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Somebody Still Likes US Airways


Long plagued by high costs, an irrational route structure, and overlapping hubs inherited from other carriers, US Airways Group Inc. (U) has always been an ugly duckling. Cobbled together in the 1970s and '80s from a handful of regional airlines, it never won respect as a major carrier. Even aviation visionary Stephen M. Wolf, who took the helm in 1996 and remains chairman, couldn't whip US Airways into shape.

Now, investing whiz David Bonderman is wagering big money that the carrier has a bright future. When US Airways filed for bankruptcy on Aug. 11, Bonderman's Texas Pacific Group swept in with a $200 million cash infusion. In return, Bonderman wants a controlling 38% stake. The court and creditors will decide in late September whether to accept the offer.

Bonderman, 59, a money manager for Fort Worth billionaire Robert M. Bass before founding Texas Pacific in 1993, clearly sees something others don't. US Airways has the industry's highest labor costs. Its passenger revenue is shrinking, and expensive leases on its fleet were signed in the anything-goes dot-com era. Worse, US Airways' market is overrun by low-cost carriers. Last year, budget airlines claimed a 19.4% share of the Northeast, while once-dominant US Airways' share eroded from 22% to 18%. Almost half the carrier's revenue is under pressure from low-cost competitors.

Doesn't sound like much of a bargain. But Bonderman isn't known for making bad picks. In 1993, he was credited with steering Continental Airlines Inc. (CAL) out of Chapter 11. When Texas Pacific sold its 14% stake in the airline in 1998, it collected an elevenfold return. Will Bonderman strike gold again? "Anytime you can get 38% of a major airline for $200 million, that's something," says David G. Neeleman, CEO of upstart JetBlue Airways Corp. (JBLU).

US Airways has its pluses. The carrier controls hubs in Washington, Philadelphia, and Charlotte, N.C. It has a strong presence at New York's LaGuardia Airport, Boston's Logan Airport, and elsewhere in the East. And it may soon have a $900 million government loan guarantee to compensate for losses stemming from September 11.

Best of all, the heavy cost-cutting will be done before Bonderman seals a deal. To win that loan guarantee, US Airways CEO David N. Siegel must slash spending by $1.2 billion a year through 2008. And he's well on his way, thanks in no small part to labor unions. In July, pilots and flight attendants, shell-shocked by talk of bankruptcy, signed contracts that will save the company $550 million. On Aug. 28, mechanics are expected to approve a 7% pay cut.

In all, Siegel expects to chalk up $950 million in wage cuts and productivity gains long before any deal is signed. And on Aug. 21, he announced plans to cut 200 unprofitable routes and ground 31 planes. "We're two-thirds of the way there," says US Airways Senior Vice-President Christopher L. Chiames.

The goal is to return the carrier to profitability by 2004. Siegel still must weed out underperforming routes, standardize a patchwork of employee benefits, and rejigger hubs. In the interim, a new marketing deal with United Airlines Inc. (UAL) should boost revenue. It's an ambitious plan. But Bonderman is betting this is one ugly duckling that will soon be taking off. By Lorraine Woellert in Washington, with Michael Arndt in Chicago


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