US Airways Says it Can Profit By '07

US Airways predicts it will make a profit by 2007, if creditors allow it to merge with America West.

The airline painted a relatively rosy picture of its future, even if oil prices remain near $60 per barrel, in filings submitted to U.S. Bankruptcy Court late Monday. The financial forecasts are part of the company's effort to convince its creditors to vote for the proposed merger.

A merger provides US Airways, Charlotte's dominant carrier and employer of 5,300 locally, its best chance to survive, management says. The combined carrier would have a network that stretches from Europe to the Caribbean to Hawaii and could compete with low-cost carriers on fares, the airlines say.

If the creditors vote against the merger and US Airways had to liquidate, the airline said in this week's filings that unsecured creditors would get nothing for the $3.1 million the airline owes them.

All the cash generated in a hypothetical Chapter 7 liquidation by selling US Airways' planes, de-icing fluid, uniforms and airport gates would produce just enough to pay back secured creditors at the front of the payment line, it said.

Secured creditors are generally the airline's biggest, such as banks and other key financiers. The unsecured creditors are often smaller vendors but also include big companies such as plane-maker Bombardier Aerospace.

If creditors allow US Airways to merge with America West, the airlines say they would trim their net loss to $65 million in 2006 and turn a $316 million profit in 2007.

US Airways, though, has been wrong in its predictions before.

In its last go-round in bankruptcy court, US Airways predicted it would be turning a $127 million profit by 2004. Instead, it filed for Chapter 11 protection a second time on Sept. 12, 2004.

That time, the airline underestimated rising fuel prices and overestimated its future revenue: It failed to foresee strengthening low-cost carriers continuing to invade its turf, analysts say.

This time, US Airways projects only modest revenue growth if it can continue to survive as a merged airline with America West.

It forecast a 1.8 percent growth in revenue between 2006 and 2007 to $9.73 billion, with most of the increase coming from the shorter-haul flights.

It also predicts oil prices to stay at or below $57.60 in 2006 and dip to $56.67 in 2007. If the price of jet fuel follows the same path as crude oil prices, each $1 increase in oil means $40 million more in jet fuel.

Believing jet fuel and oil prices will move together may prove to be too optimistic, said Robert Mann, a former airline executive who is consulting for the America West's pilots' union through the proposed merger.

Because of limitations at refineries, jet fuel prices may rise faster than oil prices, he said.

"It's unlikely that over a three- or four-year period that things will go as planned," Mann said. "But you like to take a look at what people's best guesses are, to vet them against your own assumptions."

When US Airways exited its last bankruptcy protection in March 2003 after seven and a half months, it did so with a business plan that predicted profits would come the next year.

Instead, the airline filed for Chapter 11 bankruptcy protection a second time on Sept. 12, 2004. The reason: US Airways' plan was overly bold in some of its predictions.

Oil.
The airline's plan predicted the price per barrel would be $28.05 in 2003 (it ended up closer to $31) and $25 in 2004 (it actually was $41). Because of that, the airline underestimated how much it would spend on jet fuel. Instead of an estimated $813 million in 2004, US Airways spent $1.1 billion on jet fuel.

Revenue.
The airline didn't see how deeply air fares would fall because of low-cost carriers' strengthening hold on the market. The airline predicted it would have $7.2 million in revenue in 2003 (it ended up with $6.85 million) and $8.2 million in 2004 ($7.1 million in reality).

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