DAVID FIELD WASHINGTON
David Siegel plans to use the bankruptcy process to overcome the structural flaws that have long stymied change at US Airways
For David Siegel, timing is everything. His entry to the top ranks of US airline leadership in March when he became the president and chief executive at US Airways came at what should have been the worst of all possible times for the airline but which may prove fortuitous. The confluence of forces that compelled US Airways into bankruptcy may be the best chance the carrier has to overcome the problems it has lived with for years. Siegel says the bankruptcy lets the airline deal with its fundamental problem of high costs, although he insists that the US Airways reorganisation is different in that it will be labour-friendly throughout and savings will focus on cutting aircraft costs as well as labour costs. He says: "The sacrifices have to be shared."
It is the timing of Siegel's own career that may be his greatest advantage - he is just 41 years old this month, with, in his own words, "little baggage" and a demeanour that makes him less threatening to traditionally suspicious unions than an airline executive with a high-profile history. Siegel's history is relatively labour-friendly: his time at the helm of Continental Express, the regional unit of Continental Airlines, came after a long stretch of labour-management enmity as the company recovered from bankruptcy. At Continental Express, Siegel was able to shepherd in the regional jet without engendering union resistance.
Siegel's contribution to US Airways is not a new strategy; he is building on his predecessors' efforts to take advantage of its strong position on the US East Coast. What he brings is who he is: a young and indisputably sincere person, and he comes at a time when the carrier is ripe for change. At US Airways, or "Airways", as Siegel calls it, change was limited for more than a year after the plan to merge with United Airlines was proposed in the spring of 2000. US Airways had no detailed alternative in place in case the merger fell through. By the middle of this year, US Airways had a loss of $517 million, with a year-over-year revenue decline of 24%. For 2001, it lost nearly $2 billion, extending a string of quarterly losses beginning in 2000.
To reverse this course, Siegel will use his key tools of a personal willingness to demonstrate goodwill to the airline's employees and its customers, as well as the power that the bankruptcy court reorganisation process gives him. He says: "We would rather have restructured voluntarily. The less-preferred path was to do it through the [bankruptcy] court, but one way or another we're going to fix the airline. By filing for bankruptcy and renegotiating aircraft leases down to the market rate, we saved hundreds of millions a year. That's not a bad result." Critically, the court cleared US Airways to rid itself of up to 11 aircraft.
The bankruptcy filing in mid-August came as the carrier was moving rapidly ahead with its plan to cut labour costs by $900 million through negotiations with its unions. But talks with the aircraft lessors were not going well. The bankruptcy came a few days after pilots and flight attendants had agreed to concessionary deals worth $465 million and $76 million a year, respectively. It is perhaps testimony to Siegel's personal skills that the unions do not see this timing as evidence that Siegel had bankruptcy in mind all along, says Chris Beebe, chairman of the Air Line Pilots Association union at US Airways.
Remoulding labour costs
Beebe adds: "The union is ahead because, under bankruptcy, we could have got a worse deal." The power of a company in bankruptcy to remould labour costs was very much a factor in a decision by another US Airways union, the mechanics, to accept wage cuts. The International Association of Machinists had rejected a pay cut before the filing, but a month later ratified the deal when 57% of members voted to accept.
Another factor making this an untraditional bankruptcy is the Air Transportation Stabilization Board. Before the bankruptcy, the board had given tentative approval to guarantee $900 million of loans to bolster US Airways. When the airline went into Chapter 11 protection, the board promptly stepped forward and said its tentative approval still stood and that it would help finance US Airway's emergence from bankruptcy.
The recovery plan rests on $900 million in wage savings from unions and management, which has also taken pay cuts, and on another $300-400 million in savings on leases and loans. The savings will have to be sustained during the length of the loan guarantees. The plan assumes about $202 million from lenders and vendors, $50 million from management and $952 from labour in annual savings in through 2008.
That package is only part of the Siegel financial plan. To help US Airways when it comes out of the bankruptcy, he had lined up a $200 million investment from Texas Pacific Group. He knew its co-founder David Bonderman, who had helped rescue both Continental and America West Airlines. But in late September, a rival offer arose from an unexpected quarter: the Retirement Systems of Alabama. The state's pension fund offered to invest $240 million in US Airways in exchange for a 37.5% stake post-bankruptcy. After initially rejecting it, Siegel and the US Airways board accepted the offer. It gave Siegel another opportunity to score points with the unions: "I told [fund director] David Bronner that we would only consider labour-friendly backing. I made sure of it personally." Bronner says that his $25-billion fund "reflects its beneficiaries, 280,000 public-sector employees, and so is aware of working peoples' needs".
Finding a financial sponsor was one of Siegel's primary goals. With the Alabama backing and the short-term financing it was able to attract, as well as the stabilisation loan, he has done it. Another goal was to conclude US Airways' long search for an an alliance to join. A codesharing deal with United Airlines, which won US regulatory approval, will enable US Airways to pick up traffic from the West Coast and the Midwest where it has a limited presence. Despite some limits on overlapping hub flying and on flights in Washington imposed by the Department of Transportation, Siegel says it is "a perfect fit". The airline anticipates about $200 million in added revenues from the alliance, under which flights will begin early next year. The two have already begun e-ticket interlining.
US Airways also will enter the Star Alliance. Siegel says that the carrier "will join as early as mid- to late 2003, certainly not longer than 18 months from now". He says that both the international reach of Star and United's domestic reach "will increase substantially our point-of-sale and distribution competitiveness when we seek corporate travel accounts".
Star membership will make Philadelphia an even more important gateway, but Siegel predicts that Pittsburgh and Charlotte may continue with just service to London and Frankfurt. Service from Pittsburgh to Paris ended this month.
