Competition, fuel costs launch bankruptcy
Two days before discount airlines Southwest Airlines launched service in Philadelphia, US Airways warned regulators it might have to file for bankruptcy.
Four months later, low-fare competition from airlines like Southwest and skyrocketing fuel prices conspired to squeeze US Airways into seeking protection from creditors in bankruptcy court, airline analysts said Monday.
“US Airways said fuel will cost about $300 million more this year than what was budgeted. And they’ll lose about $450 million in revenue to low-cost competitors,” said William Lauer, chairman of Allegheny Capital Management Inc., a Tarentum-based investment manager.
“When you put those two numbers together, it’s a $750 million swing,” he said. “That’s huge.”
US Airways on Sunday filed its second Chapter 11 bankruptcy petition in a little more than two years. A “transformation” plan the airline outlined in court papers calls for the nation’s seventh-largest airline to slash debt and restructure operations.
The $450 million Lauer mentioned represents how much in fares the low-cost carriers will capture this year from US Airways. In addition to Southwest, other low-cost competitors include JetBlue Airways, America West, AirTran and, more recently, Independence Air.
“They have fares at levels at which they can make a profit, and the rest of the marketplace is condemned to losses,” Lauer said.
US Airways’ first Chapter 11 reorganization reduced the carrier’s operating costs by more than $1.2 billion a year by the time it emerged from bankruptcy in March 2003. About $1 billion came from labor concessions.
But a year later, low-cost competitors were still thumping US Airways and other big carriers. In late March, then-CEO David Siegel warned that Southwest “is coming to kill us” in Philadelphia.
US Airways has faced more than its share of low-cost competitors. That’s because its main marketplace has always been the East Coast, which is “over-saturated with low-cost carriers,” said industry consultant Michael Boyd.
“So US Airways can’t get its fares up,” said Boyd, head of The Boyd Group, in Evergreen, Colo. US Airways faces low-fare competition at nearly all of its other large bases aside from Pittsburgh.
For example, Southwest began Philadelphia service to six cities with one-way fares starting at $29 in May. By July, the airline doubled flights to 28 a day and expanded to 13 destinations.
US Airways had little choice but to slash fares dramatically. Its so-called “Go Fares” in Philadelphia fell from $740 one-way to Chicago, for instance, to between $79 and $339.
“They took those Go Fares and expanded them beyond Philadelphia to wherever they face JetBlue, Spirit, Frontier or AirTran,” said Robert Mann Jr., the head of R.W. Mann & Co. Inc., an airline consultant on Long Island. “The result is pricing pressure which makes US Airways’ cash flow that much worse.”
Independence Air began challenging US Airways in the lucrative Washington, D.C., market on Aug. 23. The carrier began daily service with one-way fares starting at $39 from Dulles International to six cities, including Pittsburgh.
The revenue squeeze would not be so acute if fuel prices had not spiked upward in late spring. The airline in 2003 had figured jet fuel would cost about 86 cents a gallon this year. A steady rise since late winter pushed them above $1 a gallon by summer.
“If it weren’t for fuel prices, we wouldn’t be having this conversation” about US Airways’ bankruptcy, Boyd said. He noted jet fuel represents about 15 percent of an airline’s overhead.
Mann said US Airways suffers more than other carriers when fuel prices spike because of its route network. Namely, its many short-hop routes around the Eastern U.S. consume more fuel per mile because take-offs burn more than double the consumption rate once in flight, according to experts at Embry-Riddle Aeronautical University, Fort Lauderdale.
Adding to US Airways’ competitive woes, Southwest last year arranged contracts for 85 percent of its 2004 fuel consumption at very attractive prices. US Airways, because of its damaged credit after its first bankruptcy, could not arrange such deals.
US Airways has been “a ticking clock of excess costs” that were never worked out from bygone acquisitions, Mann said. The carrier — known as Allegheny Airlines until 1979 — had acquired Mohawk, Piedmont, PSA and Ozark over the years. But many of their hubs were left intact and competed with one another.
“Now, those costs have come home to roost,” Mann said.