Frustrated by the lack of progress in labour negotiations and under pressure to cut costs, US Airways chairman and chief executive officer Stephen Wolf has launched an 'efficiency programme' that includes the ending of jet services to nine US cities, the grounding of 22 aircraft, and consolidation in maintenance and reservations operations.

The move follows warnings by Wolf that he would have to make operational changes unless there was a breakthrough in sluggish talks with the airline's unions - the Air Line Pilots Association, the Association of Flight Attendants and the International Association of Machinists. Some furloughs may result from the changes.

From September, US Airways will end jet services on nine unprofitable domestic routes, including Albuquerque, Cincinnati, Melbourne and San Antonio, and eliminate some other underperforming services. The cutbacks will see capacity drop by 6.5 per cent and the pilot and flight attendant crew base in Los Angeles will close by next February. No estimate is available of the cost savings that the programme should realise, but Wolf stresses that he believes the airline is at a crossroads.

With a competitive cost structure in place, he argues, the airline will grow and become a global competitor. 'The alternative path leads to the airline becoming a superior, but smaller regional carrier.' Wolf also hints at his exasperation with the long-running labour negotiations. 'While we recognise that US Airways has made great strides in many areas in the past year, other areas remain unchanged,' he says. 'The time has come to move ahead by beginning to put in place operational changes that enable us to become more efficient.'

Although the unions deny that they are preventing progress, analysts agree with Wolf that reducing labour costs remains the airline's most critical problem. His task of convincing labour of this need won't have been made easier by US Airways' first quarter results, which took Wall Street by surprise, with earnings of $153 million compared to a loss of some $32 million the previous year.

One analyst points out, however, that labour costs still account for 40 per cent of total operating costs compared to an industry average of between 33 and 35 per cent. 'Put another way, US Airways has, on average, a 20 to 25 per cent cost disadvantage versus the rest of the industry,' says the analyst. Susan Donofrio, analyst at NatWest Securities, estimates that US Airways needs to cut $1 billion in annual operating expenses just to get on an even footing with other full-service carriers.

But the problem is larger than that; two of US Airways' fiercest competitors on the east coast are Delta Express and Southwest Airlines, each with low fares and keenly trimmed cost structures. Even though it dropped by 3.6 per cent in the first quarter, US Airways' cost per ASM remains high at 12.35 cents, especially against the low-cost carriers, which are strengthening their positions. In the last year alone, low-cost carriers have added 390 daily departures and 319,000 weekly seats in US Airways' markets.

Wolf has a strong reputation on Wall Street and much of what he has put in place since joining US Airways, including the airline's new name and image, are regarded as 'classic Wolf' manoeuvres that have worked for him before. However, this time there are some who believe the airline's problems may be insurmountable, even by Wolf.


Source: Airline Business