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Up in the air

Amid staggering losses and stiff competition, US Airways' new leader is considering extreme steps to try to save the airline. CEO David Siegel expects to unveil a draft of his plan by the end of this month, but he could face a tough sell.

[AP file photo]
A US Airways jet takes off from Pittsburgh in September. The airline, the nation's seventh largest, lost $2-billion last year.

By STEVE HUETTEL, Times Staff Writer
© St. Petersburg Times
published May 5, 2002


The new chief executive at US Airways has vowed to steer the long-troubled carrier in a different direction. But employees, financial analysts and commercial aviation experts are anxious to see if the nation's No. 7 airline is headed for a breakthrough or a breakdown.

US Airways was still reeling from a $2-billion loss in 2001 and the elimination of 11,000 jobs when the airline tapped David N. Siegel, the 40-year-old chief executive of Avis Rent A Car, as its boss in March.

All airlines were hit hard when passenger traffic plummeted after Sept. 11. But US Airways was already a behemoth in trouble, plagued by the industry's highest costs, relentless competition from low-fare competitors and prickly relations with labor.

After declaring last month that its $269-million first-quarter loss was "clearly unacceptable," Siegel said US Airways needed a new direction, and fast. Without it, the airline would run precariously low on cash by fall.

The cornerstone of the plan he pledged to develop was reducing costs, with all "stakeholders" -- suppliers, vendors and employees -- expected to share the pain.

Perhaps the clearest sign of the dire circumstances: Siegel said US Airways likely will apply for federal loan guarantees, a move that all major carriers except financially strapped America West have avoided.

Most airlines want no part of the guarantees because of the strings attached. In America West's case, the government demanded options on up to one-third of its stock and set penalties if the airline exceeded labor costs spelled out in a seven-year business plan.

Siegel expects to unveil a draft of his plan by the end of this month.

But he faces a tough sell if it calls for pay reductions and tighter work rules, said David Mead of the International Association of Machinists local that represents mechanics and related workers at Tampa International Airport.

The job cuts and reduced flying have hit hard at Tampa International, where US Airways has slipped from being the largest carrier to No. 3 behind Delta Air Lines and Southwest Airlines.

Mead said too many local mechanics have traveled this route in previous jobs: giving up pay and benefits at other carriers that eventually went bankrupt.

"Our position is no givebacks," Mead said. "We have a lot of Eastern and Braniff employees who went down that road, and the end result was they were out of a job."

Many US Airways workers have a lingering distrust of the airline's top management, personified by Stephen Wolf, who turned over the CEO post to Siegel but remains as chairman.

Union leaders regard the 60-year-old airline veteran as aloof and unbending. His plans to turn around the airline -- first through an ambitious growth plan, then a proposed merger with United Airlines -- failed.

Siegel comes from a different generation and employs a far more casual style.

His weekly phone messages to employees open with, "Hi, this is Dave." Siegel tells upbeat stories about workers, such as the ground crew that pushed a loaded Boeing 767 back from the gate in pouring rain when they couldn't use a tug or move the jet bridge.

He broke a long stalemate with the pilots' union by negotiating a deal allowing the airline to fly more money-saving small "regional jets."

"His biggest advantage is that he's not Stephen Wolf," said Scott Hamilton, editor of the Web site Airline Monitor Weekly.

Although the price of US Airways shares still hovers around the cost of a couple slices of airport pizza (it closed Friday at $5.17, up 2 cents), some financial analysts think Siegel can convince workers the airline needs concessions to survive.

"There's no one there who doesn't see what's going on," said Glenn Engel, airline analyst with Goldman Sachs & Co. "Fear is a good motivator, and there's a lot of fear at US Airways."

[Times file photo: Toni L. Sandys]
Passengers check in at the US Airways ticket counter at Tampa International Airport. US Airways has slipped from being the largest carrier at the airport to No. 3 behind Delta Air Lines and Southwest Airlines.

* * *

Many of US Airways' competitive problems date back to its roots.

The airline started in 1939 as a tiny cargo carrier in western Pennsylvania called All American Aviation. All American changed its name to Allegheny and began carrying passengers.

But in that era the federal government tightly regulated air service and kept small-fry Allegheny from serving long-haul routes dominated by big-name carriers such as American and United.

Allegheny's only way to get big was to merge. It first bought failing Lake Central Airlines in 1968, then Mohawk Airlines four years later. The biggest move came in the mid-1980s when the airline, then called USAir, bought North Carolina-based Piedmont Airlines.

But all those mergers became a recipe for inefficiency. USAir ended up with a hodgepodge of aircraft types, each requiring special parts, crews trained to fly it and mechanics to keep it running.

The airline's route system of costly short-haul flights was concentrated on the East Coast, especially in high-wage cities in the Northeast. Some experts say its three hubs -- Pittsburgh, Philadelphia and Charlotte, N.C. -- are too close together to run efficiently. A big snowstorm can shut down all three at once.

Wolf arrived in 1996 with visions of turning USAir into a premier global carrier. He renamed it US Airways and painted the planes an elegant midnight blue and gray.

Wolf brought in new managers from United, the last airline he ran. He made new deals with unions, ordered scores of new Airbus planes to replace the motley fleet and started a no-frills division, MetroJet, to fend off Southwest Airlines' growing East Coast presence.

It didn't work. US Airways couldn't attract enough high-paying business travelers, who wanted to fly on a global network for work -- and for vacations on their frequent-flier miles. The airline served few Midwest and West Coast cities and didn't fly to Asia or Latin America.

