"When the economy is growing, growth covers up a lot of sins."

Those words come from USAir Group Inc. Chairman Edwin I. Colodny, who has good reason lately to wish the economy were healthier.

After managing to build itself from a small regional airline into the country's sixth largest carrier, USAir is suffering through a year of record losses, layoffs and lower growth prospects.

The Arlington-based carrier announced last month that it plans to cut 3,600 jobs -- about 7 percent of its work force -- in what airline industry analysts said was likely to be the beginning of a round of major cost-cutting in the industry.

USAir's bumpy ride has been made worse by the costs of its merger one year ago with Piedmont Aviation Inc.

Just as the carrier was beginning to recover from service and operational problems that stemmed from that acquisition, along came a general plunge in the industry's profitability.

For USAir, the result was particularly dramatic: The company racked up losses of $63 million last year and $113 million in the first half of this year. Its stock has taken a nose dive along with its profit, dropping from a high of $54.75 the day before the merger to a low of $14.

For the first time, USAir's agenda is to minimize losses instead of planning for major expansion. As a result, the usually conservative airline finds itself in an unusual position -- looking like a trendsetter.

"I think they are doing something they had to do and that other folks are going to have to do," said Paul Turk of the aviation management firm Avmark Inc. "What's happening at USAir is just happening first."

Like other airlines, USAir has been hit by both dramatically rising fuel costs and intense fare competition that has made it hard to recoup increased costs. The slowdown in the economy has produced little or no growth in domestic airline traffic, leaving airlines with a choice of allowing expensive recently added airline capacity to fly empty or battling to fill seats with discount fares.

The whole airline industry is taking a pounding that may add up to a combined loss of $1 billion by the end of the year, according to the consulting firm Airline Economics.

In the case of USAir, however, the downturn has been particularly acute, in part because of the airline's mergers with Piedmont last year and Pacific Southwest Airlines the year before.

"Doing two mergers back to back in two years was a very difficult thing to do," Colodny said. "I guess we were guilty of assuming the economy was going to remain in a strong position while we did it."

But when the economy slowed instead, he said, "we had the timing problem of capturing the high cost of the mergers along with a slowdown in revenue and traffic growth."

USAir's difficulties also are compounded by regional recessions in most of its markets, intense competition on its West Coast routes, relentless discounting on the East Coast by bruised and financially ailing Eastern Air Lines, and a short-haul route structure that forces USAir to burn more fuel and absorb higher labor costs because of its frequent takeoffs and landings.

The most recent of the major mergers in the airline industry, USAir had hoped to avoid the operational and service problems that have followed in the wake of other mergers. But in the months following its acquisition of Piedmont, operations were anything but smooth.

The result was the worst on-time performance record in the industry during that period.

The airline also had to contend with the crash of Flight 5050 at New York's La Guardia airport in September 1989, which killed two people. The Federal Aviation Administration at first was sharply critical of USAir's flight training program, although the agency later softened that criticism and praised USAir's program.

The Justice Department, meanwhile, is investigating USAir and other airlines to determine whether they have used their power at the airports they dominate to violate antitrust laws.

But the operational problems have abated, according to several airline industry analysts.

"A lot of it, believe it or not, is the industry," said Paul Karos of First Boston Corp., describing the source of USAir's troubles.

Although they may not be driven to layoffs as USAir was, "every airline management team in the country is examining every possible way to minimize costs," he said.

"It's very important to know that even airlines like AMR {American Airlines} and Delta are going to see substantial, and I mean as much as 60 {percent} to 70 percent, reductions in profitability," Karos said.

USAir also has delayed delivery of new aircraft and set a rapid schedule for eliminating some of its most costly, fuel inefficient Boeing 727s. Although the airline has a relatively large number of 727s, it has the second youngest fleet of any major airline, with an average aircraft age of 9.2 years.

As USAir struggles to slash costs, the airline has cut back flying at some hubs, including Dayton, Ohio, Syracuse, N.Y., and Baltimore-Washington International Airport, and has cut back the hours allocated to some of its 12 crew bases.

