Come fly with me? – 6.03.12

US Airways’ chief executive explains why a merger with American is the right way to go

By Andrea Ahles [email protected]

TEMPE, Ariz. – It’s the airline that always has something to prove.

Since it was created in 2005 from the merger of the former USAir and America West, US Airways has had to show investors that it can turn a profit and demonstrate to customers that it can get them to their destinations on time.

Now it’s trying to prove to AMR creditors that a merger between US Airways and American Airlines is the best solution for the Fort Worth-based carrier, which entered bankruptcy in November.

“We think this is a compelling opportunity for everyone involved,” US Airways CEO Doug Parker said during an interview at the carrier’s headquarters in Tempe. “Putting US Airways and American together, we think we can restore American to its rightful position as the pre-eminent airline in the

world, one that it held for a long time but hasn’t held for quite some time.”

If Parker and his team succeed, US Airways, the fifth-largest U.S. carrier, would take over the third-largest to create a new No. 1, leapfrogging current industry leaders United Continental and Delta Air Lines.

A combined US Air-ways-American – which Parker promises would retain the American name and keep its headquarters in Fort Worth – would be a fierce competitor and provide more places to fly for more customers.

Many become one
Like other legacy carriers, US Airways traces its aviation roots to an airmail carrier in the 1930s, when All American Aviation began flying to small western Pennsylvania and Ohio Valley communities.

In the lobby of its headquarters, the airline pays tribute to the five passenger carriers that created the current US Airways: Piedmont, Allegheny, PSA, America West and US Air. A few of the airline’s planes even retain those carriers’ liveries.

After deregulation of the airline industry in 1978, Allegheny expanded service out of the Ohio Valley area and changed its name to US Air.

In 1987, US Air merged with Piedmont Airlines, which served the Southeast, followed by a merger with California carrier PSA, which became part of US Air in 1988.

The US Airways name went on planes in 1997.

When 9-11 and its aftermath decimated U.S. air travel, US Airways went into bankruptcy in 2002 and again in 2004.

It appeared that the East Coast carrier, known for its shuttle service among Boston, New York and Washington, D.C., would fade away. Instead, America West, a carrier started in the mid-1980s with a Phoenix hub and by then under Parker’s control, acquired it in bankruptcy, creating the carrier that exists today, with $13 billion in revenue and more than 36,000 employees.

Dzero
Although the carrier enjoyed earlier-than-expected profits that allowed investors to cash in on a rising stock price, the merger of US Airways and America West did not go smoothly. At its Philadelphia hub, checked luggage often did not make it onto planes. When the carrier merged its reservation systems, check-in kiosks didn’t work and flights were delayed for days.

But the biggest problem was that US Airways couldn’t get passengers or their bags to their destinations on time. In 2007, the carrier had the lowest quality ranking among the big legacy carriers, with only 68 percent of its flights arriving on time and over 1,800 customer complaints to the Transportation Department, more than any other U.S. airline.

“What we decided to do is focus on Dzero, and Dzero is departing exactly on time, not five minutes late, not 10 minutes late, not 15 minutes late,” said Robert Isom, US Airways’ chief operating officer, who was brought in to help fix operations. “We made a decision at that time that said, “Hey look, we can benefit the most folks by really holding to a strict departing-on-time philosophy.”

US Airways also implemented a new surface management system two years ago that gives employees and executives access to real-time information on all its flights, such as how many connecting passengers are on a plane with checked bags. That lets workers better decide how to deal with delayed aircraft and other operational issues.

The carrier also brought back its customer service call center operations from overseas, hiring 400 workers at centers in Phoenix; Reno, Nev.; and North Carolina.

Within three years, US Airways improved its on-time performance to 83 percent. In 2010, only 795 complaints about it were filed with the federal government. And its quality ranking, as measured by Purdue and Wichita State universities, moved to the top among legacy airlines, Isom said.

The company also earned $502 million in 2010 and $71 million in 2011 even as jet fuel prices fluctuated wildly, partly because it did not enter into fuel hedging contracts.

