Struggling US Airways Is Still Alive

The continued existence of US Airways, which is in its second round of bankruptcy protection and now flirting with a merger, defies the conventional wisdom in vogue since the airline industry went into a tailspin in 2001.

Surely, the thinking has gone, one of the nation's old-line carriers would buckle under the pain from the 9-11 attacks and the recession, the pounding from discount carriers and the wallop from surges in oil prices.

But US Airways' ability to persevere reveals a larger truth about the industry: Even the weakest airlines are hard to kill.

In the industry's last downturn, in the early 1990s, three major carriers folded, including Pan American World Airways and Eastern Airlines.

This time, despite losses of more than $32 billion in the last four years, no major airline has been grounded. At the same time, upstart carriers such as JetBlue Airways and Independence Air are rapidly adding seats.

In fact, in 2004, there were more seats in the air than any other year in the industry's history, and discount carriers have orders for more than 400 planes in the next few years. To fill all the seats, airlines are slashing fares, leading to the big losses.

For travelers, the trends have been a boon. Even in Charlotte, which has some of the highest fares in the country, average ticket prices have fallen 11 percent in the last year. With the summer travel season starting, those fares are expected to continue falling, with the Charlotte debut next month of discount carrier AirTran Airways.

News last week of US Airways' advanced merger talks with Arizona-based America West is further evidence of the industry's resilience. Both airlines, as well as most in the industry, adhere to the thinking that airline consolidation is inevitable in some form, whether through death or marriage.

But they're both also taking advantage of changes in the industry that give them a better shot than in the past to stay afloat on their own.

Among those changes: greater government intervention, deeper sacrifices from labor unions, and more innovative financing from creditors and investors.

"Consolidation and contraction will happen," said John Heimlich, chief economist with the Air Transport Association, an industry trade group. "It's just happening at a slower pace than we would have thought."

US Airways' fate has huge implications for Charlotte, the airline's biggest hub and home to about 5,600 of its 25,000 workers. If the airline disappeared, other airlines would almost certainly come to town, but passengers would have fewer nonstop flights to fewer cities. In a merger with America West, some observers think Charlotte would play a key role in a combined national carrier and that fliers would have more access to West Coast destinations.

To see how much the industry has changed, consider this quote from the ATA trade group: "It becomes starkly clear that wholesale bankruptcies in the airline industry, major liquidation and even the forced nationalization of airline system are the risks we confront. There remains a short window of opportunity if we are to avoid this likely outcome."That was from March 2003, more than two years ago. Since then, no major airline has shut down, and two of the top 10 are operating under bankruptcy protection.

As recently as last fall, pundits were forecasting US Airways' collapse.

"So long, US Airways," a National Geographic travel columnist wrote in September. "Now that the nation's seventh-largest carrier has filed for bankruptcy protection a second time in as many years, many industry-watchers give it only a few months before it liquidates."

One of the big changes in the continued survival of US Airways is the role of federal government agencies and courts.

In the aftermath of the 9-11 attacks, the federal government gave airlines $5 billion in direct payments, including about $330 million to US Airways to keep it operating.

In addition, the government created the Air Transportation Stabilization Board, which administers federal loan guarantees to airlines, including US Airways. After US Airways filed for bankruptcy protection, the ATSB granted permission for the airline to use some of its loan collateral for operating expenses.

Without access to that cash, the airline would have had to start selling assets and likely shut down.

Two other airlines that have received federal loan guarantees are operating under bankruptcy protection, ATA Airlines and Aloha Airlines.

At the same time, the government is also shouldering more of the cost of airlines' pension plans. Struggling companies are allowed to turn over the control and expense of pension payouts to the federal government.

In its first bankruptcy case in 2002, US Airways turned its pilots' pensions over to the government. This time around, it handed over pension plans of flight attendants and mechanics.

On Friday, United Airlines reached an agreement to shift its four pension plans to the government, too.

Other airlines are crying foul at the government's involvement.

By delaying the collapse of weak carriers, even profitable airlines such as Orlando-based AirTran begin to suffer, AirTran spokesman Tad Hutcheson says.

"The longer you wait," he says, "the weaker the industry gets."

Besides the shift in the pension plans, workers have contributed in other ways to airlines' continued survival, mostly by agreeing repeatedly to cut their own wages and benefits.

In the case of US Airways, all four of its major unions agreed to deals with the airline, giving up $1 billion in annual wages and benefits. The cuts were steep, with average wage reductions of between 8 percent and 18 percent, but also severe cutbacks in benefits. The new contracts could lead to the outsourcing of nearly 3,000 jobs.

When members voted on the contracts, they passed easily, each with around 60 percent approval.

No union went on strike -- unlike the early 90s, when a labor-management standoff crippled Eastern.

The push to slash labor costs has spread to other carriers. Continental Airlines employees approved more than $400 million in cuts last month. United Airlines this year won agreements from pilots and flight attendants to cut more than $300 million, and it is pushing for another $700 million from other labor groups.

In November, Delta Air Lines pilots agreed to $1 billion a year in cuts, saving that airline from a bankruptcy filing.

William Warlick, an airline analyst with Fitch Ratings in Chicago, says airline unions have "essentially been broken" in the last two years.

"The labor unions have been pushed up against the wall and have been forced to offer up concessions," he said.

Pat Friend, national president of the Association of Flight Attendants, says votes by airline workers to continue approving concessions are an "indication of reality."

"It's a recognition that here is a company which is in financial difficulty," she said. "Workers say, 'I have a relationship with this company. ... I like the work I do. I want this enterprise to continue.'"

Eventually, though, workers reach a point where they can't give any more. She doubts that flight attendants at United or US Airways can stomach more cuts.

"The employees' paycheck is not a bottomless pit," she said. "At some point, the employees will turn on the management and say it's not worth it."

A new and diverse crop of airline creditors and investors have also extended key lifelines.

US Airways has turned to a new source of investment -- regional airlines -- to help lift it out of bankruptcy protection. Last year, few analysts foresaw regional airlines as potential sources of money.

Yet in the last few months, Air Wisconsin and Republic Airways have each offered US Airways $125 million in outside investment.

At the same time, US Airways' creditors have shown an unexpected willingness to deal with the airline and keep it aloft.

Since filing for bankruptcy protection, US Airways has reached key agreements with jet makers Embraer and Bombardier to continue delivery of jets, and with Airbus to cancel orders and receive cash.

An agreement it reached in November with General Electric Co., which has a financial stake in more than half the airline's planes, gives the company access to $140 million and calls for it to return 25 aircraft to GE in the next three years.

GE has also reached agreements that have been helpful to Delta and Independence Air.

Although some airline analysts have professed surprise at GE's willingness to reach agreements with financially shaky airlines, GE spokesman Eric Jones says his company makes business judgments case-by-case, and that deals it enters into benefit airlines and GE.

"We make business decisions," he said. "We like to support our customers when we can, and deals have to make sense for us."

The strategy is apparently working. GE said this month that earnings from its aviation segment rose 13 percent in the first quarter, compared with the same period a year ago, to $163 million.

Last week, when news of merger talks between US Airways and America West broke, analysts were mostly skeptical, saying mergers traditionally have failed to solve the industry's problems.

Typically, forecasters of consolidation have painted scenarios of carriers shutting and alleviating a glut of seats. That would allow survivors to raise fares and start making money again.

But now with talk of a US Airways/America West link-up, expectations for sudden relief in the industry's overcapacity have dimmed.

Still, with high fuel costs, fierce competition and big losses, most analysts say they believe that eventually, something's got to give. Sometime.