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US Airways Group, Inc. files again for reorganization under Chapter 11 of the United States Bankruptcy code on September 14, seeking to restructure operating costs in light of ever-increasing fuel prices and cutthroat industry competition.

 

PBS News Report from Sep 13, 2004

 


MARGARET WARNER: Yesterday’s second bankruptcy filing by U.S. Airways was yet another blow to an already reeling industry.

United Airlines is struggling to emerge from nearly two years in Chapter 11. It has trimmed $2.5 billion in annual wage and benefit costs, and has stopped paying into its pension plan.

Last week, Delta Airlines announced plans to cut 10 percent of its total workforce, and warned it would be seeking wage concessions from remaining employees.

U.S. Airways President Bruce Lakefield said yesterday the Chapter 11 proceedings shouldn’t disrupt his airline’s current schedule of more than 3,000 flights daily. But he responded this way when asked about the possibility of job cuts.

BRUCE LAKEFIELD: Our employees at U.S. Airways are some of the most dedicated and hard-working professionals in the marketplace.

Our job in management is to preserve as many jobs as possible as we go through the transformation plan to become a competitive carrier in the industry.

MARGARET WARNER: Why is U.S. Airways in trouble again, and what does it say about the airline industry as a whole?

For that, we turn to Darryl Jenkins, former director of the Aviation Institute at George Washington University. He’s now a visiting professor at Embry-Riddle Aeronautical University in Daytona Beach, Florida and Philip Baggaley, an airline industry analyst at Standard & Poor’s. Welcome, gentlemen.

So, Mr. Jenkins, answer that question for me. Why are they back in bankruptcy just a little more than two years after the last time?

DARRYL JENKINS: Well, the depth of the problems is really enormous, and both sides– labor and management– both underestimated how deep the revenue cuts were. In 1998 we had enormously high fares.

We had high costs but we were able to eke out a little bit of money. Since then, since irrational exuberance went away we haven’t been able to get fares anymore.

And we’ve seen airlines like Southwest and Jet Blue, which are very well managed and have very good products sell them to customers at very, very low and prices and are able to make money.

And because of Jet Blue and Southwest and others like them we’re not able to get fares like we used to. The revenue drop off has been enormous; it’s been much greater than anybody has ever anticipated.

MARGARET WARNER: All right. And Mr. Baggaley, what would you add on the cost side in terms of U.S. Airways problems?

PHILIP BAGGALEY: Well, U.S. Airways has a couple of problems. First, as mentioned, their revenue has been clobbered. They have much higher operating costs than these low- cost carriers.

They’ve also been stuck with a much higher fuel bill as is true across the U.S. industry. U.S. Airways is particularly vulnerable to low-cost competition because a very large portion of their root structure is in the domestic U.S. market.

And that’s where the low-cost carriers have been expanding. In fact even many of their international roots which run into the Caribbean now are also gradually coming under fire from the low-cost carriers. So they’re really in the line of sight of the Southwest, Air Trans and Jet Blues.

MARGARET WARNER: So, Mr. Jenkins, what is — what do their problems say about the industry as a whole?

DARRYL JENKINS: Well, this is a problem that everybody is suffering right now. Even Southwest in the last quarter complained about what the competition was doing to it. And they were also suffering from high fuel bills so these problems are pretty much industry-wide.

But the old carriers, American, United, Delta, U.S. Airways, Continental, Northwest, have outrageously high operating costs. In the next five to ten years I am pretty sure we will not have a time when we will not have at least one, perhaps two or more, airlines in Chapter 11.

And it’s my belief that the cuts needed are so great that some of them will have to go in two or more times.

MARGARET WARNER: Mr. Baggaley, explain why those six older airlines– sometimes they’re called legacy carriers– explain why it is they have much higher costs.

PHILIP BAGGALEY: Well, there are a couple of reasons. Their contracts grew up in a time of regulation and also during the period where organized labor was much more powerful.

During the late 1990s, there was a spiral upwards of labor costs in the airline industry, a contract would be signed at one airline and that would become the jumping-off point for the negotiations at the next airline. So going into the downturn after 9/11, they were stuck with very high labor costs.

In addition, these carriers also have a more veteran work force. And in the case of U.S. Airways that’s a big factor. Their employees have been on the job much longer. They’ve been… the company has been shrinking and therefore they’ve been laying off their relatively younger, lower-paid employees.

So if U.S. Airways were able to negotiate a contract just like Jet Blue Airways, they would still have higher costs because their employees are much more veteran and therefore higher paid.

MARGARET WARNER: Follow up on that, Darryl Jenkins. The immediate trigger for this was when the pilots union in U.S. Airways refused to even consider another cost-cutting measure that the airline proposed.

I mean, obviously no one likes to take a cut in pay but why is labor so resistant to any changes even when their employer is facing bankruptcy?

DARRYL JENKINS: For the last four years the employees at U.S. Airways have really done nothing other than negotiate with labor. First during 2000 when United tried to buy them out with wages and then after that they’ve been in two, this is the third discussion now.

