Resurgence of US Airways a Merging of East and West

A failed deal with ATA Airlines that would have given America West Airlines a major Chicago hub at Midway was the best thing that happened to the company, Chief Executive Douglas Parker said.

"I think about that sometimes," said Parker, president and CEO of the newly merged US Airways. At 43, he is the youngest chief executive of a major carrier. He sat down with the Tribune this month in a conference room inside the shiny Tempe office tower with US Airways' name emblazoned across the top. Last year it bore the America West logo.

"We would have been consumed," he said of the near-pact with ATA. "Part of what made this deal come together was that that deal failed. Because we went after that, people knew we were interested."

The failure left America West open to buying US Airways a few months later, a marriage that created the nation's fifth-largest carrier and one of its most financially healthy.

And though he's still working on knitting together the two airlines' fleets, crews and cultures, Parker's interest in growing further has not waned. His airline has been mentioned as a possible partner for Northwest Airlines or Delta Air Lines, both of which have filed for bankruptcy. While such discussion is conjecture, it makes sense, Parker said.

"We clearly demonstrated that putting two companies together could create a lot of value," he said.

Parker said the most attractive partners are those in bankruptcy, carriers that the court gives the flexibility to reduce labor costs and get rid of unwanted airplanes.

Wall Street analysts expect US Airways will report a second-quarter profit Thursday, on the heels of a $65 million first-quarter profit. Expectations are that the airline will have a profitable year, despite merger-related costs of $125 million and record fuel expenses.

Last year, it lost $537 million on revenue of about $5.1 billion according to the airline's financial filings.

The US Airways-America West union succeeded because US Airways had cut so much in bankruptcy, and America West had a clear plan, said airline consultant Michael Boyd.

"US Airways on the East Coast was a cadaver," he said. "Angry people. Angry customers. A route system that was getting chopped to pieces. It was a mess. And for whatever reason, America West bought them. And they're making money."

He credited Parker with having a plan for joining the two and being able to execute it.

"Parker goes in there, decides what he wants to do and does it," Boyd said. " And everyone beneath Parker understands what Parker wants done. Therefore, things get done.

"He's re-engineered his debt. He's trying to put these airlines together. And it is messy. Don't kid yourself. There were major issues there. It's a very tough thing to put together, but they are doing it."

Parker has spent his career in the airline industry. After receiving a master's in business administration from Vanderbilt University in 1986, he joined American Airlines. Five years later he moved to Northwest, and in 1995 joined America West.

He was on the executive fast track there. Less than two weeks before the Sept. 11, 2001, attacks, he was named chief executive.

Hybrid performer

The carrier he has built has elements of two models: the full-service of legacy carriers and the slimmed-downed expenses of discount airlines. It has a low-cost structure, hubs, international reach and a regional network of a mainline airline.

Even more, Parker may have shown the industry the best way to do an airline merger, historically a messy, expensive process, and start earning money from the onset.

Elk Grove Township-based United Airlines' path out of bankruptcy involved three years of cutting costs: dumping pensions, renegotiating labor deals and turning unwanted planes back to leaseholders. The carrier eliminated 25,500 jobs and cut $7 billion in total spending.

More cutting is under way at United, with another 1,000 salaried positions slated to go before the end of 2007. Nor has United's financial performance met Wall Street's expectations. United stock climbed as high as $43 a share on March 22, but has since traded at less than $30 a share.

Post-bankruptcy US Airways began trading at $21.05 in September. Its value has more than doubled, with the stock trading at about $50 a share in recent weeks.

Merrill Lynch analyst Michael Linenberg downgraded US Airways recently, from "buy" to "neutral." Record fuel prices were the primary concern listed by Linenberg, who noted that "industry fundamentals have not been this good in years."

In many cities, the rejuvenated US Airways has benefited from the collapse of Independence Air, a Washington, D.C.-based carrier that stopped flying after entering bankruptcy last year.

"That's been a key element for them," said Helane Becker, aviation analyst with the Benchmark Co.

"We think they made a lot of money in the quarter that just ended," she said. "I think they've become one of the largest low-cost carriers."

America West was one of the first airlines founded after industry deregulation. The airline grew rapidly, but continued losses and the rise of fuel prices related to the Gulf War forced it into bankruptcy in 1991. It emerged three years later, with a smaller fleet and fewer employees.

A rocky history

US Airways traces its roots to Allegheny Airlines, a Pittsburgh-based carrier in the 1950s. It merged with several carriers during its history, including Lake Central Airlines in the 1960s and Mohawk Airlines in the '70s. In 1979, it adopted the USAir name.

In the 1980s it merged with Pacific Southwest Airlines and Piedmont Airlines, and in 1996 changed its name to US Airways.

Citing financial challenges, the airline announced plans to be absorbed by United Airlines in 2000, an effort abandoned a year later when federal approval for the deal appeared unlikely. Financial problems for US Airways worsened following the terrorist attacks in 2001. The carrier entered bankruptcy in 2002 and again in 2004.

The deal with America West began to take shape in the summer of 2005. At the time, America West was losing money, but Parker had a plan that he argued would strengthen both airlines.

"It was a way of rationalizing the system for both of them," said airline analyst John Pincavage. "America West was already strong in the West. US Airways had Charlotte and Philly hubs. They were able to take the different parts and build on their strengths in different sections of the country.

"They could take the low costs US Airways had to achieve in bankruptcy and add them to America West. It gives them a decent chance for doing very well."

US Airways also has benefited from its willingness to adopt some elements of the low-cost-carrier template and abandon others. Unlike discount airline leader Southwest Airlines, US Airways has first-class cabins, a fleet with multiple aircraft types, international service and an emphasis on a hub airport system.

"Being a low-cost carrier is not as simple as being the same as Southwest Airlines," said Scott Kirby, executive vice president of sales and marketing,

For example, having a single fleet type, as Southwest does with the Boeing 737, would save about $10 million a year but cost millions more in lost revenue opportunities, he said.

"Multiple fleet types are a big cost when you're a small carrier, but when you've got 50 or 60 aircraft, there are really no economies of scale to be gained," Kirby said.

Similarly, having first-class seating increases costs about 5 percent annually, but that is offset by customer demand for such service, he said.

"We get a revenue premium for that first-class product," Kirby said.

Where the comparison to a discount carrier is more apt is in labor costs. Wage scales rank with those of other discount carriers. US Airways ended its pension plan while in bankruptcy.

Union workers, particularly those at US Airways, gave up millions of dollars in concessions during bankruptcy. Workers at US Airways watched as their jobs were cut and outsourced. Those that remained went through three rounds of pay and benefit reductions.

"We participated in the worst of times, and we expect to equally participate in the best of times," Capt. Jack Stephan, of US Airways' pilots union, said recently.

The airline will pay its employees fairly, but it cannot afford to let labor costs get out of control, Parker said.

"We want contracts that allow us to retain the best employees in the business," he said. "We are at market rate. We're at the level it takes to allow us to retain the best people in the industry."

There are no plans to add hubs or expand to new international destinations. The airline needs to ensure its balance sheet remains strong, Parker said.

His goal is simple, he said: "We want to build an airline that can be profitable even in the worst possible environment."



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