US Airways backed off from its plan to eliminate its retirees' medical benefits and agreed late yesterday to continue paying for some of their health care.
The agreement came ahead of a crucial U.S. Bankruptcy Court hearing today at which Judge Stephen S. Mitchell was scheduled to rule on US Airways' request to eliminate health benefits for more than 11,000 of its retirees. Mitchell also is to rule on the airline's request to throw out the union contract covering the airline's mechanics and baggage handlers. US Airways wants to replace the contract with a less expensive one.
Canceling the retiree benefits was part of US Airways' attempt to cut about $1 billion a year in labor-related costs to avoid liquidation. Details of the retirees' agreement were not made public.
Also yesterday, members of the union representing US Airways' 5,800 flight attendants ratified a contract that would cut their wages by about 9 percent. The agreement would save the airline about $94 million a year.
Sixty-four percent of the voting flight attendants supported the new contract, leaving the machinists union as the only group not to reach an agreement with the airline. Negotiations continue and a deal could be made as soon as today.
If there is no agreement and the machinists' contract is nullified, union officials have said more than 3,000 workers might strike in protest, which could pose a sharp challenge to the carrier's survival.
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.
The competitive environment continues to toughen for the Arlington-based carrier. One of US Airways' biggest rivals, Southwest Airlines, announced yesterday that it will begin service at Pittsburgh International Airport, one of US Airways' key hubs. When Southwest enters a new market, it generally cuts fares as much as 60 percent, pressuring other airlines to do the same.
Last spring, Southwest moved into Philadelphia, another city where US Airways, the nation's seventh-largest airline, has dominated. US Airways executives at the time called Southwest an "enemy" and said the airline was in a battle for its life.
Delta Air Lines yesterday began what some observers believe will be an industry-wide restructuring of fares. The nation's third-largest airline cut its fares by as much as 50 percent, which could force other carriers, including US Airways, to cut their prices to remain competitive. Merrill Lynch & Co. analyst Michael Linenberg said industry-wide fare cuts could cost airlines as much as $3 billion a year.
While airfares are at their lowest in more than 15 years, US Airways' passenger traffic has slipped, too. The airline reported yesterday that passenger levels in December fell 2.8 percent compared with December 2003. Other airlines, such as Continental and Northwest, reported slight increases in traffic for the month.
US Airways also is working to repair its image among many travelers after it canceled about 450 flights and misplaced thousands of pieces of luggage over the Christmas weekend. The airline blamed bad weather and workers who, it said, took excessive sick time.
Helane Becker, an airline analyst with Benchmark Capital, said airlines -- executives and employees -- are under tremendous pressure. "These guys have their backs against the wall," she said.
US Airways isn't the only airline preparing for a court battle with labor unions. United Airlines, which has been under bankruptcy protection for more than two years, plans to ask a Chicago judge today to cut the salaries of its unionized employees and terminate its employee pension plans.
United, one of US Airways' marketing and code-sharing partners, has already cut about $2.5 billion in labor costs. It said late last year that it needs to cut $725 million a year more to strengthen its balance sheet as it searches for financing to exit bankruptcy protection. Workers represented by three of United's six unions could face court-imposed cuts.
US Airways faces critical deadlines this month. The airline must show the federal Air Transportation Stabilization Board, which backs $900 million of its loans, that it remains viable and should be allowed to keep using cash reserves as collateral. It also must show that it has generated at least $100 million in extra savings or revenue, or risk having GE Capital Inc. take back many of its leased aircraft.
US Airways executives hope that if the airline can reduce its costs, it will have a fighting chance of remaining in business. The carrier is trying to transform itself into a hybrid of a low-fare carrier like Southwest and a traditional airline offering services such as international flights and first-class cabins.
