US Airways: Adding Fuel to the Challenge

Just as US Airways is starting to save money from its latest round of wage cuts, a familiar villain is re-emerging as a threat: high fuel prices.

Company officials have not said that the rising price of oil is enough to derail the airline's planned exit from bankruptcy protection, scheduled before the end of June. But the higher prices are focusing renewed attention at US Airways and other carriers on cutting costs.

In a message to employees two weeks ago, Chief Executive Bruce Lakefield said that if fuel prices remain high, US Airways for the first time will spend more on fuel than on labor this year. He said that was a staggering statement, given that until recently the airline had been criticized for having among the highest labor costs in the industry.

Crude oil for May delivery closed last week at $54.84 a barrel on the New York Mercantile Exchange -- more than 50 percent higher than a year ago and far above the low- to mid-$40 range most airlines had anticipated. US Airways' latest public financial projections, released last fall, were based on oil at $44 a barrel.

Spread out over a year, a $10-a-barrel increase in oil prices would cost the airline an extra $240 million. The airline's 2004 revenue was $7.1 billion, with operating expenses of $7.5 billion.

The surge in oil prices comes at a delicate time for US Airways, which has its largest hub in Charlotte. After cutting about $1 billion annually in labor costs and reaching key financing deals with creditors, US Airways seems poised to complete its plan to reorganize as a low-fare carrier.

But resurgent oil prices have created new obstacles.

Because US Airways flies mostly shorter routes as opposed to longer-haul flights, its fuel costs per mile tend to be high. In a bankruptcy filing last year, the airline said it is "more vulnerable to the rapid increases in fuel prices than its competitors."

In addition, high fuel prices could eat into the airline's cash, which it needs to keep in the bank. The airline's financial report for February is scheduled for release in the next week or two.

Some analysts have speculated that higher-than-expected oil prices are prompting the airline to try to raise more money than it had originally projected.

US Airways had been seeking $250 million in new investment to help it leave bankruptcy protection. It has pledges for that $250 million, but is still searching for another $100 million. That's because one of the investors, Republic Airways, is requiring US Airways to raise a total of $350 million before it kicks in its share.

If oil prices continue their rise, the airline might need even more than that, said aviation consultant Mike Boyd.

A US Airways spokesman declined to discuss the airline's strategy for raising money, or whether fuel prices are altering financial projections.

"It hurts us," said spokesman David Castelveter. "There's no other way to say it."

The airline is scheduled to file a reorganization plan with the bankruptcy court by April 15, which should provide a wealth of financial details.

John Heimlich, chief economist with the Air Transport Association, said US Airways and other airlines are retiring older planes and trimming unprofitable flights in response to high fuel prices."If you need a certain amount to live and your heating bill goes way up, maybe it's time to cut HBO or delay that new car you're going to buy," he said.

In fact, just last month, only a few weeks after starting new service to El Salvador and Panama, US Airways announced it is ending the service in May and will return 11 Boeing 737s. A company statement blamed the "revenue and fuel environment."

Earlier this month, Northwest Airlines said is it grounding 30 old DC-9s, which are less fuel-efficient than newer planes. It blamed the move on high fuel costs.

In addition, US Airways and others are trying to save fuel when they can. Planes are more likely than in prior years to taxi to runways on one engine instead of two, fly at altitudes that require less fuel and take fuel at stations that have the best price.