Ready for Takeoff
Merger puts US Airways on the runway to success
Not long ago, if you bought a ticket on US Airways, you were taking a gamble--that the airline would still be operating by flight time. Most airlines, of course, have struggled since the Sept. 11, 2001, terrorist attacks sent the industry into a tailspin. Delta and Northwest are still operating under Chapter 11, and United Airlines emerged just this year from 38 months in bankruptcy.
But none of the big carriers have faced as much turbulence as US Airways. The company declared bankruptcy not once but twice. At one low point, during Christmas 2004, staffing shortfalls left whole banks of flights canceled, and 10,000 misdirected bags piled up on airport conveyor belts. In early 2005, the airline was close to liquidation.
Instead of shutting down the engines, however, US Airways has executed a feisty pullout. When the company posts second-quarter earnings this week, it's likely to be one of the few carriers reporting a profit. And Wall Street expects US Airways to stay in the black through the year. "It has been a pretty amazing turnaround," says William Warlick, senior airline analyst with Fitch Ratings. "They're beating the industry handily." The company's improbable success story shows that it is possible to make money in one of America's most battle-hardened industries.
While the old US Airways had headquarters in Arlington, Va., with all of its hubs in the East, the airline's new lease on life began in Phoenix, where executives at the discount carrier America West were gazing into the future--and growing worried. America West was a regional discount airline with a patchwork route map and its own cash shortfall: It was the first airline after 9/11 to obtain a government-backed loan to help ride out the aftermath of the attacks. America West had a cost structure lower than that of the big network carriers, which allowed it to price tickets more cheaply. But by late 2004, that edge was eroding. Other low-cost carriers, like JetBlue, were gathering steam. And United and US Airways were both in Chapter 11, which was allowing them to renegotiate labor contracts, cut pensions, and slash costs. The implications were dire: Once the discounter lost its cost advantage, fliers were sure to choose other carriers with wider reach and more perks. "It was going to be hard to survive in the future," recalls Doug Parker, who was America West's chief executive.
Desperate. The airline needed to expand its footprint and get more efficient, without adding to costs. It considered buying bankrupt discounter America Trans Air but was outbid by Southwest. Then Parker and his advisers started thinking about US Airways. Things were bad at the bankrupt carrier: The airline was so desperate it had asked some employees to work for free.
Yet there were opportunities others didn't see. If America West were to merge with US Airways, it could piggyback on the benefits of bankruptcy, without zeroing out its own stock price or turning control of the company over to creditors. America West couldn't simply tear up the leases on unprofitable aircraft and send them back to the lenders, for instance. But under bankruptcy protection, US Airways could. In a merger, America West could restructure the combined fleet as efficiently as possible. The idea was novel--no airline on the brink of insolvency had ever merged with a viable carrier. "At best, it appeared to be a huge long shot," says Parker.