Against a backdrop of rising costs and tough competition from low-cost carriers, US Airways is asking staff for more concessions and exploring asset sales.

The 10-month-long journey of US Airways since it left court bankruptcy protection at the end of March 2003 has got rougher, as low-cost carriers and increased costs have made deeper inroads into its performance. In response, management has sought deeper concessions, which labour promptly refused. In turn, US Airways let it be known that it had hired Wall Street firms to catalogue and put a price tag on its assets for a possible sale or break-up.

Such a move may be mere sabre-rattling, but a serious downsizing or even elimination of the airline would profoundly alter the competitive landscape of the eastern USA, while marking the ability of the low-cost carriers to topple a legacy carrier that they had already weakened. A weakening of US Airways would demonstrate that bankruptcy reorganisation is limited as a cure for ailing airlines.

After years of seeing its north-east Florida business won by low-fares rivals, US Airways is facing an even more serious threat from Southwest Airlines, which in May starts service at Philadelphia, the main US Airways hub and its single largest revenue generator. One analyst has called this "a death blow" for US Airways.

Although claiming optimism, US Airways chief executive David Siegel told employees it was critical to demonstrate that the carrier had a viable business plan and was able to adjust as its situation changes. But employees reacted angrily, announcing that "the concessions stand was closed". The Air Line Pilots Association demanded Siegel's resignation, with one union officer calling him "a thug".

In a special bulletin to employees, Siegel acknowledged the company was exploring "strategic alternatives" for viability, but he did not cite specific examples. Siegel told staff: "It is not unusual for a company to engage an investment bank. And it is not unusual for a company to explore strategic alternatives, especially when it has specific financial commitments and obligations it must meet."

It emerged that the airline had hired Morgan Stanley to identify potential buyers. The industry and the press were rife with rumoured purchasers of the US Airways shuttle or one of its hub operations, with Sir Richard Branson's planned North American low-fares operation winning most frequent mention. But only Mesa Air Group's chief executive, Jonathan Ornstein, acknowledged interest in picking up a piece of US Airways. Ornstein and Siegel are former colleagues and long-time friends.

US Airways had nearly $1.3 billion in cash on hand in early 2004, which is virtually unchanged from when it emerged from bankruptcy. "We cannot fritter that away, and we cannot fool ourselves into thinking we can simply spend that money, hope the world gets better, and not take necessary steps to remain competitive," says Siegel. US Airways must maintain at least $1 billion in cash through the second quarter to avoid default on its $900 million federal loan guarantee.

Standard & Poor's has cut its ratings on US Airways debt deeper into junk status and said another reduction was possible. The only analyst who covers the airline, Ray Neidl at Blaylock & Partners, predicts that the problems of US Airways will only get worse. He says the airline, having lost $90 million in the third quarter, will have lost $583 million in 2003, followed by $1.9 billion in 2004.

In preparation for a possible sale, US Airways would consolidate its Allegheny and its Piedmont regionals. Its dilemma has drawn wide attention, even from Delta's new chief executive, Gerald Grinstein. He said in a results teleconference that "the current situation at US Airways is a cautionary tale that we will heed well".


Source: Airline Business