“Management has done a great job running the airline and generating profits without hedging jet fuel,” Dahlman Rose analyst He-lane Becker wrote in a research note to investors in April as she raised her 2012 earnings forecast for the carrier. That decision looks good as crude oil prices, which drive fuel prices, continue to slide.

Unsettled labor
The airline hit a snag in 2011 when pilots staged a summer work slowdown. The carrier went to court and sued its pilots union, winning a permanent injunction against the work delay tactics, which caused flight delays and cancellations.

It was the latest round in a contentious relationship with pilots since America West and US Airways merged. At the time, executives reached agreements with eight of 10 employee groups. These contracts are now amendable,

and the carrier is in mediated talks with mechanics and other groups; it has already negotiated a new deal with dispatchers.

But the pilots and flight attendants, who are split into East and West groups, have been in prolonged contract negotiations with the carrier and in disputes among themselves over pay and seniority integration. While US Airways can operate as a single carrier, it must schedule pilots and flight attendants as if the two airlines were still separate.

The flight attendants, represented by the Association of Flight Attendants, recently rejected a tentative agreement, with 75 percent of members voting against a contract that offered raises of at least 11 percent.

ìThe [tentative agreement] had come out for ratification about the time rumors began to swirl about American Airlines,î said Paul Jones, US Airways’ vice president of legal affairs, who believes that some attendants want to wait to see what happens with the possible merger.

Although a union arbiter decided on a seniority plan for US Airways and America West pilots, the larger US Airways pilots group did not like the results and created a union in 2008 that the carrier had to negotiate with.

The former America West pilots then sued the carrier and the new US Airways Pilots Association, saying they were being treated unfairly.

The carrier is now in court with both pilots groups, asking an Arizona judge to decide whether the arbiter’s seniority plan is binding. If US Airways merges with American, some industry analysts say, it could solve the “pilot problem” as seniority integration is now governed by a federal statute under legislation passed in 2008.

“That’s certainly not the reason we’re interested in American,” Jones said. “That may be a benefit . . . but it’s not the genesis of our interest in American.”

“Not bad people”
For Parker, a merger with American makes sense because it would create an airline that could stand up to No. 1 United and No. 2 Delta. He has spent all spring going over a 40-page presentation with American’s union leaders, bondholders, creditors and anyone else who will listen on why this merger needs to occur – now.

“AMR can’t fix its structural-network flaws independently,” Parker said as he went through the presentation in a conference room next to his office.

“The stand-alone strategy doesn’t work. It’s already been tried, and all that’s happened” is the money American gets for flying each seat ìis declining and they’re becoming increasingly irrelevant.”

For example, American’s share of the market in 2006 was No. 3 in the West and the East and No. 1 in the Midwest.

Now it’s No. 4 in the West and Midwest and No. 5 in the East.

Adding flights to markets where it trails the competition, as American executives have proposed under their restructuring plan, will only make network problems worse, Parker said.

Corporate frequent fliers are choosing Delta and United over American because those carriers offer more nonstop destinations from second-tier business cities like Buffalo, N.Y., and Charleston, S.C., Parker said.

Vaughn Cordle, airline consultant at AirlineForecasts.com, says a merger would also benefit US Airways, which has hubs in smaller markets in Phoenix, Charlotte, N.C., Philadelphia and Washington, D.C.

“US Airways is not big enough in terms of their route structure to compete effectively with the competitors that have now merged,” Cordle said. “They know over time when their labor costs go up, no one will want to invest in the airline.”

A merger would result in $1.2 billion in cost savings and revenue gains, US Airways has said. In April, it announced conditional labor agreements with American’s three largest unions, which support a merger.

US Airwaysí plan will also save 6,200 union jobs compared with American’s restructuring plan.

US Airways has not formally presented a takeover bid for AMR to the Bankruptcy Court, since American has the exclusive right to present a restructuring plan.

But Parker is ready to make his move and sooner rather than later.

“We’re not bad people,î Parker said as part of his pitch when discussing a merger. “We’re not trying to do anything except make American Airlines stronger. We think we can. We have two networks that fit together very well that will just create a stronger airline.”

Andrea Ahles, 817-390-7631
Twitter: @Sky_Talk