- The Washington Times - Friday, May 7, 2004

A life-or-death struggle starts tomorrow for US Airways as it tries to hang on to its biggest and most profitable hub.

Southwest Airlines will begin flights at Philadelphia International Airport, bringing all the business skill that made it one of the nation’s most successful airlines to bear onto US Airways as it tries to avoid another bankruptcy.

“Philadelphia is far too important for us to retreat,” US Airways spokesman David Castelveter said. “We’ve dug in and we’re going to fight.”

In other cities where the Arlington carrier has competed with Southwest Airlines by flying similar routes from the same airport, US Airways was forced to give up some of its flights to the competition.

US Airways operates 392 daily departures at Philadelphia International. Southwest will start with 14 daily flights to six cities and expand to 28 flights to 13 cities by July.

This time, more is at stake than a percentage of US Airways’ market share.

“The threat is great because it affects the whole pricing structure that US Airways needs to support its high costs,” said Ray Neidl, an airline industry analyst for the Wall Street investment firm Blaylock & Partners.

A worst-case scenario is a return to the bankruptcy from which US Airways emerged last year, perhaps never to emerge again.

US Airways said in a quarterly filing with the Securities and Exchange Commission it would consider “asset sales or a judicial restructuring” — or bankruptcy protection — if it cannot match the costs of low-fare competition.

US Airways is pouring its resources into a marketing blitz. An advertising campaign that started last week in Philadelphia includes prime-time television commercials with free movie tickets, massages and flowers for customers it is courting and trying to keep.

Southwest countered by hiring people to stand on street corners handing out luggage tags, antenna toppers and inflatable airplane hats.

“It is one of the biggest new city openings in Southwest’s history and our first city to be announced since the tragic events of September 11, 2001,” Southwest spokeswoman Linda Rutherford said.

Beating Southwest will require much more than image for US Airways.

Southwest started at Baltimore-Washington International Airport in 1993, when the airport was a hub for US Airways.

Now, Southwest is the biggest airline at BWI and is building its own pier while US Airways is in sixth place.

A similar situation occurred in Los Angeles in the 1980s.

Southwest Airlines offers low fares daily, rather than as a sale price. It also operates with expenses the airline says are at least 40 percent lower than US Airways as a result of fewer pension obligations, efficient use of equipment and quick turnaround times between flights.

US Airways posted a $177 million loss in the first quarter of 2004. This week, Standard & Poor’s credit-rating service downgraded US Airways one level.

By contrast, Southwest reported a $26 million profit in the first quarter, 8.3 percent higher than a year earlier.

US Airways is preparing for the competition in Philadelphia by operating more like Southwest.

Its new chief executive officer, Bruce Lakefield, is changing many flights to “point-to-point” schedules, instead of the traditional “hub-and-spoke” used by most large airlines, or network carriers.

Point-to-point, which is the key to success for low-fare airlines, means the flights have no single base of operations. Instead, they change schedules frequently and fly between any cities where they can get the most passengers.

Hub-and-spoke means the flights originate from a single base of operations and later return there.

They are most effective for flights between major cities that require stable, frequent service.

“What we are doing is transforming our company,” Mr. Castelveter said. “If we did nothing to lower our costs and did not match Southwest dollar for dollar and flight to flight, we’d lose over $100 million in revenue. We simply can’t allow that to happen.”

US Airways’ fares at Philadelphia International, which are about the same as Southwest’s, range from $29 to $499 one-way.

The airline’s unions, which are angry the company is demanding more labor contract concessions from them, are saying the new business model looks promising.

US Airways officials say they need to drop their expenses by 25 percent to compete with Southwest.

“Southwest has the staying power,” said Darryl Jenkins, a professor at Embry-Riddle Aeronautical University.

But its victory over US Airways is far from certain.

Southwest pulled out of San Francisco International Airport in 2001 and Denver Stapleton International Airport in 1986 because of delays that backed up schedules throughout the airline’s system. Philadelphia International often deals with the kind of delays that plague many big city airports.

In some cities, such as Atlanta and Denver, network carriers coexist profitably with low-fare carries.

Philadelphia International officials say they believe US Airways and Southwest also will be able to coexist.

“I think they’re both going to win,” said Jeff Shull, Philadelphia International’s chief of staff. “US Airways understands the need to shift their business model.”

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