Merger May Be US Airways' Last Shot at Survival

Threats to US Airways, meanwhile, were emerging on another front: Budget carriers Southwest and AirTran were stepping up expansion of their service along US Airways routes. Weakness in the economy and growth of the Internet was driving business travelers toward the cheaper fares. US Airways prices remained high to cover its higher costs. Management insisted that travelers were happy to pay because in exchange they got full service that the budget carriers weren't offering.

By 2000, US Airways faced another new competitor: low-fare carrier JetBlue. The budget carriers were beginning to present a formidable threat to long traditions in U.S. air travel.

US Airways was stymied from launching an aggressive response to the fast-moving changes in the industry partly because during some of this time it was also focused on enticing United Airlines into a possible merger and on winning approval of the plan from the government. The airlines announced in 2000 that United would acquire US Airways for $12.3 billion.

For the next 15 months, executives turned their attention to securing the deal. They argued that the merger was critical to US Airways' survival because the airline was too small to compete with the larger global carriers such as American, United and Delta and that its cost structure and operations were too complicated and costly to battle the low-cost carriers.

The Department of Justice didn't buy the arguments. In July 2001, it blocked United from acquiring US Airways, saying the deal would reduce competition and result in higher fares.

"They put the entire future of the airline into this merger," said Roy Freundlich, who served as chief spokesman for US Airways' pilots union from 1997 through 2003. "They spent an entire year on getting that merger through. It was the greatest neglect of the airline."

The government's decision forced US Airways executives to quickly find ways to reduce costs so the airline could continue operating on its own. Executives returned to the negotiating table in a bid to persuade the labor unions -- most important, the pilots -- to allow the airline to add the regional jets.

The biggest blow to US Airways -- and the industry -- was just around the corner. After terrorists hijacked four planes and crashed them into New York's World Trade Center, the Pentagon and a Pennsylvania field on Sept. 11, 2001, US Airways' spiral intensified. The airline slashed 11,000 jobs and eliminated about 20 percent of its operations. It filed for Chapter 11 bankruptcy protection in August 2002, and executives embarked on a fast-track reorganization, quickly lining up much of its exit financing and securing a $900 million loan guarantee from the federal government.

The airline emerged from court supervision after just eight months, having cut about $2 billion in costs, with more than $1.2 billion coming from employee concessions in pay, benefits and work rules. The airline also eliminated an additional 17,000 jobs. Still, many analysts speculated that the cuts were not deep enough and that the carrier should have stayed in bankruptcy rather than emerging just as the country was in the early days of its war in Iraq.

US Airways executives contended they had no choice but to take the airline out of Chapter 11 when they did. They said several lenders tied approval of loans to the emergence date, and that the airline's credit card processor demanded that US Airways emerge by the scheduled date.

The airline's fortunes only worsened. The war weakened travel demand, the economy was sluggish and Southwest Airlines moved into US Airways' biggest market, Philadelphia. By now, the budget airlines had snatched about 20 percent of the aviation market, up from 5 percent in the late 1980s. Projections put their share at 40 percent by 2006, according to US Airways at the time. The growth has come primarily on shorter routes of about 500 miles and has been concentrated in the Northeast.

With revenue still low, US Airways' costs continued to climb -- rating among the highest in the industry. In September 2004, the airline filed for bankruptcy protection for a second time in two years. Another round of worker concessions lopped off $1 billion in costs, and the airline has also brought in Bruce R. Lakefield as its third chief executive in three years.

"Every employee . . . has taken a hell of a beating," said Bill Freiberger, general chairman of US Airways' machinists union. Freiberger, 57, said the past decade has been among the most difficult in his 37-year career at the airline.

A deal with America West, Freiberger said, would help relieve a lot of the stress among workers who remain concerned about their future. "It would be nice to have the employees be able to relax for a while. This has been a roller coaster ride for the last 15 years."

Staff researcher Richard Drezen contributed to this report.