Why must US Airways seek more savings?



Why must US Airways seek more savings?
ARLINGTON (theHub.com) - US Airways is seeking work-rule and benefit changes to complete its cost-cutting initiatives and emerge from Chapter 11 protection by March 2003. As part of management's commitment to preserve jobs where possible, it has proposed that the airline will maintain the fleet at its current level of 279 aircraft 34 more than the 245 level required under restructuring agreements ratified last summer if an agreement on productivity improvements can be achieved.
Q. In addition to furloughs, every work group in the company has already taken pay cuts and benefits changes. Why is US Airways seeking more?
A. In a nutshell: to survive. The industry's revenue performance has been well below projections since the summer, which no carrier anticipated, and the outlook remains weak, given the threat of war and the lingering recession. Consequently, our cost-cutting targets have increased as revenue has declined. It is not necessary to cut anyone's pay rates more, because cost savings can be achieved through productivity improvements.
To meet all the conditions of the $1 billion loan guaranteed by the Air Transportation Stabilization Board (ATSB), we must be able to demonstrate that we can generate enough profits to pay off the loan. Furthermore, our ability to draw the remaining $200 million of our debtor-in-possession (DIP) financing to complete our reorganization in bankruptcy court is contingent on our getting final approval of the ATSB loan guarantee. So we need to quickly complete this process to access the cash we need for operations.
Q. But haven't we already received conditional approval from the Air Transportation Stabilization Board for the $1 billion loan?
A. Yes, but the key word is conditional. We have made good progress on many of the conditions, such as enhancing revenue with our code-share deal with United and our plans for securing additional regional jets. But as the outlook has deteriorated for the entire industry, we are forced to fill the revenue gap with additional cuts, which is why the company has reset its target to up to $1.7 billion in annual cost reductions.
Q. What about the money from our investor, The Retirement Systems of Alabama? Won't that help?
A. As our restructuring plan sponsor, RSA will invest $240 million in the company upon its emergence from Chapter 11. In the meantime, it also has provided $500 million in DIP financing of which we have already accessed $300 million. The remaining $200 million of the DIP loan becomes available only when US Airways receives final approval from the ATSB for the federally guaranteed loan. And, of course, the $240 million doesn't come into the picture until US Airways comes out of bankruptcy.
Q. Is there a deadline?
A. Our agreement with RSA requires us to meet all the conditions of the ATSB loan guarantee to draw the remaining $200 million of DIP financing. It also requires us to file a plan of reorganization in December for hearing in January. The bankruptcy court filing deadline for the Jan. 16 hearing date is Dec. 20. This will allow for the company to complete the bankruptcy process and emerge from Chapter 11 by March of 2003.
Q. What is the significance of maintaining a fleet of 279 aircraft?
A. As part of the restructuring agreements reached with unions this past summer, we agreed not to reduce the size of our fleet to below 245 (absent force majeure). Since filing for Chapter 11 protection in August, we have reduced the fleet from 311 mainline aircraft to the current fleet of 279.
If we can get additional cost savings that comes with more productive work rules, we are prepared to raise that commitment to the current fleet of 279 aircraft. Ultimately, the larger the fleet, the more employees needed to fly, maintain and service a higher level of operations.
Q. What about asking management for more? Why just front line employees?
A. Just as all employees have shared in the sacrifices thus far, management will participate in further cost reductions. If there are changes in benefits, that will impact management employees. And what seems to be overlooked in some of the discussions is that we are not asking for cuts in pay rates. We are looking to change the most inefficient work rules in the industry that the company simply can't afford to maintain.
We have made significant reductions in management staff, and have one of the leanest management structures in the industry. And, as far as pay cuts go, keep in mind that all the labor groups begin to see increases in pay rates beginning in 2004, and union-represented employees also have longevity step increases. Management, most significantly, senior management, has taken pay cuts that are equal to 100 percent of its target when all other work groups took 85 percent of the target numbers. Also, management has not committed to future pay increases with its own group, nor do management employees have the step increases, recall rights and job protection afforded those in collective bargaining units.
Q. Won't productivity gains translate into more furloughs?
A. Unfortunately, the answer is yes. But the alternative would be far worse if we don't complete our plan, secure the additional financing and emerge from bankruptcy.
Q. What about pensions? Are they subject for discussions too?
A. The business plan under consideration by the ATSB takes into account all of the company's obligations. The company recently estimated it will have to contribute $3.1 billion in cash over a six-year period beginning in 2003 to meet pension funding obligations under the current plans. Such a huge funding obligation would cripple the company's recovery.
Q. Why such a large figure?
A. It's a combination of the dramatic drop in the value of the stock market and falling interest rates. The decline in returns in the securities markets over the past three years has eroded pension plan assets. In addition, today's declining interest rates means US Airways must set aside more money now to pay for future pension liabilities. This is not a situation unique to US Airways. Many other companies, both inside and outside the airline industry, face the same issues.
Q. Not every work group has a defined benefit pension plan. Who does?
A. We have three active plans, covering our pilots, flight attendants and mechanics. We have a frozen defined benefit plan covering passenger service, fleet service, and non-contract employees for service prior to 1992. Other US Airways Group subsidiaries have a total of three defined benefit plans. We have made it clear that only those employee groups covered by defined benefit pension plans will be involved in a solution to the pension funding issue. Those work groups not covered by such plans will not be impacted.
Q. Could US Airways terminate defined benefit plans as part of the bankruptcy process?
A. While there are provisions under federal law to terminate these types of benefit plans, they are maintained pursuant to collective bargaining agreements. Termination of these plans is not something the company wants to pursue at this time. Rather, US Airways is seeking to negotiate with the unions involved for ways to ease the impending financial impact.
Q. So what's the solution to the pension problem?
A. The company is in discussions with the unions that represent the impacted employees, as well as the Pension Benefits Guaranty Corp. (PBGC), the federal agency responsible for overseeing the funding of pension plans, as we explore ways to maintain the pension plans but negotiate funding options that are more acceptable.