Houdini Blues
Issue 9, March 2002
Welcome to this the ninth issue of Houdini Blues, a subzine of TAP edited by Michael Lowrey, 6903 Kentucky Derby Drive, Charlotte, NC 28215. My email address is mlowrey@infi.net or call me at (704) 569-4269. Bonus points if you catch the music reference in the subzine name.
© 2002 by Michael Lowrey. All right reserved.
US Airways at the Brink
There's no doubt that the free market can be brutal. Companies that can't define their reason for existence in the market place face a tough go of it. Even having a famous name doesn't guarantee success, as Kmart has discovered. While Kmart's problem amounts to being caught between Wal-Mart and Target in the hypercompetitive low end mass retail market, businesses in other sectors that can't adapt to changing markets face an equally questionable future. Among those appears to be US Airways.
US Airways recently made headlines with its $1 billion fourth quarter loss and a loss for the year nearing $2 billion. While it would be simple to blame Sept. 11 and the ensuing flight restrictions at Washington National Airport for much of the airlines losses, that would be unfair. US Airways lost nearly another $1 billion during the first nine months of 2001. The carrier, despite being the sixth biggest U.S. airline and flying over 300 jets, has never really been able to present a business model that assured consistent profitability. Instead it has merely adopted economic models from others in the industry, and made ineffective use of them.
US Airways problems began in the late 1980s, when US Air bought Piedmont and PSA. The mergers were part of a widespread consolidation in the airline industry, based on an oligopolistic theory of cost that a bigger business will have lower costs.
Unfortunately, the airline industry faces not one big market but a mass of smaller markets. The expanded then-US Air was a mess. Its route structure, with major hubs in Charlotte, Pittsburgh, Philadelphia and Baltimore and smaller operations in Dayton, Syracuse, and Indianapolis, competed against itself. What had been PSA, meanwhile, was an isolated operation on the West Coast. That arrangement might have worked it US Air had taken on bigger carriers in the transcontinental market. With only six planes larger than a 727, that wasn't an option. What USAir was flying was virtually every sort of 80 to 140 seat jetliner in existence, creating serious spare parts, training, and crewing problems for the airline. High labor cost combined short flight lengths also produced among the highest cost per seat-mile flown in the airline industry.
After bleeding red ink and downsizing for a number of years, US Airways finally became a modestly profitable operation by the mid-1990s. This is not to say its underlying problems had been solved; its now three big hubs (Charlotte, Philadelphia, and Pittsburgh) still compete against themselves to a degree and the airline still had too many different types of planes. US Airways major routes were also becoming increasingly competitive, with low fare Southwest Airlines becoming a player in the mix. It's just that US Airways rode a strong economy into again having some freedom of action, enough cash and credit to transform itself into something other than what it was.
Its choice was to again follow the market, this time by forming a low fare division as United and Delta had done to battle Southwest head on. In addition, the fleet would be rejuvenated with a major buy of Airbus jets, the one plane type it did not own to date. (Perhaps the goal all along was to make the airline healthy enough to be bought out by a bigger carrier; United, of course, was willing to buy but the Justice Department said no.)
Unfortunately, like the early acquisition spree, this also turned out to be a bust. US Airways' low fare division, called MetroJet, was a flop and unable to compete effectively in the market place. Indeed, its elimination was one of the main cuts the airline made following the Sept. 11 attack. This is not to say that the rest of US Airways is anything close to profitable; it's not.
Faced with a more desperate situation now, US Airways is again restructuring. The key this time is seen to be increasing the number of smaller jets the carrier's commuter affiliates fly. In recent years, commuter airlines have replaced turboprops with smaller jets called regional jets, which seat up to 70 on many routes. These planes can also replace mainline jets on certain routes as well, making them a contentious issue in labor negotiations. US Airways' pilot union contract allows the commuters to fly only 70 of the jets. US Airways sees increasing this number substantially, as other carriers such as Delta and Continental have already done, as a means to regain profitability. US Airways is pushing the issue very hard; it's even retiring its 40 Fokker 100 jets, the smallest plane in its fleet.
Whether merely doing what everyone else in the industry is already doing will save US Airways is questionable, "Me Too" rarely carries the day in any market. An even in the airline industry, there's a limit to how long a carrier can bleed red ink. US Airways is not at the end of days yet, but unless it can define a reason to exist, its future is just as questionable as Kmart's.
The deadline for all games is March 24.