They’re still in bankruptcy, so on their part this has to be very frustrating. I’m sure there is an awful lot of anger out there amongst these people that they’ve done nothing over the last four years other than negotiate and they still haven’t gotten to the bottom.

MARGARET WARNER: And give things away.

DARRYL JENKINS: Yeah. So they haven’t gone to the bottom yet. They’ve spent all of this time and they’re still negotiating.

MARGARET WARNER: Mr. Baggaley, what would you add to that about why the employees, even when faced with the possibility that their employer may go bankrupt or even belly-up, resist… are still resisting in this industry — cuts?

PHILIP BAGGALEY: Well, I think it’s a battle of rational calculation against gut emotion. As Professor Jenkins indicated, they’ve been giving an awful lot.

They’re coming back already 18 months out of bankruptcy, having to give even more. On the other hand, the rational calculation is if they go into bankruptcy, as they have, it will only be worse.

And, of course, if they shut down, they could lose their jobs. In some cases there’s one other factor at work here. And that is labor politics. In the case of U.S. Airways’ mechanics, they’re represented by the International Association of Machinists. And that union has been under challenge to represent mechanics at various airlines around the industry.

United, for example, the IAM, was voted out by a rival union so they’re in a bit of a bind. If they give concessions, they’ll be called soft and if they don’t, their members may lose their jobs.

MARGARET WARNER: Getting back to politics again, do workers at, say, Jet Blue or Southwest, Darryl Jenkins, make a lot less than at U.S. Airways and United?

DARRYL JENKINS: Well, it’s not that they make a lot less; they make a livable wage. At Jet Blue every year they also get additional money from profit sharing.

So what you have here at Jet Blue is you have an airline where the employers are getting a little bit more money each year and you have U.S. Airways where they’re making more money than they are at Jet Blue but each year they’re making less.

MARGARET WARNER: So, Mr. Baggaley, what will it take for U.S. Airways to emerge from bankruptcy? We heard the CEO talk about a transformation plan.

PHILIP BAGGALEY: Well, first, if I could add just a bit to the labor cost comparison because I think it’s important. The wages at some of the low- cost airlines like Southwest and Jet Blue, as indicated, aren’t that different from the legacy carriers.

However, the work rules, the productivity, the benefits are dramatically different. So what U.S. Airways is proposing to try to emulate some of these low-cost carriers is a combination of pay cuts but also changes in work rules that would allow the airline to use its planes more hours per day, would have the flight crews fly more hours per month and so forth.

Now, as to the question of what will it take for them to get out of bankruptcy, the first thing they have to tackle is pursuing these labor cost contracts. They’ve indicated they will try to negotiate with the unions. If that fails, they’re prepared to go to the bankruptcy judge and ask to have the new contracts imposed.

And I would expect that they would succeed in that. If they can argue to the judge that the airlines’ survival is at stake, he would probably agree to impose those contracts. Beyond that, they have to seek agreements with various key creditors: The Air Transportation Stabilization Board, General Electric Capital, and others.

And one further hurdle and an important one, they’d have to raise financing to exit from bankruptcy. One of the longer-term problems they face is there’s no more federal loan guarantee program, which they used last time.

The retirement system of Alabama. Their principal shareholder is not likely to put in more money. So who do they turn to for more financing?

MARGARET WARNER: All right. And before we go, let’s talk about customers, consumers, Darryl Jenkins. We heard the CEO say there wouldn’t be any cuts in the schedule but it sounds like they’re talking about some revamping.

How far out can a person feel comfortable making a reservation on U.S. Airways right now?

DARRYL JENKINS: Well, certainly in the short run there will be no problem whatsoever so in the next three months to the end of the year I would have no problems booking on U.S. Airways whatsoever.

If they’re able to come in, if they’re able to get a quick agreement with their labor– and I agree with Philip that the bankruptcy court is the big lever on this one– then I think they will be good for a little bit longer after that as well.

MARGARET WARNER: What happens to people’s frequent flyer miles?

DARRYL JENKINS: As long as they’re flying their frequent flyer miles are good. It’s a nice autumn, a nice time to fly up to New England and other places. I would suggest people take advantage of it.

MARGARET WARNER: And use their airlines. Mr. Baggaley, briefly, what do you think are the prospects U.S. Airways will make it or versus the prospects that it may end up going belly-up?

PHILIP BAGGALEY: Well, unfortunately I think the odds are against them. They certainly have a chance, and the way to do it is to pursue those labor cost cuts and the other measures indicated but they go into bankruptcy with relatively limited cash and they’re going into the slow winter season. So it’s going to be difficult; possible but difficult.

MARGARET WARNER: Despite Darryl Jenkins advice to take advantage of the fall weather. Well, Philip Baggaley and Darryl Jenkins, thank you both.

DARRYL JENKINS: Thank you.

PHILIP BAGGALEY: Thank you.


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