How US Airways Defied the Odds

How US Airways defied the odds

With crisis after crisis, just how was this airline able to come back from the brink? Merger with America West is set to close on Tuesday Visiting family in New Jersey, Bruce Lakefield spent much of his Christmas weekend on the phone.

His fragile airline, US Airways, was confronting a public relations nightmare. It was canceling flights by the hundreds, stranding thousands of passengers. Workers were calling in sick. The airline lacked the staff to replace them.

Lakefield was worried.

"Everybody was of course scared about what the next shoe to drop would be," he recalls.

Then an interesting thing happened. He and other executives started receiving e-mails from employees who wanted to help. Volunteers sorted missing bags. Others served coffee and snacks to waylaid passengers. It wasn't pretty, but the company had survived yet another jam.

To the airline's top leaders, US Airways' Christmas debacle was perhaps the most dramatic example of how it defied the odds. In crisis after crisis, they say, the company and its employees made precisely the right decisions at the most desperate moments to avoid total collapse.

In the past week, five high-ranking current and former US Airways executives spoke with the Observer about the airline's tumultuous path in the last year and a half. Though they rarely grant interviews, they say they now feel free to talk, because a bankruptcy judge has approved their plan to leave bankruptcy court. The airline's merger with America West is scheduled to close Tuesday.

They say they inherited a deeply flawed airline and quickly went to work to fix it. Along the way, competition grew tougher, and oil prices climbed higher, making their task more difficult.

At times, some privately doubted the airline would survive.

They acknowledge taking painful steps to end pensions, slash wages and eliminate thousands of jobs. Yet they say those were the only decisions they could make if they wanted to preserve the airline.

"We came into an airline that had major, major problems in an industry that's dysfunctional," Lakefield says. "We found a solution that saves tens of thousands of jobs."

One of the most daunting challenges was squeezing more money from the airline's employees.

By late 2003, it was becoming clear to the company's leaders that the cutbacks they made in the airline's first bankruptcy case just a year earlier were insufficient.

In one meeting, then-CEO Dave Siegel and the company's chief financial officer told senior management they needed to draw up a new plan to save the airline.

At that, all heads turned to Jerry Glass, the airline's senior vice president who oversaw relations with the airline's unions.

As the airline's biggest expense, labor was an obvious target, though not an easy one. Glass, a self-described liberal Democrat from New York with a hardball reputation, would have to return, hat in hand, to labor unions that had already given up plenty in two prior rounds of concessions.

Though some employees thought Glass relished the chance to clash again with the airline's unions, he says he didn't welcome the task. "If you think there's enjoyment out of that, you need your head examined," he says.

Talks dragged. To kick start them, the airline's board forced out Siegel as a peace offering, replacing him with Lakefield.

Still, the company struggled to convince its unions of the impending crisis. Glass says he was brutally honest with the unions, giving them access to internal financial reports that showed the company wasn't exaggerating its need for cuts.

Yet the pilots' union, the focus of most of the airline's initial negotiating effort, was deeply divided over tactics. It had installed a new negotiating team just as talks began.

The second bankruptcy filing allowed the airline to postpone or reduce some payments. It also helped accelerate labor talks, because the company could invoke bankruptcy powers to force wage cuts if necessary.

Talks with the pilots started moving, but the airline's three other major unions fought back in court, arguing that the proposed cuts were unnecessary and excessive.

At one point, Glass recalls heading home after work and telling his wife, "We're not going to make it." There seemed like too much to do in too little time: get the unions on board, keep enough cash to continue operating -- and then somehow find an investor.

"I just didn't think we were going to get there," he says.

Yet in the end, under the threat of court-mandated cuts, all four labor groups agreed to new contracts that called for wage cuts, new work rules and the elimination of thousands of jobs. Later, a judge agreed to eliminate pension plans.

Bill Pollock, leader of US Airways' pilots' union, credits management with sharing internal information, which he says allowed the union to make better decisions.

"The pilots respect the truth, as brutal as it may be," he says.

Asked if he had any regrets, Glass shook his head, no.

Then he clarified: "I regret everything that had to be done, but it had to be done."

Hope from a dark moment

In a pile on his desk at US Airways' headquarters, Chris Chiames kept a page clipped from a public-relations trade magazine. It listed 10 signs the company you work for is in crisis. On it were things like "mass layoffs or plant closings," "unplanned change in company leadership" and "significant court/legal action."In more than two years at US Airways, Chiames, the company's senior vice president for corporate affairs, figured the airline had hit all 10.

Some of the worst publicity came over Christmas, when staffing problems led the airline to cancel more than 400 flights. National TV news showed lost bags piling up. Angry passengers vented to newspapers and threatened never to fly the airline again.

"It was so penalizing to the airline," says Ben Baldanza, a senior vice president who left in January. "We couldn't have the veneer of `this isn't affecting out customers' any more."

But other leaders couldn't understand why problems with about 15 percent of their flights, principally out of Philadelphia, was receiving top billing in the news over the other major Christmas weekend story, the tsunami that killed more than 100,000 people.

Executives initially blamed the problems on workers for calling in sick. Later, a Transportation Department report blamed management for failing to plan for large numbers of sick calls.

