Markets & Finance

US Airways' Welcome Updraft


Delivering financial validation for its big merger last year, US Airways (LCC) reported a first-quarter profit of $5 million on May 9. That marks the first profitable quarter since the company was created last September through the combination of America West Holdings and US Airways Group. Chairman and CEO W. Douglas Parker says the results represented a big improvement from a year ago.

At that point, US Airways was in bankruptcy and the two carriers had lost a combined $270 million in the first quarter. This year's profit, though slim, came despite a 37% increase in fuel prices, Parker says: "That's quite a turnaround."

The US Airways news comes as the airline industry enters the busy summer travel season. Passengers should brace themselves for higher ticket prices and more crowded planes, the product of capacity reductions on many routes coupled with much higher fuel costs. In April, the nation's 10 largest carriers filled 81.1% of their available seats, a record for that month.

"There are no backup planes flying half-full," FAA administrator Marion C. Blakey says. "You'll see delays because everyone will be under pressure to get passengers on connecting flights."

RAISING THE BARBELL. Travelers may mourn the disappearance of the ultra-low, $158 cross-continental fares, but the industry is the better for it. This was especially a problem at US Airways, which before the merger was unloading many discounted tickets on travel Web sites such as Priceline.com. Parker estimates that ticket prices are now up about 20%. He says that's still a great value when you consider "prices are still well below 2000 levels, probably 30% below if we include inflation."

When laying the groundwork for the merger last year, Parker called it Project Barbell. That's because the strategy called for balancing America West's strong position in markets like Las Vegas and Phoenix with US Airways' stronger presence on the East Coast. Yet critics of the plan dubbed it Project Dumbbell, says Parker, 44, a veteran of Northwest and American Airlines who joined America West as chief operating officer in 2000.

The conventional thinking was that few airline mergers work well, particularly when both players are basket cases. US Airways had filed for bankruptcy twice in recent years, while America West had survived only thanks to a massive post-9/11 bailout from the U.S. government.

LOW-COST CO. But Parker saw things differently. In his eyes, the two carriers had complementary strengths and weaknesses. Founded in the early 1980s, after deregulation of the airline industry, America West had lower labor costs and was therefore able to offer lower fares. However, the carrier was never able to build up the route network and flight options to compete with its larger rivals. On the other hand, US Airways, whose history dated back to the 1930s, suffered from perennial mismanagement and high "legacy" labor costs.

Parker's bet was that the two combined could offer the amenities of a full-service airline -- first-class seats, food service, private airport lounges -- and the fares of a lower-cost one. To emphasize that the company is a low-cost carrier, he chose the ticker symbol LCC.

The company's cost problems were largely solved by US Airways' second trip to bankruptcy court. That allowed Parker to get out of unneeded gate and airplane leases. Faced with the possibility of liquidation, US Airways pilots, flight attendants, and ground crew also agreed to swallow steep pay cuts that put their salaries on par with those of America West employees. To boost employee morale, Parker has solicited their advice on everything from uniform design to the choice of destination cities.

BYE-BYE BONUS. After learning that people still maintained active Web sites about once-storied airlines, such as Allegheny and Piedmont, with which US Airways had previously merged, Parker painted four planes in colors reminiscent of those carriers. "I want people to embrace the past, as well as the future," he says.

As a further show of support, Parker told employees in March that he was forgoing his $770,000 bonus for 2005 -- equal to about 75% of his 2004 compensation -- because he didn't feel right taking the money when so many US Airways employees had been forced to take pay cuts and furloughs.

The merger hasn't always been smooth flying. In February, a US Airways ground crew in Philadelphia crashed an organizing meeting run by their America West counterparts, who belong to a rival union. The US Airways staffers began fighting with their new colleagues and throwing furniture around. The police were called, and Parker fired 22 employees.

The company is still operating under transitional contracts with its major unions until votes are cast on who will represent whom and all merger-related policies are worked out. Parker says he hopes to get new contracts from all of the unions by the end of the year.

EMERGING AIRLINES. In the meantime, Parker and a dozen of his top lieutenants meet every Friday morning to iron out various merger-related issues. US Airways allowed unescorted children, pets, and hazardous materials on flights. America West didn't. Parker decided the additional revenues weren't worth the additional costs and no longer accepts any of them.

One issue has been more contentious: The old US Airways let employees who were off work board free flights based on their seniority; America West dealt with them on a first-come, first-served basis. Parker couldn't figure out which was the best practice, so for now he's boarding the old US Airways planes one way and the old America West planes the other. "We punted," he says.

With demand for summer travel strong and ticket prices on the upswing, Parker is at last getting some relief from such post-merger headaches.


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