NO PAIN, NO GAIN
Throughout its near 73-year history, an array of amalgamations at US Airways has seen the carrier absorb multiple identities, and at times it has come alarmingly close to joining PanAm, Eastern and TWA as names of a bygone era. However, since the latest iteration of US Airways emerged in 2005, after being acquired by and merging with America West, any remnants of an identity crisis are long dissolved.
US Airways’ understanding of its place in the new world order of American legacy carriers – what it is, and what is not – is the product of a management team largely comprising former America West executives led by chief executive Doug Parker, who never fails to deliver an honest assessment of the carrier’s stance in the US market to employees and the investor community at large.
Parker has just wrapped up his regular monthly meeting with pilots and flight attendants in training at the carrier’s Charlotte hub, and his message was crystal clear: “We are an airline that succeeds with a lesser route network than American, United and Delta have, but the only way you can do that, because you’re going to have a lower unit revenue than they do with a lesser network, is you have to have lower unit costs”.
For the third quarter of 2011, US Airways posted the lowest unit costs excluding fuel and special items among the four American legacy carriers. US Airways’ own estimates, using a baseline stage length of 1,033 miles, show its unit costs increased 0.7% year on year for the third quarter. This compares with 4% growth at American, a 3.6% rise at Delta, 1.8% growth at United-Continental and an increase of 1.7% at Southwest Airlines.
Parker predicts modest profitability for 2011, despite the fact US Airways paid roughly the same price for fuel last year as in 2008, when it bled $800 million. The performance “says a lot about how far we’ve come and going forward we just need to keep doing what we’re doing”.
In 2010, using a baseline stage-length of 981 miles, US Airways’ passenger per available seat mile was 15% below American, United-Continental and Delta. However, its unit costs were 16% below its legacy peers. The cost advantage the Star Alliance carrier must maintain to counter the revenue-generating disadvantage it has at its Charlotte, Phoenix and Philadelphia hubs rests largely with keeping labour expenses in check – a difficult but necessary message Parker tirelessly communicates to employees.
“From the start, we’ve tried to be candid and open. I think some of the problems with US Airways in the past is management teams that have not been open with employees about what US Airways is and is not. We know who we are.”
He also points out that keeping labour costs in check does not mean US Airways employees cannot enjoy large pay increases. “All it means is that we cannot allow ourselves to have the same cost structure as other companies that have higher generating capabilities than we do.”
Acknowledging it is not the easiest message for employees to accept, Parker says: “They wish it was not the case as we all do.” But he need only point out that the former US Airways got uncomfortably close to ceasing to exist after filing for bankruptcy protection in 2002, and again in 2004, to highlight the importance of cost control.
The company “went through a lot of pain and almost went out of business”, Parker says. “None of those things are the situation now. Indeed, we have a major airline [American] that filed for bankruptcy today and US Airways is doing just fine. It says a lot about how far we’ve come, but we can’t lose sight of how we got here.”
Taking a moment to reflect on what he calls the “new news” [editor’s note: Parker spoke to Airline Business the day American filed for Chapter 11] after hearing about American’s decision to formally restructure, Parker says: “I think American Airlines and AMR has been trying mightily to get their airline where it can be competitive again. I’m sure it was a difficult decision. They’re a good, strong competitor. What they have been for the last few years is a competitor that had lesser margins than the rest of us, and I think this will allow them to get back in line with the rest of us. But I don’t think it will change any of the other competitive dynamics otherwise.”
In the short-term, US Airways is focused on proving its viability as a stand-alone carrier for an extended period of time. The crux of that focus is aligning its flying where it enjoys an optimal competitive advantage. US Airways in mid-December completed its slot swap with Delta, meaning 99% of its flights now touch its three hubs, its US northeast shuttle markets between Washington DC, Boston and New York, and Washington National airport.
The slot swap with SkyTeam carrier Delta – which entails US Airways gaining 42 slot pairs at Washington National – is the final piece for US Airways in building what it feels is a viable route network. “We’ve been through a lot of things: closing the Pittsburgh hub, reducing flying at Las Vegas, eliminating some flying from Boston to the Caribbean, places where we didn’t have a strategic advantage,” Parker says.
Transferring 142 slot pairs at New York LaGuardia airport to Delta allows US Airways to eliminate the last location in its network where it has a large concentration of flying without a competitive advantage. US Airways estimates the value it will garner from the slot transaction is roughly $75 million a year.
But with completion of the slot swap, Parker does not see the need for further major work on the network. “I don’t think you’ll see the kind of major moves like that from US Airways because I think we’ll have it [the network] structured properly,” he says.
MIT international research engineer William Swelbar estimates that domestic operations account for 80% of US Airways’ flying, while the number for its legacy competitors is 60%. A natural by-product of US Airways’ higher domestic concentration is a broader exposure to low-cost carrier competition.
US Airways’ own calculations show low-cost carrier seat penetration at its Phoenix hub at 35-36%, and 15-16% at its Philadelphia hub. Charlotte, the carrier’s largest hub by number of departures, remains shielded from low-cost penetration at less than 5%. Parker admits there are “airlines out there with lower costs than ours, but those airlines when they fly in and out of our hubs don’t have the same ability to connect traffic that we do on those same routes”. He believes US Airways attains a revenue advantage over those airlines “by being able to connect people over the hub and fly to markets those airlines cannot fly to”, smaller markets that US Airways will always be able to serve that others will not.
