Thursday, May 19, 2005

In the end, US Airways fell victim to the same dilemma that has ruined many companies: high costs and tough competition.

The problems forced the Arlington airline yesterday to agree to merge with America West, which after 66 years of flying will save it from liquidation.

The merger of the two companies would form, after regulatory and shareholder approval, the nation’s fifth-largest airline — one that could provide stiff competition for Southwest Airlines, the nemesis that helped sink US Airways.

Last year, Southwest Airlines started service at Philadelphia International Airport, competing on many of the same routes that US Airways had dominated at the airport.

The competition was shaping up as a repeat of Southwest’s entry into Baltimore-Washington International Airport 12 years ago, where it soon overtook US Airways and became the airport’s biggest tenant.

“When competitors smelled the blood, they laid more flights on US Airways and cut prices,” said Michael Mooney, senior vice president of the Boyd Group, an aviation industry consulting firm. “So it just became a vicious cycle.”

US Airways used the “hub-and-spoke” operating system of many large airlines, which involved flying large jets between major cities and clustering the flights around peak flying times.

Southwest Airlines, like other low-cost carriers, operated with “point-to-point” service, which involved using midsized jets to fly between less-expensive airports and changing flight schedules frequently to keep passenger loads high.

The steady decline of US Airways was ironic for an airline that was praised on Wall Street in the early 1980s as one of the industry’s most profitable.

From a 1939 start-up as a mail carrier, the predecessor to US Airways carried its first passengers in 1949 from Washington to Pittsburgh.

It built large hubs in Charlotte, N.C., and Philadelphia in the early 1980s.

The decline started in the late 1980s, when US Airways spent $2 billion merging with Pacific Southwest Airlines and Piedmont Airlines. The deals saddled US Airways with huge union contracts, debt and a difficult-to-manage variety of aircraft.

In addition, fuel costs shot up in 1991 during the Persian Gulf War, forcing the company to lay off 7,100 workers.

US Airways tried to negotiate a merger with United Airlines in spring 2000.

The deal collapsed in August 2001, when the Justice Department refused to approve it amid antitrust concerns.

While US Airways awaited regulatory approval, some of its regular passengers fled, and the airline that had been profitable throughout the mid- to late-1990s plunged into the red.

A month after the Justice Department rejected the merger, terrorists struck on September 11, causing East Coast passenger loads to drop by half on routes where US Airways made most of its money.

Ronald Reagan Washington National Airport, where US Airways is the biggest tenant and operates 188 daily flights, was closed for 23 days.

The airline nearly saved itself by declaring bankruptcy Aug. 11, 2002.

The bankruptcy was “brilliantly executed,” Mr. Mooney said, allowing US Airways to reduce labor-contract, pension and contractor expenses by $2 billion.

It emerged from bankruptcy in March 2003 with $900 million in federal loan guarantees.

However, the airline overlooked higher fuel costs and the continuing high costs of its operating structure, Mr. Mooney said.

“When that came unraveled, the company came under intense pressure from competitors,” he said. “They had to go back for more concessions, which leads to more employee frustration.”

US Airways tried again to spare itself by declaring bankruptcy on Sept. 12, 2004.

However, its financial condition continued to deteriorate with rising fuel prices, demoralized employees and fleeing customers.

“Everybody had September 11, everybody had fuel problems and everybody had labor problems,” said Terry Trippler, an expert on airfare. “It just hit US Airways a little harder.”

However, the takeover by America West could be good news, Mr. Trippler said.

“You’re going to have a large low-fare carrier on the scene,” he said. “This is going to be one that does battle with Southwest Airlines. The consumer’s going to win on this one.”

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