US Airways is moving towards more non-stop service and must reduce its costs still further to remodel itself as a low-fares airline.

New US Airways chief executive Bruce Lakefield declared that he had not taken office to preside over the dissolution of the carrier, telling employees in one of his first recorded messages: "I'm not interested in breaking up the company and selling it in chunks." But the company conceded in a regulatory filing that the entry of Southwest Airlines into its main hub, Philadelphia, may force it to file for bankruptcy again, 15 months after it emerged for the first time, and may compel it to sell off assets.

Days before Southwest's onslaught began, Lakefield met union leaders to outline his plan to transform US Airways into a lower-cost airline. The idea is to take US Airways away from the hub-and-spoke model by offering more non-stops. The plan emphasises increased direct flying from its business-centre airports - Boston Logan, New York LaGuardia and Washington Reagan National - as well as Philadelphia. It retains its Caribbean and transatlantic operations, but formally downgraded Pittsburgh from hub status.

The carrier is clear that it must still lower costs. Its trip cost between Philadelphia and Orlando is over $14,000 with a 126-seat Boeing 737-300, while an unidentified low-cost carrier's is under $8,000 with a one-class 137-seat 737-300. So the US Airways break-even fare at an 83% load factor is $135, while that of low-cost carriers is $70 at the same load factor.

In reaction to the Southwest invasion, US Airways launched a "guerilla marketing" campaign that featured giving away pizza on the streets of Philadelphia and other publicity stunts. Its centrepiece, however, simplified pricing called "Philly Go Fares", removes Saturday-night stays and lowers the highest fare by 40-60%, but applies only in markets where US Airways and Southwest compete, says Lehman Brothers analyst Gary Chase.

Many of the new fares are still higher than the Southwest fares, which led JP Morgan Securities analyst Jamie Baker to note: "In the vernacular of pricing circles, this is known as charging a stupid premium."

Worse, Standard & Poor's cut US Airways debt ratings to CCC+, which may jeopardise the financing of the new Bombardier and Embraer regional jets that were the key to previous chief executive David Siegel's survival plan for the airline. Siegel resigned in April under intense union pressure and was replaced by Lakefield. The downgrade triggers an escape clause for lessor GECAS to end or modify its $2.8 billion in backing for the regional jets.


Source: Airline Business