To US Airways' executives, though, the big story coming out of Christmas was not the stranded passengers and the missing bags. It was the response from employees, who volunteered at airports to deliver bags and help travelers.

A few of the top leaders turned out, too. Pilot Bob Vendley of Davidson recalls seeing Chiames, wearing casual slacks and a jacket, helping push bags on rollers. Sweat poured down his face, Vendley says.

"That was a great vote of confidence by the people in this company," Lakefield says. "It gave us every reason we could to find a solution and change the way we operated."

Competitors try to strike

In January 2005, US Airways faced yet another dilemma: How would it find the cash to survive?

Yes, it had made deep cuts. But given its track record and financial projections, it still looked like a poor investment.

Other airlines were sniffing around but seemed interested only in pieces of US Airways' carcass, such as its coveted takeoff and landing slots at congested airports.

Chiames says he received word one day through "back channels" that JetBlue CEO David Neeleman was headed to Washington and wanted to meet with Lakefield to discuss buying assets. The company refused the meeting, Chiames says.

A year earlier, the company had rejected an overture from Virgin Atlantic to buy takeoff and landing slots and gates at East Coast airports. Executives had also met with counterparts at United to discuss a merger -- rekindling flames from the failed merger of the two in 2001-- but those talks failed to bear fruit.

The airline turned to John Luth, CEO of the Seabury Group, which specializes in raising money for airlines.

"The wisdom out there was it couldn't be done," Luth said in an interview this summer.

Yet he and the executives devised a strategy to tap regional airlines for money. Those airlines depend on major carriers to survive, and US Airways wanted them to pay to operate as US Airways Express.

The company landed two such deals.

At the same time, Luth encouraged Lakefield to revive previous talks about a merger with America West.

Within weeks, executives of the two airlines were meeting, in hotel meeting rooms near US Airways' headquarters that Chiames had found. The airline didn't want to be seen talking with America West CEO Doug Parker and others, for fear of sparking speculation.

In May, after a busy day of discussions, Parker, Lakefield and other executives headed to US Airways' skybox to take in a Washington Wizards NBA playoff game. Dressed in suits, they drank beers as the player introductions began.

Just then, Luth received an e-mail on his BlackBerry, confirming the final piece of the investment needed, a $75 million pledge from Air Canada. Struggling against the crowd noise and booming player introductions, Luth waved the BlackBerry and shouted the good news.

The men shook hands and congratulated each other.

The companies announced the deal the following week.

Doing the unexpected

Looking back on the ups and downs, Lakefield and the others say the company came close to extinction."I think we skirted around the edge through most of the process," Lakefield says. "You didn't need a big deviation for things to have gone terribly wrong."

He and many others worked hard, he says. He doesn't like talking about the sacrifices he's made, or how the experience has changed him.

Some labor leaders, though, don't view the company leaders through such a soft filter.

"All they did was cut our labor contracts and lower the costs," says Mike Flores, leader of the airline's flight attendants' union. "I don't think it took geniuses to do that."

Unions have protested that executives didn't share in their sacrifices, pointing out that Lakefield never cut his $425,000 salary. A judge also approved severance payments for the top leaders of up to twice their salaries. Lakefield's share is $1.7 million.

Lakefield says he dealt with the criticism and stress of the job by running on a treadmill, or by playing tennis. He'd keep his eye on the ball and hit it, hard.

"When you've got everybody refusing to quit and refusing to die," he says, "sometimes you can do the unexpected."

Tony Mecia: (704) 358-5069; tmecia@charlotteobserver.com

Back From the Brink

When it filed for bankruptcy protection a year ago, US Airways faced long odds of surviving.

Statistically, companies that file for bankruptcy a second time are far more likely to die than those heading in for the first time, says Lynn LoPucki, a bankruptcy professor at the University of California at Los Angeles.

A bankruptcy relapse creates low worker morale, tarnishes a company's brand name and reputation and makes vendors wary of doing business, he says.

US Airways filed for bankruptcy the first time in 2002 but emerged just eight months later, in March 2003. Executives say they probably would have stayed in longer that first time to make additional changes but that a credit-card processor pressured them to leave bankruptcy court.

Even airline industry experts were surprised that under CEO Bruce Lakefield, US Airways has been able to improve its prospects and deliver a merger with America West. The deal is scheduled to close Tuesday.

Lakefield, a retired banker, had little airline expertise. "He really did recover and deliver a great sales pitch on a combined entity," says industry consultant Robert Mann.

Now, attention will turn to other airlines battling through bankruptcy. Delta Air Lines and Northwest Airlines filed for court protection this month, joining United Airlines, which has been in bankruptcy protection for three years.

With labor talks stalled, US Airways leaders say they couldn't avoid a second bankruptcy filing. "Without it, we'd be out of business," says Executive Vice President Jerry Glass. CEO Bruce Lakefield (above) spoke outside of court in Alexandria, Va. A holiday meltdown of canceled flights and mounting luggage was a fiasco, to be sure.

Some senior managers doubted it was the death knell some made it out to be. America West boss Doug Parker (right) pressed US Airways chief Lakefield for details on cost cutting in February. The more Parker learned, the more he believed a merger made sense. The two announced the deal in May.

Charlotte Observer



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