US Airways Reduces Outsourcing Of Reservations

It's not just shareholders who have benefited from the US Airways(LCC:NYSE) merger.

Last year's combination of US Airways and America West Airlines is also creating jobs at the airline, including 600 reservations jobs that had been outsourced abroad.

The return of reservations jobs from San Salvador, Mexico City and Manila to Phoenix, Reno, Nev., and Winston-Salem, N.C. -- including 200 jobs that have already been restored -- represents a reversal of the widespread trend to outsource customer service jobs to other countries.

"Our reservations team does a much better job than those the work has been outsourced to," said US Airways CEO Doug Parker, in an interview with TheStreet.com. "Despite our efforts to improve the outsourcing, it will never be as good as having our own employees do it."

Parker also said that the expectation of further consolidation in the airline industry may be overblown, simply speculation resulting from the bankruptcies of Delta Air Lines (DALRQ:OTC BB) and Northwest Airlines(NWACQ:OTC BB). "Both of these companies are going through their bankruptcies, finding themselves coming in ahead of their plan and probably have standalone plans for emerging," he said. "If they do come out independent, you won't hear much about consolidation anymore."

The reservations jobs were outsourced last year by the former US Airways, which was operating under bankruptcy court protection, strapped for cash and struggling to reduce labor costs. Parker, who had headed America West Airlines, took over management of the combined airline when the merger was completed in September. He regularly heard complaints, from customers and employees, about the quality of the outsourced service.

"When the pay scales were so divergent, I wasn't here, but I guess the analysis said, 'It's going to be a little worse service, but so much (less) money,' " Parker said. "Now we look at it and say, "It's going to be a little more money but much better service."

A US Airways spokesman said service at the three foreign facilities has gradually improved, and that all three will continue to be used, but some of their call volume will be redirected. When the hiring is completed by the end of the year, US Airways will employ 2,400 reservations agents in the U.S.

Reservations are not the only area where the new US Airways has reduced its reliance on outsourcing. The company has also brought several America West Boeing 757s into Pittsburgh for heavy maintenance that had been scheduled to be done by a third-party vendor. And it has hired about 100 information technology workers; US Airways had outsourced much of its IT work to EDS.

Parker stressed that he is not opposed to outsourcing; in fact, all of America West's heavy aircraft maintenance work is outsourced. "America West has always outsourced some maintenance, just because we didn't have the infrastructure to do a lot of it inside," he said. "US Airways now does some of each. What we're finding is that work that's being done by our own people, no surprise to us, is being done better than by a third-party vendor."

He credited the intensive cost-cutting at the former US Airways for making it feasible to bring work back. "The lesson here is that when you get to where pay scales are outside of market rates, jobs go outside," he said. "But when you can do stuff inhouse close to as efficiently as it can be done outside, you would always prefer to have it done inside."

Because outsourcing has declined, the airline economy has improved and the merger has gone well, job loss from the combination of the two companies has been far less than expected. Although the merger was initially projected to result in the loss of roughly 5,000 jobs, only about 1,000 to 2,000 workers have been let go, Parker said. US Airways today employs about 35,000 workers, about the same as the combined total at the two predecessor airlines. Recently, the airline recalled 55 pilots and 203 flight attendants.

About 1,000 management employees, including about 400 of the 600 workers at the former Crystal City headquarters in Arlington, Va., lost their jobs, many because they were unwilling to relocate to Phoenix, where America West has its headquarters and employs nearly 10,000 people. The airline also closed its Pittsburgh reservations center and reduced the Winston-Salem workforce from 800 to 450. That number has since grown to about 600, and will increase as more reservations agents are hired and trained.

To be sure, Parker faces a difficult task as he moves to combine labor groups. Union workers who accepted cuts in wages and benefits during the bankruptcy now see a profitable airline whose stock price more than doubled since shares began trading last year at $20.40. About six dozen pilots marched silently into the airline's annual meeting in Charlotte last week, demonstrating their commitment to an improved contract.

"No single investor, no investor group, has equaled the capital that this group has committed to the new US Airways," said Jack Stephan, chairman of the US Airways chapter of the Air Line Pilots Association. Stephan valued the concessions made by pilots at more than $2 billion, including pension concessions. "We participated in the worst of times, and we expect to equally participate in the best of times," he said.

The US Airways' pilots contract doesn't open until 2009, but the America West pilot contract is up for renewal on June 30. America West pilots are paid more than US Airways pilots, and will be seeking an increase. Clearly, US Airways pilots, who are more senior, expect to be paid as much as America West pilots -- which conflicts with Parker's commitment to put the contracts together without raising costs.

Parker said nothing requires that the two airlines have a single contract. He noted that Delta and Northwest are reducing their labor costs in bankruptcy court. Meanwhile, AMR(AMR:NYSE) unit American Airlines "is saying they need to go back to their employees and get their costs down," he said. "In an environment where everybody else is going through concessionary contracts, to suggest it's time to increase our pay is difficult."

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