Hispanic advertising today begins with its "Yo invito" ("My treat") campaign to promote the launch of low-fare flights between its new Fort Lauderdale, Fla., hub and U.S. and Latin American cities. The Arlington, Va.-based airline last month named SiboneyUSA, which is 49 percent owned by Interpublic Group, as its Hispanic agency of record. Prior to US Airways' Siboney relationship, Eisner Communications, the carrier's general-market shop in Baltimore, handled Hispanic advertising.

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USA320Pilot comments: The South and Latin American advertising campaign is perfectly timed with US Airways’ international expansion, which will help promote business. Expect the company to announce a new reservation sales office in El Salvador and probably to close the Pittsburgh reservations office in the not-so-distant future.

In conclusion, without all stakeholders participating in the new business plan US Airways will fail in the not-so-distant future, but I believe all stakeholders will participate in the new business plan and we will know more tomorrow.

Regards,

USA320Pilot

 

[AP Tech]

I enjoyed your posts and some of the comments but as I mentioned in a previous post the hangars systemwide were bustling with activity that consisted mainly of tool boxes being rolled out the door. By tomorrow morning there will be very few rollaway's left. They did not seem to care to much about the chance of an injunction. Rumor mill was talking about a lock-out.

Thursday will turn out to be very interesting indeed!!!!!!

 

[USA320Pilot]

AP Tech:

A total maintenance and FSA lock out is interesting, but I believe it's too big to be done at once.

I have a gut feeling there could be 3 IAM TA's tomorrow.

Let's all hope so.

Regards,

USA320Pilot

 

[FrugalFlyerv2.0]

It has come to my attention that senior management believes the Christmas “Operational Meltdownâ€￾ cost the company about $8 million.

Am I the only one that thinks the company / senior management just don't get the magnitude of the cost of the Christmas "Operational Meltdown"?

Perhaps they can get some commercials out there, sort of on the mastercard 'priceless' theme from a few years back:


GoFares tickets on US via PHL: $99 plus fees and taxes
New suitcase and matching carry-on: $200
Gifts for the fam - stored in new suitcase: $500
Numerous days of negative publicity on national TV, thousands of lost/irrate customers and resulting financial damage to an already struggling company: PRICELESS !!!

 

[AP Tech]

A lock out would have to be accomplished all at once, no station would operate knowing another station had been locked out. I'm sure there is a legality issue also.

 

[ClueByFour]

Southwest’s announcement that it will begin Pittsburgh service in May 2005, but this news should not be overly concerning for those parties interested in the success of US Airways. Southwest would begin with fewer than five gates and a "modest" number of daily flights. The airline typically begins in new cities with one or two gates and 10 to 15 flights, according to the Associated Press.

PHL started with 16 flights. It's up to 41, and they are looking for more gate space. US had admitted that it's revenue from PHL got smacked.

Pittsburgh is a relatively high cost airport with abysmal revenue and O&D traffic. Yes the airport has great facilities, but very little local traffic. US Airways effectively shifted its Pittsburgh flying to Ft. Lauderdale where costs are relatively low and international yields are expected to be much higher than in Pittsburgh. LCC’s have over 500 aircraft on order and in the future, US Airways must be cost competitive in the new world and must be able to compete with Southwest or any other carrier, for that matter.

So, the CEO of the most profitable airline in the US says that Pittsburgh is "overpriced and underserved" and USA320pilot says that the revenue and O&D are "abysmal." I guess the question for the gentle reader is which of these sources' speculations about an airport are more viable. Or why LUV did not go to CLT?

If the entire US plan is to be cost competitive, why go running to the islands? It's worth note that Airtran already goes into the region, and so does ATA. You know, ATA who LUV will now codeshare with and took an equity stake in? And it's a forgone conclusion that AA is going to roll over and allow MIA to take a hit, because of all the legacy airlines, AA is usually the slowest to respond to a competitive threat.....

Delusion at 11.

The South and Latin American advertising campaign is perfectly timed with US Airways’ international expansion, which will help promote business. Expect the company to announce a new reservation sales office in El Salvador and probably to close the Pittsburgh reservations office in the not-so-distant future.

Ask DL how offshoring reservations went. Ask Dell. US might do well to learn from companies who have earned more money (particularly in the case of Dell) than US has on this score. For a company whose public image is currently in the tank to send a large chunk of it's customer service function offshore is suicide, but it's not as if the folks at CCY are known for their managerial acumen.

Absent a trustee or a management team with some talent, the place is toast. In fact, most observers believe that it's too late to save.

 

[FrugalFlyerv2.0]

2. USA320Pilot comments: Southwest’s announcement that it will begin Pittsburgh service in May 2005, but this news should not be overly concerning for those parties interested in the success of US Airways. Southwest would begin with fewer than five gates and a "modest" number of daily flights. The airline typically begins in new cities with one or two gates and 10 to 15 flights, according to the Associated Press.

