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Sunday, September 08, 2002

By Frank Reeves, Post-Gazette Staff Writer

Perhaps no major airline was more adversely affected by last September's terrorist attacks than US Airways. So much so that immediately after Sept. 11, some airline industry analysts predicted that Pittsburgh's dominant carrier would be out of business by the end of 2001.

	A US Airways passenger waits for transport in the near empty passenger pickup area at Pittsburgh International Airport on the day after the Sept. 11 attacks. Although business has picked up, it's still off sharply. (Martha Rial, Post-Gazette) Customers find no item safe from scrutiny Airport business hasn't been terrible

That didn't happen. The already hemorrhaging carrier limped along until last month when, 11 months to the day after the attacks, it filed for Chapter 11 bankruptcy protection, the latest move in a restructuring that it says must happen if it is to survive.

Ironically, it was US Airways' dominant position in East Coast markets and its short-haul service to numerous Atlantic seaboard cities that made the carrier vulnerable after Sept. 11.

US Airways is the largest carrier at Washington, D.C.'s Reagan National Airport, which remained closed for nearly a month after the attacks, long after other airports had reopened.

And while overall passenger traffic plunged after Sept. 11, short-haul travel on routes under 500 miles was clobbered even more, as many abandoned planes to travel by car and rail on these relatively short routes. These so-called "puddle jumper" routes are the backbone of US Airways' route structure.

In order to stay afloat, US Airways, the nation's seventh-largest carrier, having been surpassed by Southwest Airlines, retired part of its fleet, pared unprofitable routes and slashed about 23 percent of its work force.

Its ranks, once about 46,000, now hover around 35,000, with more layoffs in the works. Locally, it now employs about 10,350, down from 11,700 before the attacks. Hundreds more local layoffs are pending as it slashes the number of local daily flights 16 percent, dropping Pittsburgh below Charlotte, N.C., as its largest hub.

Of course, US Airways was hardly in fighting trim before Sept. 11.

Except for a five-year stretch, from 1995 through 1999, it's lost money every year since 1988, with the losses mounting well before the attacks as the recession that began in March 2001 cut deeply into business travel, critical to airline profitability. And during the first half of 2001, the cost of jet fuel, typically an airline's biggest expense after employee wages and benefits, soared as oil prices climbed.

The airline also is saddled with the highest labor costs in the industry -- in part a reflection of the relatively high cost of doing business in the East as well as a result of union contracts the airline had negotiated during the boom times of the late 1990s. Its industry-high labor costs reflect its historical makeup, a conglomeration of commuter carriers in which the best of union contracts were cherry-picked by labor and management to ease the merger process.

These costs made it that much more difficult for US Airways to confront increasing competition from low-cost carriers Southwest and JetBlue in its key East Coast markets. It had tried to stave off the upstarts with its own low-fare division, MetroJet, but that effort ended shortly after it was launched in the late '90s, a victim of the industry's downturn and its inability to compete effectively for business.

If anything, the Sept. 11 attacks forced US Airways and all major airlines to confront a mounting problem: costs that were trending up at a time revenue was trending down, said industry analyst Aaron Taylor of Arlington, Va.-based Eclat Consulting.

Something had to give, Taylor said, and something has -- most major carriers are paring routes, idling aircraft and seeking givebacks from their unions. In US Airways' case, its actions have been the most severe, largely because of all major carriers, it is in the most precarious financial shape.

Its latest effort at survival began in earnest in May, when newly appointed Chief Executive Officer David Siegel outlined a radical streamlining plan. Its components included $1.2 billion in annual concessions from employees, creditors and aircraft lessors; $900 million in federal loan guarantees so that it could borrow $1 billion from private lenders; a massive deployment of lower-cost, smaller regional jets; and if necessary, bankruptcy to buy time for all its actions to kick in.

So far, the airline's unionized pilots, flight attendants, flight dispatchers, simulators, baggage handlers and fleet service workers have ratified $616 million in annual wage and benefit concessions, while non-union salaried workers have accepted an additional $30 million a year in cuts. In addition, the union representing reservationists, ticket and gate agents has struck a preliminary accord, leaving the union representing mechanics and related personnel as the lone holdout.

Despite the progress, the company filed for Chapter 11 bankruptcy protection on Aug. 11, in part because it was having trouble coaxing lenders to reduce financing costs and cancel debts. Once a company has obtained bankruptcy protection, its management has broad powers to take such actions -- and to abrogate collective bargaining agreements from recalcitrant unions, something it has threatened to do if the machinists don't give in.

Siegel, who has used Chapter 11 to shed $600 million of debt, mostly aircraft leases for planes parked in the desert, has said he expects the airline will emerge from bankruptcy early next year.

From the company's perspective, there are reasons for his optimism. In addition to its progress with the unions, it has obtained conditional approval for the $900 million in federal loan guarantees and received $200 million in backing from the Texas Pacific Group, an investment company with a track record of turning around ailing companies, in return for a 38 percent stake in the remade airline.

All this could make US Airways competitive with other carriers, especially if they are unable to coax similar concessions from their workers. And with the right to eventually deploy as many as 465 regional jets -- the pilots union approved this change -- US Airways could even emerge as a strong competitor against Southwest and JetBlue.

But there are plenty of reasons to be pessimistic, too. For one thing, the economic recovery has been weak and business travel has showed few signs of rebounding.

Airline industry analyst Ray Neidl, of Baylock & Partners, and others are concerned that even a return of good economic times might not be enough to woo business-class travelers back to the major airlines. Those who are coming back are opting for lower-cost carriers or are demanding bargain fares from the major airlines, a movement that's likely to pick up steam in coming years, forcing fundamental changes in the way carriers do business.

Kevin Mitchell of the Radnor, Delaware County-based Business Travel Coalition, said that unless the major airlines narrow the gap between business-class and leisure fares, they will continue to lose their corporate customers to low-cost carriers.

Of course, the already weak recovery could be derailed if war breaks out in the Middle East, threatening oil supplies and driving up fuel prices. Rising insurance and security costs in the wake of 9/11 already are adding to airline's costs.

Frank Reeves can be reached at freeves@post-gazette.com or 412-263-1565.