Folks: Here is the column posted in USA Today on 5/23/05. You folks are the best in the industry, keep up all the work you are doing!
America West foolishly bets the farm
As P.T. Barnum allegedly once said: "There is a sucker born every minute." And so it is with America West Airlines and several other companies that have decided to pump hundreds of millions of dollars into twice-bankrupt US Airways.
America West is betting the farm on this merger bid for US Airways. The Arizona-based airline has decided to commit suicide; that's the only explanation I can fathom. CEO Doug Parker and his staff must have stayed out in that Arizona sun too long if they think they can turn around an airline that lost more than $600 million in 2004 and another $190 million in the first quarter of 2005 despite billions of dollars in cost reductions and federally backed loans.
This proposed merger is fraught with problems. For starters there is a clash of cultures old and new. Launched in 1983, America West is a relative newcomer to the industry: US Airways has been around much longer. There is sure to be bad blood with many US Airways employees having far more seniority than those at America West.
Then there is the clash of culture when east meets west. Both carriers are primarily regional airlines serving opposite coasts. There is very little overlap in the airlines' route structures. This could be a good thing in a merger, and many believe the combination will create a national network that will rival the big guys. But one essential piece is missing: Each carrier lacks a major hub in the heart of the country.
US Airways serves many smaller cities along the Eastern Seaboard and America West's routes are concentrated in the Southwest. America West's hubs in Las Vegas and Phoenix are located far west and US Airways' hubs in Philadelphia and Charlotte are located far east. Having one more centrally located hub in Chicago, Dallas, Detroit, Houston, Minneapolis or St. Louis could change the entire picture. But these hubs are spoken for and other airlines are already entrenched.
Both airlines already tried and failed to manage operations on the opposite coast. America West pulled down its unprofitable Columbus, Ohio, hub in 2003. US Airways abandoned an extensive West Coast route network after the carrier acquired PSA (a regional airline based in California) in the late 1980s. It's difficult to operate a bicoastal airline when there isn't much in the middle.
There is also a clash of cost structures. Now in its second bankruptcy, US Airways' survival is a long shot. The carrier is losing more than $2 million per day and its cost-per-seat mile is still more than 10 cents when low cost competitors are averaging 7 to 8 cents per seat mile. With all of the cash infusions, employee concessions and relief from creditors, US Airways will continue to lose money if it emerges from bankruptcy.
Having survived one bankruptcy from 1991-1994 and narrowly avoiding another in 2001 thanks to a federally backed loan of $429 million, America West has reduced its cost per seat mile to less than 8 cents. This allows the carrier to successfully compete in the Southwestern USA, an area dominated by low-cost airlines since deregulation. With a competitive cost structure, America West can afford to match Southwest Airlines prices, in spite of soaring fuel costs.
Discrepancy in airline size creates another clash. America West managed to turn a profit of $50 million in the last quarter. But this would not offset the enormous losses incurred by US Airways. The combined airline would not be a low-cost carrier and would still have lost approximately $140 million in the same period if the carriers merged.
Though the new airline may raise up to $2 billion in cash to begin operations, the combined carrier will still carry many more billions of dollars in debt and it won't take long to burn through the rest of that cash when they are currently losing almost $1 billion each year.
With the price of fuel more than 50% higher than at this time last year and no relief in sight, I cannot see how America West can possibly turn US Airways around. America West trying to save US Airways is like a rowboat trying to save the Titanic. Both will go under.
Amid all the doom and gloom there is some possible good news for US Airways customers…at least in the short term. The merger could breathe new life into the dying carrier. With the help of America West and other investors, US Airways could be rescued temporarily from liquidation. The infusion of cash from America West could keep the sinking ship afloat for a while longer.
If you are a member of America West's frequent-flier program, there is good news as long as the carrier survives this merger. Your miles will most likely be usable on any Star Alliance carrier, such as Lufthansa, SAS or Singapore Airlines. You will also be able fly to such US Airways destinations as Hilton Head, Myrtle Beach and many European and Caribbean ports of call.
Of course, America West could have another agenda for US Airways – liquidation. If America West gained control of the failing airline for a mere $100 million and then sold off the assets piece by piece, they could offload debt and eliminate unprofitable routes and duplicate resources. America West could essentially "cherry pick" the most profitable routes and assets, such as the shuttle or some international routes.
American Airlines deployed a similar strategy, acquiring dying TWA several years ago in a "fire sale" only to unload most of the assets and furlough most employees. Sadly, it's a lot easier to liquidate than integrate. Yes, it's nasty business, but perhaps a more rational explanation for America West's perplexing interest.
Oddly enough, the liquidation of US Airways is the one scenario in this merger that could save America West. But integration or liquidation, US Airways' fate is sealed. The carrier will cease to exist in the long term whether the merger goes through or not.