David Castelveter, a spokesman for US Airways, said the growth of low-cost service was not surprising in Pittsburgh "and further underscores the importance of us establishing a cost structure comparable to that of our low-cost competitors."

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USA320Pilot continues: Pittsburgh is a relatively high cost airport with abysmal revenue and O&D traffic. Yes the airport has great facilities, but very little local traffic. US Airways effectively shifted its Pittsburgh flying to Ft. Lauderdale where costs are relatively low and international yields are expected to be much higher than in Pittsburgh. LCC’s have over 500 aircraft on order and in the future, US Airways must be cost competitive in the new world and must be able to compete with Southwest or any other carrier, for that matter.

If I was one of those parties interested in the survival of US, the entry of SW into PIT should concern me. (Heck, the entry of SW into BWI and PHL would concern me also, but I guess that ship has sailed).
Reasons for my concern:
1) although SW will initially start with less than 5 gates and 10-15 flights/day, they surely will increase the # of gates they use and the # of flights they operate. SW could easily grow PIT into a 10 gate 100 daily flight operation.
2) what does US do if SW runs a PIT-PHL shuttle-type operation?
3) although I'm not from western PA, I get the feeling that the public image of US isn't all that great (mostly negative), whereas SW is the darling who can't do wrong. The presence of SW in PIT will encourage more people in western PA to fly SW instead of US & GoFares, especially since they don't have to drive to CLE or CAK to catch a SW flight.
4) In addition to SW possibly starting PIT-PHL, they will most likely offer $49 fares to Florida - can US break even on $49 fares? How about PIT-BWI; PIT-BUF; PIT-LAS; PIT-MHT/PVD; PIT-MDW? I'd be very concerned that in addition to generating their own traffic /demand, SW will draw a lot of customers away from US. I'd be very concerned.

 

[GeezLouis]

It has come to my attention that senior management believes the Christmas “Operational Meltdownâ€￾ cost the company about $8 million.

[post="236070"][/post]​

Damn! That could have made some VP a nice parachute!

 

[trvlr64]

I'd like to know who your dealer is. You're smoking some great stuff!!

Hey Chicken Little, your sky has fallen.

 

[LGA Fleet Service]

Delta shakes up industry



While you were busy snipping quotes did you come across this one?

Delta's move could pummel US Airways (UAIRQ:OTC BB - commentary - research), which is struggling to emerge from Chapter 11 bankruptcy protection. "One possible outcome of Delta's more aggressive fare structure could be the demise of US Airways, which overlaps with approximately 60% of Delta's domestic revenue," wrote Merrill Lynch's Linenberg. "If that were to occur, it would be a positive for the industry."

 

[ClueByFour]

Two additional notes:

You will be able to how serious LUV is about nailing the coffin shut on US if they start with PIT-PHL in the first round of flights. They can do it at rock bottom prices forever, whereas it'll kill US to bleed the cash. US has also downsized some of the relatively larger O&D markets, particularly to the west coast, to the point where LUV could run 1 or 2 a day to OAK and/or LAX and make it work off the bat. That said, I'd expect to see BWI one of the biggest "first" cities, both for the gouge that US has run for years on the PIT-BWI route, and the connectivity at BWI to the rest of the LUV system. You might see LAS (O&D and connectivity in the west). MCO is almost a given. HOU is also a possibility (again, the CO/US gouge has been silly for years). Later, I'd expect RDU, BNA, MSY, and a larger chunk of Florida. Airtran cannot be happy with this, as it will probably draw a bunch of folks back from CAK, and PIT does not suffer from the operational contrainsts or city-run silliness that pervades CLE.

I spent a day or so over the holidays in PIT this year, and the sentiment is not, shall we say, pro "US" at the current time.

 

[mweiss]

what does US do if SW runs a PIT-PHL shuttle-type operation?

[post="236085"][/post]​

I'm sorry...did you say "if?" That's a foregone conclusion. The only real question is how quickly they can ramp that baby up. Can you say cash cow?

 

[mweiss]

Clue...don't forget MDW, and perhaps MCI, for midwest/plains connections.

 

[ClueByFour]

Clue...don't forget MDW, and perhaps MCI, for midwest/plains connections.

[post="236091"][/post]​

D'oh. I thought I mentioned Midway.

The problem that I have with PIT-MDW is that ATA is (or was?) already doing it, and you already have AA/UA/US in the PIT-CHI market. That's not to say that LUV would not do it, but they might be able to do better elsewhere.

I think the first "expansion" in PIT will be more interesting than the initial service startup, unless US folds before May, in which case I see a ton more service from the get-go.

 

[Rico]

I think the SWA operation in PIT will look exactly like the SWA operation in CLE since the two markets are about the same. Just another market for Southwest, and not some focal point like BWI or MCO.

But then I do not share the strange love affair with anything and everything to do with PIT that so many on here have.