America West Airlines stumbled and nearly fell after 11 September. Now its young chairman and chief executive is using the government bail-out money and new pricing ideas to engineer a recovery
How many times can a phoenix rise from the ashes? America West Airlines' journey upwards from a near collapse in the early days of the crisis after the 11 September may have interrupted a longer-term recovery from lengthy bankruptcy, but it has established itself as a well-operated carrier and is moving to position itself as major low-fare airline.
Even if some questions remain about its fundamentals, the carrier has succeeded in making itself the test case for government intervention. Chairman and chief executive Doug Parker frankly admits that without $380 million in loan guarantees and $108 million in compensatory payments from the US government, it would not have survived.
Parker recalls the first days of the crisis well. Just 10 days before the attacks, he had added the chairman's duties to his roles at the airline. At 40, he is the youngest executive to run a major carrier in the USA.
Before his elevation, Parker was well on the way to turning around the carrier's operating performance with a new team of experts, including professionals in hub scheduling and dispatching and recovery from service disruption. The airline had begun to post some impressive operating statistics, including industry-leading on-time rates.
Three years' profits
The airline posted profits from 1997 onwards, although in 2000 they fell from $119 million to near breakeven as the US travel slowed. Last year it lost $148 million.
Just days before 11 September, America West had lined up a $200 million unsecured loan to boost its cash reserves, but the deal fell through after the post-attack shutdown. The terrorist attacks, the nationwide airline grounding and the ensuing crisis came close to pushing America West into bankruptcy for a second - and most likely final - time. The loan had fallen through by 12 September, helping place the carrier at the top of the endangered-airline list. "It was a real crisis," Parker says.
The carrier took advantage of the Airline Stabilization Act, passed by Congress in November to provide $15 billion in grants and federally guaranteed loans to bail out the strapped industry.
After demonstrating that it had undertaken cost-saving exercises that would make it more competitive, America West obtained a $429 million loan from Citibank, $380 million of which was guaranteed by the government, making it the first beneficiary of the still-controversial airline bail-out programme.
For his part, Parker defends the aid programme, saying: "We were not about to fail and we had already shown that we had a viable business plan. All we needed was liquidity." The plan, however, has numerous critics who believe that no matter how unprecedented or external to the business cycle were the effects of the terrorist attack, airlines should not depend on government financial intervention for their survival.
And, in the case of America West, many question Parker's premise that the airline was a demonstrable survivor. An attorney who advised America West on its possible bankruptcy and other financial issues (but wishes not to be named) calls the loans "a stopgap", adding: "They have a lot of work yet to do financially."
Parker himself expects the airline to be cash-positive this summer, which would be a vast improvement over late last year's daily cash burn of $1.5 million. Parker says that the biggest benefit of the loan and the loan guarantee is that America West was able to move beyond crisis and managing day-to-day or hour-to-hour just to keep alive. Because of the cash infusion, he says, the company is "no longer making decisions just to last until the next day".
His goal from the beginning of his work at America West in 1995 was to overcome the legacy of the airline's long slide into and out of bankruptcy and reorganisation in the early 1990s and its incomplete recovery thereafter. Parker added scheduling, planning and revenue-management duties to his portfolio a year after becoming chief financial officer in 1995. By 1999 he was executive vice-president and when America West's long-time leader and chairman Bill Franke in December 2000 named him president and then added the chief operating officer role to Parker's titles, it was clear he had become heir apparent to the top spot.
Franke, a powerhouse of Arizona business, is a very different person to his successor. Where Parker - who will be 41 in October - is boyish and modest, Franke has the presence and gravitas of a senior executive and can be sharp tongued, if not outright abrasive.
Parker is more low-key and easy-going. At a recent presentation to reporters and analysts, members of his management team had no fears about clarifying a minor detail or making outright corrections to what their boss was saying.
As the youngest chief executive ever to serve at a US major, he credits his rapid ascent to "a willingness to take risks", such as leaving American Airlines in 1991 for a finance post at then-ailing Northwest Airlines, and then joining America West when it was only a year out of bankruptcy. He says: "You get great experiences in those situations which you couldn't get any other way."
America West' reputation, however, has not made his job easy. "We were not running a very good airline," he says, referring to the carrier's poor rating for delayed and cancelled flights.
The company reached a low point one day in 2000, when a computer glitch led to the cancellation of 160 flights and left about 1,000 passengers stranded. In fact, it was so bad that in spring 2001 America West was named as the nation's "worst airline" by the business publication Forbes.
The new chief executive says that the process of reversing this trend came about through "simple, old-fashioned hard work, paying attention to basics". An important milestone was reached, he explains, when "we realised that we had not given our people the tools they need to do the job".
So the company spent heavily on spares, even cannibalising older aircraft. Executive vice-president for operations Jeff McClelland explains: "We doubled the number of front-line mechanics with the hiring of an additional 300 machinists and brought in about $40 million in spares inventory. Not only did we not have enough spare parts, but we did not have an effective inventory-forecasting tool," something it ultimately developed in-house.
