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US Airways may go if costs aren't cut

Saturday, April 05, 2003

By Mark Belko, Post-Gazette Staff Writer

The future of the US Airways hub in Pittsburgh rests on efforts to reduce the airline's costs at the airport, Allegheny County Chief Executive Jim Roddey said yesterday.

Without reductions, the region's dominant carrier may eliminate its Pittsburgh hub and consolidate operations at Philadelphia and Charlotte, Roddey said at a news conference.

"If they had to go to two hubs because of cost, Pittsburgh is the hub they would sacrifice," he said.

His comments came hours after he, Pittsburgh Mayor Tom Murphy and county Airport Authority officials met with US Airways Chief Executive Officer David Siegel and other airline officials at the airport to discuss lease costs.

It was the first meeting between county and US Airways officials since the airline decided to reject its leases at Pittsburgh International shortly before emerging from bankruptcy on Monday. The carrier has given the airport authority until January to renegotiate the leases and lower costs. Until then, it will pay the current rates and charges.

Roddey said US Airways officials indicated during the meeting that the airport's hub status, the proposed headquarters for regional jet unit MidAtlantic Airways and the future of ancillary facilities was "dependent on their being able to lower their costs."

The airline decided at the last minute to reserve the option to renegotiate the leases because of continued traffic woes exacerbated by the war in Iraq, Roddey said.

During yesterday's meeting, US Airways officials indicated that bookings were off 30 percent before the war and another 40 percent since it started. International traffic is down 60 to 70 percent.

"People simply are not flying," Roddey said.

US Airways decided to seek concessions in Pittsburgh before emerging from bankruptcy.

Roddey said the airline's costs in Pittsburgh are far higher than in Charlotte, mainly because of the construction of the midfield terminal in 1992.

US Airways pays about $62 million a year in rates and charges at Pittsburgh, with the bulk going toward paying off $673 million in outstanding debt. It is paying $7.46 for each passenger it boards at Pittsburgh, compared to $1.52 in Charlotte.

Of that $7.46, about $6.85 goes to pay off debt, Roddey said.

"We have agreed with David Siegel that we will work on lowering that cost," Roddey said.

He conceded that driving down debt costs would be a tall order, given that the airport authority already has refinanced bonds several times.

US Airways has not rejected leases at either Charlotte, among the lowest in the country, or its international hub in Philadelphia.

In a statement released after yesterday's meeting, US Airways described the session as "productive."

"We reiterated our need to reduce our costs at Pittsburgh International Airport and that we had no choice but to take the action to not assume our leases given the precarious condition of the industry," the airline stated.

"Both the airline and the airport view this as a business relationship, and we will be negotiating to find a solution."

Roddey said Gov. Ed Rendell has pledged to work with the county to try to lower costs to the airline. Rendell is proposing what Roddey described as a "Pennsylvania response," tailored to meet the airline's needs at Pittsburgh and Philadelphia.

"US Airways, I think, is amenable to looking at the structure that way," Roddey said.

The county hopes to have a proposal before US Airways in the next two to three weeks, although much of that depends on Rendell's timetable.

Roddey said Siegel gave the county and airport authority officials some "targets" to meet, although he refused to say what they were.

"We just have to reduce [costs] to a number acceptable to US Airways," he said.

In addition to looking at ways to reduce debt costs, he also said the airport authority would look at ways to cut operating costs. Other options include raising more revenues from airport parking and concessions.

He said it would be nearly impossible to reduce debt costs "without some external help," although he firmly ruled out taxpayer subsidies.

Much of the airport debt stems from the $1 billion midfield terminal construction, a project US Airways agreed to undertake and back with revenue bonds.

"That, of course, was in a different time," Roddey said. "Today is a different reality."

U.S. Sen. Arlen Specter, R-Pa., also pledged to work with local and state officials to develop a "battle plan" to help keep the airline in Pittsburgh. At the same time, he chided the airline for rejecting the lease at Pittsburgh.

"If US Airways expects [U.S. Sen.] Rick Santorum, Jim Roddey and Arlen Specter and others to go to the mat for them, they are going to have to pay more attention to the working men and women who are at the Pittsburgh hub," he said.

Meanwhile, the US Airways decision is giving one of the country's largest bond rating agencies the jitters.

In a statement yesterday, Standard & Poor's kept in place the airport authority's BBB plus rating with a negative outlook but added Pittsburgh's "heavy reliance" on US Airways and depressed traffic levels constituted "key credit concerns."

"It is Standard & Poor's view that Pittsburgh International is vulnerable and that any material service/routing decisions by US Airways could have rating implications," the agency said.

The authority's rating with Standard & Poor's is only a few notches above noninvestment grade. Last year, passenger traffic dropped 9.6 percent at Pittsburgh compared to 2001. This year it is down more than 20 percent.

"US Airways' decision to reject Pittsburgh International's leases could have far-reaching effects for the airport sector.

"The outcome of the renegotiations could set a precedent for other teetering airlines serving airports where they account for a lion's share of the traffic," the agency said.

"The predicament of the Allegheny County Airport Authority highlights its vulnerability in having a non-diverse carrier mix coupled with a moderately high-cost structure, which limits its financial flexibility in light of potential service reductions or route changes."