US Airways Merger Making Converts of Skeptics Impressed With Progress

TEMPE, Ariz. - For a deal dubbed Project Dumbbell by skeptics, the merger last year of US Airways and America West Airlines has exceeded expectations, turning investors and others into believers.

"We are exceptionally pleased about where we are right now," said Doug Parker, chairman, president and chief executive of the combined company, US Airways Group Inc., at the company's media day on Friday.

"A lot of people thought this wouldn't work," Mr. Parker said, including a strategy for focusing on operations on each coast, called Project Barbell. "But it has."

The company's stock, which started trading in September at $20 a share, closed Friday at $33.26. Wall Street loves the company's potential to generate profits, even with crude oil prices above $60 a barrel.

The stock price may go up some more, says Jamie Baker, an analyst with J.P. Morgan. In a note to investors this week, US Airways was Mr. Baker's top choice among low-cost airlines.

Mr. Baker wrote that the carrier's stock remains relatively cheap, compared with other airlines, even though the company has more potential for earnings growth than its rivals.

For Southwest Airlines Co., US Airways' surprising progress doesn't pose a serious threat, but it does dim hopes for an easy expansion and more pricing power in the markets where it overlaps with the carrier.

For example, Southwest's thirst for more gates and flights at Philadelphia may not be quenched, because US Airways officials say they're "more committed than ever" to the city.

Old rivals

Dallas-based Southwest had been the old US Airways' nemesis, nearly running it out of Baltimore/Washington International Airport in the 1990s when the low-cost carrier expanded quickly there.

When Southwest launched service in 2004 to Philadelphia, a key hub for the old US Airways, most analysts began writing obituaries for the traditional carrier.

But with the merger last September, America West took over management of the surviving carrier and shifted the headquarters to Arizona.

Now the carrier believes it is leading the domestic industry in revenue growth and should enjoy 20 percent to 25 percent increases in revenue per seat mile flown in coming months.

That performance comes despite US Airways' hubs - Phoenix, Las Vegas and Philadelphia - all facing either strong or growing Southwest schedules.

Las Vegas is currently Southwest's top city, and Phoenix tied with Chicago for No. 2 in terms of daily flights.

"It's a gangbusters revenue environment out there right now, and we really like our position," said Scott Kirby, executive vice president of sales and marketing at US Airways.

Southwest chief executive Gary Kelly has said the merged US Airways doesn't concern him because it can't match Southwest's low costs, so it won't be able to price fares lower.

"They're not a threat to us," Mr. Kelly said last year. "We're going to be the lowest-cost provider in our markets."

US Airways won't fight seat-for-seat against Southwest, he said.

Instead, it offers just a limited number of flights in markets where Southwest has lots of capacity to keep loyal US Airways customers happy.

More resources

By not tying up its aircraft in costly market share battles with Southwest, US Airways has more resources to focus on building its strong connecting hubs that are laden with business travelers who want what Southwest doesn't have: assigned seats, first class and elite flying privileges.

"We could pull off our first-class seats and cut our costs immediately by 5 percent," Mr. Kirby said, but that would also cut a higher proportion of revenue at the same time.

US Airways executives say they're confident they'll get higher average fares competing against low-cost carriers such as Southwest.

Meanwhile, US Airways doesn't plan to fly head-to-head against Southwest at its home airport, Dallas Love Field, should the airport open up to long-haul flights if the Wright amendment were repealed.

"It doesn't appear to make much sense for us," Mr. Parker said.

Mr. Kirby added that the airline believes North Texas residents are simply used to traveling from Dallas/Fort Worth International Airport, not Love Field.

US Airways' merger is far from complete, and it's seen its share of bumps.

The carrier had to fire 22 ground workers recently after a union fight broke out in Philadelphia over how the two workforces would integrate.

Published reports said chairs were thrown in the fight, and airline labor experts have said more skirmishes might erupt as employees battle for seniority in the new carrier.

The two carriers' technology systems are far from integrated, but should yield $100 million in annual savings.

"Right now I feel like Noah - I've got two of everything," said Joe Beery, chief information officer.

Still, savings from combining the two carriers is greater than expected, approaching $300 million annually instead of the $250 million originally predicted.

Revenue is also exceeding last year's projections, helped by a sharp reduction in capacity by competitors to give remaining carriers much more pricing power.

"We're not here to declare victory yet," Mr. Parker said. "But we've really come a long way in short time."


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