Convinced US Airways couldn't survive as a midsize carrier, Wolf struck a deal in 2000 to sell it to United for $12.3-billion in what would have been the largest airline merger ever.

Federal antitrust regulators reviewed the proposal for more than a year without reaching a decision. With US Airways posting ever-widening losses, United backed away from the deal last summer.

After Sept. 11, the airline slashed its schedule by more than 20 percent, closed MetroJet and laid off or furloughed 11,000 employees, nearly a quarter of the work force.

• • •

Enter Siegel, who before his stint at Avis played a key role in the remarkable turnaround of Continental Airlines in the mid-1990s.

After Frank Lorenzo's contentious ownership and two trips through bankruptcy reorganization, Continental was known for surly, dispirited workers and bad service. Gordon Bethune took over as chief executive and in 1995 introduced the Go Forward Plan, focused on improved operating performance, profitability and teamwork.

His tactics included paying cash bonuses for employees when Continental ranked at the top of the government's airline performance rankings and entering workers with perfect attendance in quarterly drawings for a new car.

Only two months later, Continental ranked first among the top 10 airlines in on-time performance. Continental closed the year with a $224-million profit, the largest in its 61-year history. The airline quickly became a favorite of business travelers.

Siegel was the airline's senior vice president of scheduling and planning, then ran its regional airline subsidiary, Continental Express. He negotiated what was at the time the largest purchase ever of regional jets.

At US Airways, Wolf has pleaded with pilots to let him expand the use of such regional jets. The 50- to 70-seat planes burn less fuel and are cheaper to operate than big jets, especially in small markets. Pilots said Wolf's real goal was to replace as many of them as possible with pilots flying smaller jets at smaller salaries.

Last month, Siegel struck a deal with the US Airways pilots' union to double the regional jet fleet to 140 planes. In return, the airline retained nearly 300 pilots it had planned to furlough.

"We found this management to be much more receptive to our concerns compared with previous management," said Roy Freundlich, a first officer and spokesman for the pilots' union.

Siegel wants to buy far more regional jets as part of the new strategy. He's also counting on joining an alliance with a domestic or international carrier that would feed connecting passengers to US Airways.

The airline's strong East Coast route system is what sparked the purchase offer from United, which largely flies long east-west routes.

But the key to getting the airline into the black remains what it has been for years: reducing costs.

It costs US Airways 12.46 cents to fly one airliner seat 1 mile, compared with 10.14 cents for Delta Air Lines and 7.54 cents for Southwest.

Besides paying more in salaries and benefits, the airline is saddled with contracts that include restrictive work rules that reduce productivity, said Jon Ash, managing director at Global Aviation Associates, a consulting firm in Washington.

When US Airways dominated big East Coast markets, he said, it could make money charging high fares for business travelers. But low-cost carriers Southwest, AirTran Airways and JetBlue have invaded its turf and make profits with lower fares that US Airways must match.

"When you're up against those guys, you ain't going to make it," Ash said. "In good years, they could make money extracting a yield premium. Now, that's gone."

* * *

Siegel has tried to avoid public statements about what he wants from workers.

But he has criticized clauses in the pilot and mechanic contracts that automatically boost their pay when counterparts at bigger competitors get raises.

Pay scales for both groups must remain 1 percent higher than a weighted average of those at the four largest carriers. So when United and Delta gave their pilots big raises and Northwest substantially increased mechanics' pay, US Airways got hit in the pocketbook.

That's part of the reason labor costs at US Airways fell just 6.4 percent in the first quarter of this year even though the airline had 23 percent fewer people on the payroll.

Airlines in crisis have traditionally used bankruptcy court to cut labor costs. Judges can throw out union contracts and impose new ones to help companies reorganize finances and get back into the black.

Is US Airways a candidate for a bankruptcy filing? It had $561-million in cash at the end of March. In a report last month, Merrill Lynch analyst Michael Linenberg called that amount "a bit precarious" with the airline losing $3.5-million a day.

A $169-million tax refund last month and the upcoming summer travel season will give US Airways a temporary cash cushion, chief financial officer Neal Cohen told analysts. But without a new strategy, there will be "pressure" on the cash position by fall, he said.

The federal loan guarantees could be a way for Siegel and the unions to agree to concessions, consultant Ash said. "Maybe it's everyone's way out: Blame it on the government," he said.

Nonetheless, plenty of workers already are grumbling about the airline's new regime.

With air traffic slowly recovering, most airlines are restoring flights and recalling furloughed employees. But not US Airways, said Bill Wise, head of a union local in Charlotte that represents 3,300 fleet service employees, mechanics and related workers.

"This was supposed to be temporary," he said. "We reduced as much as the other carriers, but US Airways hasn't rebounded."

Furloughed flight attendant John McCorkle highlighted Siegel's compensation in an Internet newsletter he sends to US Airways employees, retirees and journalists.

Siegel is guaranteed at least $2.25-million in salary and bonuses his first year. He could get up to $4-million more in bonuses if the airline exceeds performance goals.

"No wonder this guy sounds so happy on his Friday phone messages to employees," McCorkle wrote.

Hamilton, the online airline newsletter editor, agrees that Siegel's worker-friendly attitude will only go so far.

"Being a nice guy will get him a hearing," he said. "But it's not going to alleviate what needs to be done at US Airways."

-- Times researcher John Martin contributed to this report. Steve Huettel can be reached at

huettel@sptimes.com or (813) 226-3384.

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