Barring any last-minute hitches, US Airways will be reborn Monday as a smaller, more regional carrier after seven months in bankruptcy.
The airline went into bankruptcy as the nation's sixth-largest carrier. It was known for its wide-body jets that crisscrossed the nation and spanned the Atlantic. It will emerge as the seventh-largest airline, with an enhanced fleet of 50-seat jets servicing the East Coast, the Caribbean and Latin America. It is paring its long-haul flights.
"US Airways will never be a global network carrier, but it will now be a very good East Coast niche player," said Darryl Jenkins, head of George Washington University's Aviation Institute.
US Airways returns in its lean, refocused form at the most difficult time in the industry's history. Although reinvigorated by a sharp reduction in costs and debt, the airline still faces a tough battle to attract passengers amid a severe drop-off in travel because of a slack economy and the war in Iraq. The Arlington-based airline has long suffered from middle-of-the-pack syndrome: It was not big enough to go head-to-head with the industry giants -- United, American and Delta -- and not small enough to compete with low-cost carriers such as Southwest, AirTran and JetBlue. But with United in bankruptcy and American close to filing, US Airways will emerge in possibly the strongest competitive position in its history.
Today, U.S. Bankruptcy Judge Stephen S. Mitchell is expected to deliver a final ruling on the creation of a new pension plan that the airline and its pilots agreed on last weekend. To cut costs, the airline sought to eliminate its former pension plan, which was underfunded by $2 billion. Also today, the Pension Benefit Guaranty Corp., the government agency that oversees pension benefits, is expected to sign off on the change. A delay, or rejection, from Mitchell or the agency would force a postponement in the airline's emergence.
Analysts aren't expecting any demurs in these final hurdles. William J. Rochelle III, a bankruptcy lawyer for Fulbright & Jaworski LLP in New York, praised US Airways for the speed of its reorganization and for emerging on schedule.
"They did it in the least amount of time conceivable for a company of that size and magnitude," said Rochelle, who has worked on previous airline bankruptcies, including United's and Continental's. "They moved forward with virtually no hiccup."
The test now is whether US Airways can turn a profit, he added. "There's a distinction between reorganization in Chapter 11 and fixing the business," he said. "Let's hope they really did fix the business."
The airline isn't likely to return to profitability anytime soon, analysts said, given the weak demand since Sept. 11, 2001, and the wartime environment. US Airways said yesterday that war in Iraq has forced it to reduce its flights by 5 percent on domestic and transatlantic routes. Bookings dropped 20 percent in the first week of the war, the airline said. It has suspended flights to London in April and cut the number of flights to Frankfurt and Amsterdam from Pittsburgh and Philadelphia.
United's troubles also are hanging over US Airways. If United fails to successfully reorganize and goes into liquidation, US Airways could suffer because of a marketing agreement between the airlines. In October, the two merged their frequent-flier programs and allowed their top frequent fliers to use each other's airport club. The code-share agreement was supposed to create about $200 million in additional revenue for each carrier.
Earlier this month, though, United said it could be forced to liquidate if it was unable to cut about $2.56 billion a year from its operations. The carrier reached an agreement yesterday with the leaders of its pilots union on the pilots' portion of the cuts. The union members still must ratify the agreement.
US Airways' stronger financial position should help it weather the weak market. The airline's debt has been slashed by more than $2 billion -- to $8.05 billion, from $10.65 billion last August, when it filed for bankruptcy. After it emerges from bankruptcy, the carrier can obtain a $900 million federal loan guarantee that it will use to secure $1 billion in loans. It will also get $371 million from its largest investor, the Retirement Systems of Alabama.
David N. Siegel took over as president and chief executive of the airline in March 2002. Siegel, 41, is confident US Airways executives have restructured the airline for long-term success. The carrier has retrenched from its long-haul markets and reduced cross-country flights by nearly 25 percent. With its eye on a more regional market, the airline is beefing up its service along the East Coast and to Florida and the Caribbean. It also is increasing its presence in Latin America by adding such cities as San Jose, Costa Rica, and Cozumel, Mexico.
The carrier, which flies 80 regional jets, will add up to 320 more of the smaller jets now that its pilots have agreed to the plan. The airline grounded many of its larger, fuel-guzzling planes and its less popular tiny turboprops. Passengers prefer the new 50-seat regional planes, which are cheaper to operate than wider ones.
The airline has eliminated many of its early and late-night flights, such as those before 6 a.m. or after 9:30 p.m., because those times attracted the fewest passengers. Other flights were cut for efficiency.
US Airways has closed most of its city ticket offices, sending travelers to the Internet to book flights. It has begun charging fees for paper tickets. Meals, of course, are history on most routes. The carrier is testing an a la carte service, allowing passengers to purchase simple foods, such as sandwiches, before boarding.
The airline said it was able to reduce its costs according to a key barometer the industry has used for years. US Airways has cut its expenses from 12.25 cents per seat per mile, the highest in the industry, to 10.5 cents. While that's still not as low as Southwest's 8.5 cents, it's below the levels of rivals Continental and Northwest.
Robert Fornaro, president and chief operating officer of AirTran, said US Airways' new cost structure will make it more competitive. "They've gone a long way in matching their supply to demand, and that will help them," he said. "They'll defend better, but the best defense is not having to play defense at all. It's playing offense." Fornaro was US Airways' vice president of planning from 1992 through 1997.
Sam Buttrick, an airline analyst at UBS Warburg, cautions that whatever cost reductions US Airways has achieved, it must confront other factors, too. "In effect, US Airways has gone from having extremely high costs to having high costs," he said. "It will take a combination of a vastly improved revenue environment and lower oil prices for the airline to become profitable. And that's certainly unlikely to happen anytime soon."
Overall, the airline cut costs by $1.9 billion. More than $1.2 billion of that came from employee concessions in pay, benefits and work rules. The rest came from agreements with the airline's major creditors, including aircraft leaseholders, suppliers and airports.
To achieve its cost targets, the airline eliminated nearly 17,000 jobs, and workers gave up thousands of dollars in pay and benefits. Many workers lost their retirement benefits because they were tied up in the airline's stock, which lost virtually all its value with the bankruptcy filing.
But the workers who remain seem optimistic about their employer's future. "We're still here," said US Airways flight attendant Bob Kenia. "There's still an airline and people still have a job." Kenia, who is also the Washington area president of the airline's flight attendants union, said employees are going to closely watch the new management and how they operate the airline.
"Siegel has been good in bringing this airline around, but it's been on the backs of the employees," Kenia said. "We had things crammed down our throats these past seven months, and we did things to survive. Now it's time to see how this management team works with its employees moving forward."
US Airways will have a new slate forming a majority on its board of directors. Only three current members will remain directors. The board, which could assume leadership of the airline April 1, has eight members representing the Alabama pension fund, including its chief executive, David G. Bronner. That investment fund invested $740 million in interim and long-term financing and took a 37 percent stake in the carrier. Industry observers said that Bronner could become chairman since the pension fund has 71 percent of the voting rights.
One name that is absent from the new board is US Airways' outgoing chairman, Stephen M. Wolf, who joined the carrier in 1996 after serving as head of several airlines, including United, Republic and Tiger International, in the 1980s and early 1990s.
Wolf, 61, who says he's enjoying life outside of the industry, believes that US Airways is bound for success. "While significantly smaller, US Airways under Dave Siegel's able leadership is clearly well positioned for the future," he said.