By Keith L. Alexander
Washington Post Staff Writer
Wednesday, May 18, 2005
For US Airways -- one of the oldest and most recognizable names in the industry -- time is drawing short. After plunging twice into bankruptcy protection and shearing off nearly $2 billion in costs, the nation's seventh-largest carrier is pinning its hopes of survival on a merger with America West Airlines.
"We don't have many other options left. This is it," said a US Airways Group Inc. executive who spoke on condition of anonymity because of the sensitivity of the negotiations.
Negotiations are entering a critical stage, with a deal possible this week, people familiar with the talks said.
If a merger succeeds, the Washington area could suffer a blow to its prestige as the new airline would likely move its headquarters from Arlington to Tempe, Ariz., the home of America West Holdings Corp. The merged carrier is expected to be led by America West senior executives and could move some of the 1,970 Washington-based jobs out of the Washington region.
The US Airways saga -- from one of the most profitable carriers in the mid-1990s to its near demise today -- symbolizes the travails of the entire U.S. airline industry. It illustrates the hard times that befall companies that fail to adapt swiftly enough to changing times. The traditional airlines, like other older industries such as steel, retail and autos, have been slow to respond to the emergence of efficient, low-cost rivals and increasingly price-conscious consumers. A US Airways-America West merger could spur other troubled carriers to seek linkups, producing a leaner, more efficient industry.
US Airways, formerly known as US Air, has been a household name since it was founded in 1939 as All American Aviation based in Wilmington, Del. Ten years later, the carrier moved its corporate headquarters to a hangar at Washington's National Airport, then in 1989 moved again to its current home in Crystal City.
The airline flourished in the mid-1990s largely because of its dominance in the Northeast, where business travelers on short-haul flights paid rich fares -- for example, nearly $1,000 for a half-hour trip between Pittsburgh and Washington. Today, fares are considerably lower, but flights in and out of Washington are popular and lucrative and will not likely be reduced by a merged US Airways-America West.
"Washington is one of the few places they make money," said airline consultant Darryl Jenkins, visiting professor at Embry-Riddle Aeronautical University. "They would be silly to give up an asset like that."
The airline's gradual descent began around 1998, according to several current and former executives, labor leaders and employees. US Airways was still turning a healthy profit, but signs of its future troubles were emerging. At the heart of its struggles has been the often tense relationship with its workers, many of whom have been at the airline for 30 years or more -- much longer than most of the senior executives. As the airline's fortunes have fallen, executives have had a hard time persuading workers to accept changes that have often led to lost jobs or wages. Workers have grown distrustful of managers who sometimes have backed off assurances to the rank and file while doling out millions of dollars in retention incentives to executives.
The airline recently revealed that it is paying $55 million to keep some of its top executives as it tries to complete the America West deal. The retention pay angered many US Airways workers who have given up more than $1 billion in pay and benefits this year.
As far back as 1999, workers resisted the airline's efforts to increase service of 60-seat regional jets on routes where tiny turboprop planes were in use. US Airways managers said the shift was necessary to compete with other airlines such as Continental, Northwest and Delta, which were quickly adding the smaller jets on routes where US Airways had only turboprops. But the workers, fearing that the change would result in cuts in jobs and pay, wanted assurances of job security.
While managers and employees spent two years negotiating over the use of the new planes, competitors continued adding their own regional jets and stealing passengers from US Airways.
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.