McClelland, who was central in developing Northwest's system operations centre before joining America West, has adopted Parker's philosophy of avoiding the blame game. After one particularly bad day this spring, rumours arose that the airline's pilots were deliberately slowing down operations to protest at the pace of contract negotiations. McClelland denied this in an internal memo in which he wrote: "If there is blame to be cast, it falls directly at my feet for not getting us set up for success with the increased June schedule. We are now digging out of the hole we've created."
Parker says such situations and the industry's underperformance have "masked some of the good things happening at America West". In recent months, he says, the airline has been performing as well as and "actually better than, any time in our history".
America West led the industry in on-time performance for the first five months of 2002. By May, 88% of its flights arrived on schedule and it had cancelled only 0.4% of its flights;
By May, customer complaints to the Department of Transportation had dropped by almost half while its lost luggage rates were better than the industry average;
It had record passenger traffic in May, the first monthly increase since before the 11 September.
According to the chief executive, America West's "challenge is to keep reality where it is today, and perception will catch up". Parker has brought his pricing skills to the centre of the airline's long-term strategy and has made it his goal to position the airline as a low-fare, hub-and-spoke carrier that attracts business travellers through its reliable service. To reach this target audience, Parker rolled out a pricing simplification in March that he says "is permanent, not a sale, ploy or marketing gimmick".
The plan cuts most fares -some by as much as 70% - for last-minute buyers, eliminates Saturday-night stay requirements and raises the number of fares available on a one-way basis. With this one move, says the Business Travel Coalition's Kevin Mitchell, America West eliminated the three restrictions that business travellers hate the most.
At the same time as it rolled out the new fares, America West drastically slashed the amount of inventory it was willing to sell through Internet outlets such as Travelocity. That step increased the number of seats it could offer to leisure travellers buying direct and also cut distribution costs.
As an immediate response to its new pricing plan, other airlines undercut America West on many competitive routes through Phoenix, which independent analyst Ray Neidl labels a retaliatory move. Others have wondered if government funding enabled the carrier to implement a plan it otherwise could not have.
For his part, Parker calls it "an irrational response" which cost the airline enough money to ensure that the revenue gains from the new fares were about equalled by the revenue lost in matching the competition at Phoenix. "The net result is that we are about even," he says, insisting that the new fare structure came as a response to growing business traveller protests against traditional airline fare structures, and that it had nothing to do with the federal backing.
Parker says the goal of the fares move is to make America West more like Frontier or AirTran "even though they may have lesser networks". Neidl calls it "a step toward changing America West into a different kind of airline". Because Parker brings so much revenue management to the chief executive's office, the plan was central to his vision for the future.
It could position America West to be a company that co-exists healthily, in the same way that AirTran has flourished at Atlanta - Delta's home base - or Frontier has thrived at Denver despite United's dominance there. But instead of just co-existing with a major in one city, America West, the theory goes, would thrive on a national basis with the majors.
If successful, the growth strategy could also balance Southwest's strength throughout the western states and in particular at Phoenix where Southwest's market share of 27% is nearing America West's 42%.
The strategy should also shore up America West in its second hub at Las Vegas. Southwest dominates there with a 34% market share against 17% for America West, but its new strategy could help attract more of the city's business and convention traffic. The airline also does a brisk holiday trade there through its leisure company subsidiary, which books about $60 million in sales a year.
Parker concedes that America West will be unable to compete on price because Southwest's costs will always be lower. He says that the goal to be the nation's largest low-fare hub-and-spoke airline rests on a mid-market approach. The airline will not pursue the price-sensitive customers for whom cost overcomes almost all considerations. Instead America West will seek to attract a segment above those who decide exclusively on price, but who also require convenience.
It will be able to compete in this niche because Southwest's point-to-point network does not offer the convenience America West can provide with its longer non-stop flights. Nor will America West rely on premium traffic, but instead will pursue passengers who want flexibility on fares without sacrificing the advantages of longer non-stop flights, a choice of classes and the amenities of a full-service airline. That is the very segment that is at the heart of the business traveller revolt over the way fares are determined and the vast, seemingly arbitrary difference between ticket prices.
Parker explains that the strategy also takes advantage of geography - the hubs at Phoenix and Las Vegas give it a regional strength, while a smaller operation at Columbus, Ohio, bolsters it in the east. "We will have growth not because we're going to open another hub, but because of where we are. Phoenix is about the fastest-growing city in the country," he says.
Whether or not the airline, like the mythical phoenix, can rise from its own near-destruction remains an open question, and one that encompasses an entire government response as well as a management philosophy.
Analysts contend that the airline is still precariously vulnerable to any sustained economic downturn and to any concerted competitive response. America West, they say, is still a test case, and that is perhaps an assessment with which Parker would not quarrel.
Source: Airline Business