The course US Airways is plotting for itself entails much of what helped the carrier start a path of stability, including keeping a check on costs and ongoing capacity discipline. Since 2005, US Airways estimates it cut capacity 18% and this year expects consolidated capacity growth of less than 1%.
“We’re not going to do anything outside of what got us here,” declares Parker. “We’re not going to start up a new hub somewhere or start flying to places just because we think it would be neat to fly there.”
Stressing the progress US Airways has made in achieving profitability as a stand-alone entity, Parker says: “We know how we got the company fixed and we’re not going to deviate from that now just because it would be more exciting to do something else.”
However, staying the course should not be interpreted as US Airways planning a no-growth scenario. Parker says as economies expand, the airline will retain an ability to grow. He foresees more international growth for US Airways building on its expansion in the past few years, including penetration into South America from its Charlotte hub to Rio de Janeiro. The carrier also hopes to add Sao Paulo as its second Brazilian destination. But any growth of an international footprint “will be gradual and it will be out of our hubs”.
The 18 Airbus A350-800s and four -900s US Airways has ordered for delivery from 2017, while still “a way off”, give the carrier the flexibility to increase capacity on some markets that could use a boost or “allow us to fly to markets that we don’t fly to today”.
For the time being Parker sees no competitive disadvantage from US Airways’ smaller international presence compared with its legacy peers. There are no issues with passengers eschewing US Airways “because they cannot use their miles to fly internationally. The Star Alliance gives us that”.
The transatlantic joint venture among US Airways’ Star partners United, Lufthansa and Air Canada “is something that hopefully over time we will be able to work our way into, which will just make things better”, Parker says. “But we are happy where we are right now, in a strong alliance that serves our customers and the airline really well.”
TO CONSOLIDATE OR NOT
In late 2011, Parker declared at an industry conference: “I’m done talking about consolidation.” US Airways’ management team for almost the past decade has constantly pounded the consolidation drum and, arguably, ushered in the mergers of United and Continental and Delta-Northwest after attempting its own tie-ups with both Delta and United. Low-cost carriers took their own step last year when Southwest acquired AirTran Airways.
“My point in that statement was that it has happened,” says Parker. “It is not an industry issue any more. The industry has now gotten itself to a position where it could stay forever and be a viable business.” On many occasions recently, US Airways has demonstrated how fragmentation in the US airline industry has eroded, pointing out four US hub-and-spoke carriers, two nationwide low-cost carriers and niche player Alaska Air comprise the American market, which is vastly different than the 12 legacy and low-cost carriers that vied for business in 2005. Obviously there is still room for tactical moves by individual companies, and it could make sense for US Airways to combine its assets with a larger network. However, Parker remains convinced his carrier would remain viable in either scenario.
In some ways, he says, US Airways has talked so much of consolidation, a perception was created that the carrier had to participate in some sort of tie-up. “I understand how that perception could be created, but I was always careful when we talked about it to say the industry needs consolidation and it may make sense for US Airways to participate.”
Consolidation was key to improving the health of the industry and US Airways, he says. “Even if we didn’t participate, getting consolidation to happen was positive for us and we knew it.” The mergers that have occurred during the past few years and the strict capacity discipline in the industry have allowed US Airways to “do as well as anyone while being smaller”. Parker says there is an understanding that US Airways is not being forced into a merger scenario. “I don’t find many people saying ‘gee, don’t you have to consolidate?’ The answer is no.”
Capacity discipline, consolidation and airline executive leadership teams squarely focused on financial returns have all contributed to the US airline industry fostering a different path to possibly achieve the sustained returns regularly enjoyed by other business.
Citing enormous progress, Parker says the dramatic turnaround in the financial performance of US Airways in 2008, compared with 2011, “is not much different for other airlines in the industry”. Even notorious airline industry labour relations, while still difficult, have improved, he says, citing a “much better understanding among labour unions that it is in all our best interests to make sure the company is strong”, instead of “the old school of let’s try and hurt the company, they’ll be forced to pay us more”.
However, he says the last challenge the industry faces is government policy that seems to have “gone backwards a little bit”. Despite the US Congress “Super Committee” failing to reach consensus on a deficit reduction package, including a proposal for a $100 departure tax for airlines and jet owners and a hike in passenger security fees on a one-way trip to $7.50 by 2017, US Airways recently warned employees that airline tax hikes could be attached to bills, and additional airline taxes could emerge in a new deficit reduction plan tabled this year.
US Airways estimated the additional taxes could hike its costs by $350 million a year, while Parker stresses the highest yearly profit the carrier has recorded is $500 million. He concludes the airline industry needs “to get past playing defence and actually have an aviation policy that looks forward and appreciates the value of commercial aviation to the economy and treats it accordingly”.
What hope does Parker hold that the taxation grip can be loosened? “There’s this view that the airline business will never get fixed. I don’t accept that view. I think we can fix it and we’ve proven that it can be fixed. But it requires people working to get it fixed instead of being fatalistic about it and saying it will never get fixed.”