Text Size:
A|
A|
A
Email
PrintUS Airways' struggle to survive began 27 years ago, with a visit from economist Alfred Kahn.
 |
|||
|
 |
|||
|
|||
The country's chief airline regulator, Kahn controlled where carriers could fly and what they could charge. US Airways -- then called Allegheny Airlines -- was a short-hop carrier to towns in the Northeast, frequently passing over the Appalachian and Allegheny mountains. The federal government protected its routes from rivals and set fares high enough for Allegheny to cover its costs.
But as Kahn visited in the summer of 1977, all that was about to change.
Against the opposition of Allegheny and many of the nation's major airlines, President Jimmy Carter wanted to erase five decades of government involvement in the airline business, hoping it would increase competition, lower prices and allow more Americans to fly.
Kahn, the chairman of the Civil Aeronautics Board, was asked to win over the airlines. He touted the freedom that would result from it, urging them to consider what was unprofitable about their routes. Whatever they found, Kahn, now 87, remembers saying at the time, "I'll let you drop it,"
Figure out where in the country you would like to expand, he also told them, and "you will be free to do so."
How US Airways reacted to Kahn's advice and to the competitive forces unleashed by deregulation would bring the airline to the brink of collapse a quarter-century later.
No one foresaw it at the time.
Rise and fall
In the years after Congress deregulated the airlines in 1978, it appeared that US Airways had pulled off the most "dramatic" transformation in the industry, Kahn said in a recent interview.
|
|
The strategy pushed revenue from $373 million before deregulation to $6.6 billion by 1990, making it the nation's sixth-largest airline. With the growth, USAir -- which renamed itself US Airways in 1997 -- solidified its position as the region's dominant carrier. Pittsburgh served as its largest hub and the region as a cash machine for the airline.
Moreover, USAir was the most profitable airline in the United States by the mid-1980s and a darling of Wall Street.
In retrospect, however, the 1980s transformation did little to change a fundamental problem already exacerbated by US Airways' expensive operations in the dense Northeast: high costs.
The $2 billion it spent acquiring California carrier Pacific Southwest Airlines and North Carolina carrier Piedmont Aviation only saddled US Airways with higher labor expenses, debt, an array of fleet types and a clash of cultures. Upon acquiring both companies in the late 1980s, it raised wages in an attempt to maintain labor peace -- a move it is still trying to undo.
Edwin Colodny, the airline's chief executive officer at the time, believes that if US Airways had not acquired those companies, it would have been swallowed by another airline. Just weeks after his Piedmont bid, for example, Trans World Airlines Chairman Carl Icahn launched a surprise takeover bid for USAir.
But with costs so high, US Airways was not able to compete in California against low-cost pioneer Southwest Airlines or against United's Los Angeles-San Francisco shuttle, forcing it to soon abandon the routes it acquired from PSA for $385 million. US Airways also was slow to respond when Southwest launched service in 1993 from Baltimore, a then-US Airways hub that it eventually abandoned, too.
The airline acknowledged in the early 1990s that it had to reduce its costs to survive, but fundamental changes never happened. Executives did not want to risk a fight with labor, so they looked elsewhere for temporary fixes -- to the hub system, frequent-flier programs, reservations systems, alliances.
Stephen Wolf, who ran the airline in the late 1990s, wrested some concessions from unions in exchange for a pledge to grow the carrier and buy new Airbus jets, but his exit strategy was an attempt to merge with United Airlines, believing that US Airways would not survive on its own.
'The jig is up'
All that only delayed a reckoning now sweeping through the industry. The 9/11 attacks, which came roughly two months after the United-US Airways merger collapsed, exposed the underlying weaknesses of large carriers. Relics in some ways of the regulated era, they quickly realized they could no longer rely on exorbitant fares to cover their high costs.
The soaring popularity of fare-shopping on the Internet, combined with the increasing market share of Southwest, JetBlue Airways and other low-cost carriers, have conspired to bring an end to complicated, confusing fare structures. And because they operate without cumbersome work rules and costly hub-and-spoke systems that require lots of gates and personnel, low-cost airlines also are bringing an end to the way US Airways and many other so-called legacy carriers have operated for decades.
To stay competitive and keep customers, the big carriers have been forced to slash fares, but that has meant bigger losses. Since 2001, airlines have lost a combined $23 billion and are expected to lose another $6 billion this year and $2 billion in 2005.
Three of the 10 largest carriers -- US Airways, United Airlines and ATA Airlines -- are in bankruptcy and Delta has flirted with going that way. Others, including Continental, Northwest, American, are losing money and trying to cut more costs.
The only big carrier making money is Southwest.
US Airways and other legacy carriers "used every advantage they could, every trick in the book" to hold off lower-cost rivals over the last quarter century, said Frank Lorenzo, former chief executive officer of Continental Airlines. "They should have anticipated that whatever they were doing, they were just buying time.
"Now," Lorenzo said, "the jig is up."
Lorenzo, the first airline executive to void union contracts in bankruptcy court, acknowledges that such dramatic change is painful for employees losing pay, benefits and retirement money. But he blames management for not addressing the hard choices sooner.
"What we have tended to see are short-term decisions because unfortunately, if management makes longer-term decisions, they get the hell beaten out of them and they lose their jobs," he said.
At Continental, Lorenzo earned the scorn of employees by convincing a bankruptcy judge to throw out his union contracts in 1983 and then hiring new employees at half their old salaries. He said he did that because he was worried about the success of Southwest, and he decided not to wait "for the sheriff to come to the door."
