The Best May Be Behind US Airways

New headwinds are once again threatening to roil US Airways and the rest of the ever-volatile, always-cyclical U.S. airline industry.

It was only three months ago that Tempe, Ariz.-based US Airways boasted about the $303 million it made in 2006, its first profitable year since 1999, and the belief, as expressed by Chief Executive Officer Doug Parker, that, "We are doing better than our competitors and we are widening the gap."

But that was before the failure of a bid to acquire rival Delta Air Lines, the arrest of Mr. Parker for drunken driving, protests from unhappy unions, bad weather that temporarily closed a Philadelphia hub and a reservations-systems meltdown that stranded thousands of passengers up and down the East Coast.

Now analysts are downgrading the entire industry, citing lower demand and higher fuel prices. And two big US Airways rivals, Delta and United Air Lines, are out of bankruptcy and competing anew with a lower-cost structure and lower fares, just as a twice-bankrupt US Airways did in 2005 when it merged with America West Airlines.

US Airways, which remains the region's largest air carrier despite employing about 2,000, down from nearly 13,000 before 9/11, had the post-bankruptcy airline market to itself for more than a year. During that period, it ramped up operations, grabbed market share and made a heck of a lot of money.

It's now clear those salad days are over. "You're no longer able to see what you've seen in the last couple years -- increases in revenues," Mr. Parker told analysts last week after reporting a first-quarter profit of $66 million (up 2 percent) and warning about slowing revenues and increased competition. "And this comes at a time when fuel costs are increasing. What you're seeing is that it is flattening, making it more difficult to raise prices as costs go up."

Just in the last week, two major brokerages -- UBS and J.P. Morgan -- pulled back their bullish predictions about airline stocks, citing higher fuel prices and a slowing economy, which could further affect demand from travelers.

A slowing economy "has the same kind of effect on the airline industry as the aging process does on a human anatomy," said local airline analyst Bill Lauer.

Moreover, rising fuel costs will exceed US Airways' 2007 predictions by $300 million, the airline said last week.

Still, it expects to make money in the second quarter and for the full year. But not without some pain -- given the new competition from a leaner Delta and United, US Airways can no longer rely on customers to pick up the costs of rising fuel prices in the form of higher fares.

"This cost increase pretty much falls to the bottom line," Mr. Parker told analysts last week.

US Airways' unions are not in the mood to hear about tougher times.

Several, including the pilots, flight attendants and machinists, are without a single contract as US Airways tries to bring together its employees following the 2005 merger with America West. All want the company to compensate employees for the billions in pay and benefits they sacrificed during the airline's two bankruptcies.

Mr. Parker has tried to deflect any dissatisfaction by sharing some of the 2006 profits with employees as part of an agreed-upon plan and openly disclosing his lucrative 2006 pay package of $5.4 million, even acknowledging in an April letter that, "I'm sure many of you are wondering how I could be paid so much when our airline is doing so poorly right now."

But what generated more employee anger than any other recent event was the conversion in March to a single reservations system -- combining operations from the old US Airways and America West. Many check-in kiosks malfunctioned the weekend of the changeover, producing long lines and haggard airport workers forced to deal with the snafu.

After that event -- which continues to affect the US Airways system -- US Airways flight attendants President Mike Flores produced an angry message titled "The Company That Couldn't Shoot Straight."

Describing passengers waiting "zombie-like" in "endless lines" and the sight of travelers running "madcap" through concourses trying to catch connecting flights, Mr. Flores said the lesson in all of this is that, "There is no such thing as a 'Full Service-Low Cost Airline.' That model, sold to Wall Street, only works if you find employees willing to work for nothing and customers willing to pay for nothing. Neither will continue to happen."

US Airways has said it will hire 1,000 workers in time for the summer travel season and replace 600 self-service kiosks with better models as a way of preventing a repeat of the March meltdown.

It also plans to give up seven Boeing 737s next year as a way of reducing capacity. But the airline also needs to resolve its contract negotiations, and quickly, noted one observer. "It's got to be settled," said Terry Trippler, a Minneapolis-based airline analyst with Cheapseats.com. "They have got to settle these labor issues so they can move forward."

If that happens, Mr. Trippler said, US Airways can be a formidable competitor for many years to come, even in tighter times. "I still believe this is the airline to watch," he said. "This is the airline that is going to make some noise."