America West foolishly bets the farm
As P.T. Barnum allegedly once said: "There is a sucker born every minute." And so it is with America West Airlines and several other companies that have decided to pump hundreds of millions of dollars into twice-bankrupt US Airways.
America West is betting the farm on this merger bid for US Airways. The Arizona-based airline has decided to commit suicide; that's the only explanation I can fathom. CEO Doug Parker and his staff must have stayed out in that Arizona sun too long if they think they can turn around an airline that lost more than $600 million in 2004 and another $190 million in the first quarter of 2005 despite billions of dollars in cost reductions and federally backed loans.
This proposed merger is fraught with problems. For starters there is a clash of cultures old and new. Launched in 1983, America West is a relative newcomer to the industry: US Airways has been around much longer. There is sure to be bad blood with many US Airways employees having far more seniority than those at America West.
Then there is the clash of culture when east meets west. Both carriers are primarily regional airlines serving opposite coasts. There is very little overlap in the airlines' route structures. This could be a good thing in a merger, and many believe the combination will create a national network that will rival the big guys. But one essential piece is missing: Each carrier lacks a major hub in the heart of the country.
US Airways serves many smaller cities along the Eastern Seaboard and America West's routes are concentrated in the Southwest. America West's hubs in Las Vegas and Phoenix are located far west and US Airways' hubs in Philadelphia and Charlotte are located far east. Having one more centrally located hub in Chicago, Dallas, Detroit, Houston, Minneapolis or St. Louis could change the entire picture. But these hubs are spoken for and other airlines are already entrenched.
Both airlines already tried and failed to manage operations on the opposite coast. America West pulled down its unprofitable Columbus, Ohio, hub in 2003. US Airways abandoned an extensive West Coast route network after the carrier acquired PSA (a regional airline based in California) in the late 1980s. It's difficult to operate a bicoastal airline when there isn't much in the middle.
There is also a clash of cost structures. Now in its second bankruptcy, US Airways' survival is a long shot. The carrier is losing more than $2 million per day and its cost-per-seat mile is still more than 10 cents when low cost competitors are averaging 7 to 8 cents per seat mile. With all of the cash infusions, employee concessions and relief from creditors, US Airways will continue to lose money if it emerges from bankruptcy.
Having survived one bankruptcy from 1991-1994 and narrowly avoiding another in 2001 thanks to a federally backed loan of $429 million, America West has reduced its cost per seat mile to less than 8 cents. This allows the carrier to successfully compete in the Southwestern USA, an area dominated by low-cost airlines since deregulation. With a competitive cost structure, America West can afford to match Southwest Airlines prices, in spite of soaring fuel costs.
Discrepancy in airline size creates another clash. America West managed to turn a profit of $50 million in the last quarter. But this would not offset the enormous losses incurred by US Airways. The combined airline would not be a low-cost carrier and would still have lost approximately $140 million in the same period if the carriers merged.
Though the new airline may raise up to $2 billion in cash to begin operations, the combined carrier will still carry many more billions of dollars in debt and it won't take long to burn through the rest of that cash when they are currently losing almost $1 billion each year.
With the price of fuel more than 50% higher than at this time last year and no relief in sight, I cannot see how America West can possibly turn US Airways around. America West trying to save US Airways is like a rowboat trying to save the Titanic. Both will go under.
Amid all the doom and gloom there is some possible good news for US Airways customers…at least in the short term. The merger could breathe new life into the dying carrier. With the help of America West and other investors, US Airways could be rescued temporarily from liquidation. The infusion of cash from America West could keep the sinking ship afloat for a while longer.
If you are a member of America West's frequent-flier program, there is good news as long as the carrier survives this merger. Your miles will most likely be usable on any Star Alliance carrier, such as Lufthansa, SAS or Singapore Airlines. You will also be able fly to such US Airways destinations as Hilton Head, Myrtle Beach and many European and Caribbean ports of call.
Of course, America West could have another agenda for US Airways – liquidation. If America West gained control of the failing airline for a mere $100 million and then sold off the assets piece by piece, they could offload debt and eliminate unprofitable routes and duplicate resources. America West could essentially "cherry pick" the most profitable routes and assets, such as the shuttle or some international routes.
American Airlines deployed a similar strategy, acquiring dying TWA several years ago in a "fire sale" only to unload most of the assets and furlough most employees. Sadly, it's a lot easier to liquidate than integrate. Yes, it's nasty business, but perhaps a more rational explanation for America West's perplexing interest.
Oddly enough, the liquidation of US Airways is the one scenario in this merger that could save America West. But integration or liquidation, US Airways' fate is sealed. The carrier will cease to exist in the long term whether the merger goes through or not.