Vice-president international Douglas Leo adds that "on the Atlantic, we see the network working in two stages: the first in 2003, as we add non-alliance-related flying to secondary European destinations, and the second in 2004, when we add alliance-related flying". Siegel anticipates new traffic opportunities at secondary cities with Star presence, such as Manchester and Munich, but believes the biggest benefits will be generated in Frankfurt.
As Philadelphia - the fifth-largest US city - becomes an even larger overseas gateway, it will grow domestically in a way that Siegel compares with Continental's build in Newark hub. although he admits that, even with market potential in the Baltimore-Washington area, "Philadelphia will never be as big as Newark".
In terms of daily departures, Charlotte recently overtook Pittsburgh as US Airways' biggest hub, with 462 weekday flights, compared with Pittsburgh's 414 (down from 495 before). For its part, Philadelphia will see a major schedule change in the spring, when a new international terminal is completed.
Siegel says the hubs are being re-engineered to reduce redundancies, leverage the geographic flow and improve time-of-day efficiencies. "There had been north-south redundancy between Philadelphia and Charlotte and east-west redundancy with all three, but particularly with Philadelphia and Pittsburgh." A main goal of the hub redesign is to increase business frequencies. Its November changes - the first major overhaul since it filed for bankruptcy - eliminated around 300 of its 3,800 weekday flights, but increased frequencies on business travel routes such as Philadelphia-Detroit.
Siegel says that the three hubs "are our basic triangle. The other triangle we have is formed by Boston, Washington and New York, the three most important cities in the East from a business commuting perspective. We are either the largest or tied for the largest carrier at the preferred airport in each of those communities. We'll re-deploy assets at these airports, putting in regional jets (RJs) where we now have turboprops."
The US Airways regional jets increase, reached only after deeply contentious labour negotiations that still led to the pilots' most concessionary offer, represents an opportunity to catch up in an area where it has badly lagged the rest of the industry. The pilots permitted as many as 465 regional jets, which eventually will include up to 315 in the 50-seat and above range. Siegel says these will most likely be supplied by Embraer and will include its larger ERJ-170 family.
Siegel says the regional jets will solidify the US Airways hub structure by penetrating new markets, especially on longer, thinner routes. Combining the regional jet feed with the Airbus A319, which is the workhorse of the new fleet plan, will enable US Airways to develop longer spokes from its hubs to cities such as Austin, Texas; Portland, Oregon; Salt Lake City; and San Jos‚, California.
Within its home territory of the East Coast - where it is the single largest carrier with about 35% of the capacity - US Airways knows it must respond to low-fare carriers. These newcomers, which compete for some 40% of its revenues, have made deep inroads on traditional US Airways strongholds over the past decade. His plan comes through building on the carrier's strengths rather than developing a separate unit along the lines of its failed MetroJet experiment. Siegel says: "We'll be at least as effective as the Delta Air Lines plans for Florida low-cost routes. We'll use bigger aircraft with a denser configuration. We'll be competitive there but it's not going to be a meaningful percentage of our network." The service will use Boeing 757 aircraft, but not on current terms. The existing 757 fleet is listed as up for sale and Siegel notes with some glee that "there are plenty of people out there willing to lease us 757s at market rates".
Leisure destination flying will be important to US Airways in the Caribbean, explains Leo. A relative newcomer to the region, it is already the second-largest US carrier in the Caribbean, after American, with 24% of the capacity, compared with American's 45%. US Airways is flying jets to 22 destinations and serving 15 more through codesharing with three small carriers in an operation called GoCarribean. Leo says, "In the Caribbean, we will have 220 weekly frequencies this winter compared with 189 the winter before. It is network basics. We already had the East Coast network. It makes Philadelphia a great gateway."
The carrier's growth in the region builds on its industry-leading East Coast network. Because it flies to hubs - and Caribbean gateways - Philadelphia and Charlotte with mainline aircraft, it can offer passengers all-large jet service, which is preferable to American's connections via Miami and San Juan, which usually includes a leg served with regional aircraft.
Siegel's overall plan depends on some basic changes in the corporate culture of US Airways. Saying that "building trust takes years", he acknowledges that a legacy of mistrust remains. He has made efforts to include employees in more events, spends several hours a day responding to individual e-mails from workers, and has helped with passenger service at hub airports during busy holiday periods. From what he has seen, Siegel believes the carrier can become an operational leader. It did not cancel a single transatlantic flight over the summer and in August was first among network carriers in on-time performance and baggage handling.
The airline's performance rests on some degree of employee confidence. Siegel is trying to win it with a stake in corporate governance. Union seats on the board may make help. Beebe of the pilots union, the first of three labour members named on the board, insists that employee ownership at US Airways will be different than in its famous and ill-fated experiment at United because his goals are more realistic. He says: "On the board, one seat has less power than many people think. It is very much about the power of influence, of adding credibility to the cause, rather than control."
On the whole, Beebe says: "We are cautiously optimistic, perhaps damned cautiously. We gave Siegel what management had been asking for in one form or another for almost a decade. But he has a different modus operandi than his predecessor and certainly has better communication skills." The pilots believe that Siegel's predecessors wanted to sell the airline from the beginning.
For his part, Siegel says: "I have no plan or desire to sell or merge Airways. But in business, you cannot tell what's going to happen. You have a duty to evaluate offers if and when they come in. I've been misunderstood on this." He says that alliance membership brings US Airways its best chance at remaining independent. What is his role in this? " I'm here to run an airline, and to save jobs. I'm still making my reputation."
Source: Airline Business