Some employees still have not forgiven him for that.
"You don't get popular," Lorenzo said. But "there was no way to sugarcoat it."
Now US Airways is trying to make the same unpopular decision, asking a federal bankruptcy judge in Alexandria, Va., to abrogate several union contracts, arguing it has no other choice if it wants to survive and preserve jobs.
Trying to match the more efficient Southwest, JetBlue and America West Airlines, all of which have descended on its mainstay East Coast markets with abandon this decade, US Airways is going after pay, benefits, retiree health care and pensions. It is pulling down its hub in Pittsburgh, rerouting connecting traffic to Philadelphia and Charlotte, N.C., and concentrating on the Caribbean as an area of growth.
It, in short, is trying to become a low-cost carrier.
"History is littered with the ashes of companies that failed or refused to change," the airline said in a recent bankruptcy filing. US Airways, it went on to say, intends to "avoid that fate."
The regulated era
It is hard to believe, given the current crisis facing US Airways, that there was a time when airlines did not have to worry about making money.
It was a period that lasted for more than 50 years, and it began with help from Pittsburgh.
In the years after World War I, delivering mail on airplanes had been the job of the U.S. Post Office. Clyde Kelly, a congressman from McKeesport and chairman of the House Post Office Committee, knew from his industrial constituents in the Pittsburgh area that mail delivered by plane was a threat to railroads.
So he listened when influential Pittsburgher Alan Scaife talked to him about opening air mail to private contractors. Scaife got the idea from an old Yale University classmate, Juan Trippe, who would go on to start Pan American Airlines.
In 1925, Kelly introduced and helped pass the Air Mail Act, a bill that allowed the federal government to contract with private carriers, set their rates and provide them with cash subsidies. Among the first to win air mail contracts were the predecessors to United Airlines, Eastern Airlines, American Airlines and TWA, and aviation experts now credit Kelly's legislation with the start of commercial aviation in the United States on a large scale.
Other carriers not regulated by the government began carrying people, not mail, and they often competed on price. Worried about the low profits and safety of these carriers, the federal government decided in 1938 to regulate all airlines. A newly created Civil Aeronautics Board set routes and fares while making sure airlines recovered from bad years with federal subsidies. Regional monopolies were protected from new entrants.
The airlines liked the arrangement.
Though they did not make lots of money, carriers that got in early enjoyed the protection from new competitors. Unionized employees were well paid and benefited from generous work rules. The costs were passed on to well-heeled passengers.
Still, there were signs of what was to come.
Before deregulation, one of the few opportunities for cheap, upstart carriers was to fly short distances within state borders, thus avoiding the restrictions on price established by the federal government. PSA Airlines did that in California and Southwest Airlines did it in Texas, both holding their own against larger carriers.
Both proved "there was another way you could run airlines and be profitable," said Elizabeth Bailey, a former commissioner of the Civil Aeronautics Board and now a professor at the University of Pennsylvania.
Winners and losers
Free market proponents knew that deregulation would be messy.
Bailey, a member of the federal airline board from 1977 to 1983, said, "It is much harder than you think to move to a market way of doing things if you haven't been used to it." She said she knew "there would be winners and losers because there always are in a competitive situation."
Perhaps the biggest winners have been airline consumers. Fares are as low as they have been in 16 years. Travelers can fly anywhere in the country and do so at a low price.
The number of domestic passengers this year is expected to top 685 million, up from 250 million the year of deregulation. The average number of occupied seats is higher than 70 percent, up from 55 percent the year before deregulation.
The losers are the big airlines and employees. Both fought the proposal before it passed. Airline executives were afraid of what could happen to their business in an unregulated environment, and union officials worried about a drop in wages and a loss of jobs.
But Kahn, now known as the "father of deregulation," said he tried not to predict what would happen. In a speech before deregulation passed, Kahn told a group of New York financial analysts that there were two business models that could be successful -- one with many plane models and a large, integrated route network or one that sends a single plane type back and forth, like Southwest.
"I said, 'I don't know what is going to emerge,' " he said. "That is exactly why regulation is ridiculous."
Some of the nation's biggest carriers did not make in through the years immediately following deregulation, including some of the best-known names in the business: Eastern Airlines, Pan American and Braniff Airlines. Many low-fare carriers and upstarts either failed or were acquired: New York Air, Reno Air, People's Express.
"Everyone disappeared except America West," Kahn said.
Another group of low-cost carriers entered the market in the mid-1990s and buckled under price wars with large carriers such as US Airways, which fended them off by matching fares on certain flights and establishing large hubs that dominated traffic in certain cities. The hub-and-spoke model, pioneered in Atlanta by Delta Air Lines, also opened up travel to people in smaller cities and allowed airlines to fill more seats on each plane.
"It looked like a very successful operation," Kahn said. "We were warned that the big hub-and-spoke carriers were dominating the whole industry."
Kahn now is surprised so many low-fare carriers failed in the 1980s and 1990s. But he is also mystified by the rapid demise of several large carriers in recent years, including US Airways and United. Several are dismantling hubs -- such as US Airways in Pittsburgh, American Airlines in St. Louis and Delta in Ft. Worth, Texas -- while low-cost carriers grab the extra planes and airport space that became available after 9-11.
"Deregulation took place 25 years ago, but we still live with it every day," said Lorenzo, the former chief executive of Continental.
"It's like it happened yesterday."
But Kahn suspects the industry will experience another cyclical change that cannot be predicted. When asked if US Airways will survive, he said, "I don't know. That's why I don't try to run an airline."