USAir also deferred the $27 million construction of a new maintenance facility in Tampa, which was planned in anticipation of expansion that has been postponed.

Some of the other savings are smaller: printing the company newspaper on newsprint instead of higher quality paper to save $100,000 a year and sending facsimiles with a stick-on label in place of a cover sheet, which the company expects to save it $200,000 a year.

"It blew my mind when I discovered we were not saving that amount of money when we should have been," Colodny said.

The company also is eliminating charitable contributions, which totaled $1.2 million last year, until better times.

The food-service budget has been under review for more than a year, but Colodny said the airline will look for savings that won't effect the quality of service.

The hardest costs to address are fuel and labor.

At the end of June, the carrier was paying 65.3 cents a gallon for jet fuel. Recently the cost of fuel went above 90 cents a gallon. Every penny increase in the cost of fuel adds $13 million to expenses at USAir, where the short-haul nature of its route system means higher fuel consumption because of the higher number of takeoffs and landings.

The airline is taking steps to save on fuel. In some markets, USAir is looking at using turbo-prop planes in place of jetliners. And pilots are sometimes taxiing with a single engine, a practice the FAA said does not compromise safety.

Although USAir and other major airlines imposed a 5.3 percent price increase on Aug. 30, many passengers were able to book flights at a discount before the increases took effect.

In any event, the 5.3 percent increase doesn't begin to recoup the higher fuel costs, industry officials said.

"We are caught between the twin Scylla and Charybdis" of high fuel costs and the in ability to raise fares enough to recover the fuel costs, Colodny said.

Labor costs also have had a major financial impact. Contract agreements designed to give former Piedmont and Pacific Southwest workers parity with their counterparts at USAir have boosted the carrier's labor costs to 4.13 cents per available seat mile, compared with 3.57 cents before the merger, making them among the highest in the industry.

Although Colodny said he wishes he had been able to persuade the airline's unions to adopt a slower approach to pay parity, providing equal pay "had to be done," he said.

The airline is in mediation in an attempt to reach a new contract with its flight attendants, in negotiations with the International Association of Machinists on a new contract and looking toward negotiations with its pilots next year.

USAir also faces the prospect of a renewed Teamsters organizing drive because of a National Mediation Board decision that a previous union representation election was invalid.

Labor relations at USAir, which have been considered unusually good for the industry, have grown a little testier, first from the merger and now from the layoffs.

"I think people might have felt this was coming, but the way USAir handled it was quite poor," said Dee Maki, president of the flight attendants union at USAir. Many people first heard about the layoffs from the press, she said. Now morale is "kind of down," Maki said. "Nobody likes to see anyone laid off."

Most of the furlough notices will have been received by the end of this week. Because USAir had hired rapidly in the last year in anticipation of expanding its hubs and beefing up cross country routes linking its East and West Coast systems, most of the workers hit by the layoff are either probationary workers or workers with less than a year's seniority.

In departments that deliver customer services, many of the cuts will be in management, rather than at the delivery end of the department, said Colodny.

With the layoffs announced, USAir's remaining workers should have a cloud of uncertainty removed, said Colodny. "We have no intention of further cuts. We think we've done what we need to do," Colodny said.

Colodny is as accessible as he always has been, though perhaps not as ebullient. He is, however, confident that the mergers were the right choices for USAir, he said. As for the timing -- well, Colodny said that depended on circumstances beyond USAir's control, such as how long it took the other two airlines to agree to the merger.

"If things are in a good posture," it is Colodny's intent to retire next summer when he turns 65, following the general practice for the company's executives. If the board asks him to stay on, or if things are not in a good posture, his decision "will have to be reviewed," he said.

Despite the losses, the airline is "in good shape, but not as good as it needs to be. It needs to get back to earning a profit," Colodny said, adding that it may be awhile. "I sure hope by 1992, we've got the economy turned around," he said.

"There will be an airline industry, and there will be carriers that prosper, and USAir will be among them," said one of the airline's major investors, Berkshire Hathaway Chairman Warren E. Buffett.

"But it's not going to be in 1990."endquad