US Airways

[eldondre]

US Air Rating
Lowered by S&P;
Competition Cited

By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL


Beleaguered US Airways Group Inc., which recently hired investment bankers to help it sell assets, on Friday received more bad news. Standard & Poor's Corp. lowered the carrier's corporate credit rating to single-B-minus from single-B, citing rapidly growing competition from low-cost airlines and the potential that it may default on a $1 billion loan.

The nation's seventh-largest airline, which emerged from bankruptcy-court protection nine months ago, has been struggling despite cost reductions achieved in Chapter 11. "The industry is changing much more rapidly than anybody could have expected," David Siegel, the carrier's chief executive, told workers last week. He cited Southwest Airlines' plan to start serving US Airways' hub in Philadelphia in May, and JetBlue Airways' order for hundreds of new jets.

Mr. Siegel had intended to propose new work rules and productivity measures to US Airways' unions, but last week canceled meetings because of what he characterized as union opposition. US Airways employees already have made tremendous sacrifices in Chapter 11. Without further savings from them, US Airways is looking to Morgan Stanley to develop alternatives, including the sale of some assets, to get the company back into the black and help it meet its financial obligations.

David Bronner, US Airways' nonexecutive chairman, said last week that he has no target for sale proceeds, adding that the carrier may not wind up selling anything. "I'm trying to get everything on the table, and then let management and the unions look at [the options]," he said. "Will this let us get the last 5% to 10% toward breaking even?" Mr. Bronner, who runs a pension fund that is US Airways' largest investor, said he aims to have choices available when the board meets next month.

Weighing on directors' minds are financial covenants that kick in this spring and summer on a $1 billion loan backed in large part by the federal government. One requirement of the Air Transportation Stabilization Board, the government entity that provided $900 million of loan guarantees, is that US Airways' credit rating doesn't sink to "C." Its ratings remain on CreditWatch with negative implications.

Mr. Bronner acknowledged last week that any proceeds from assets sales would go toward paying down the government-backed loan.

Other requirements include: US Airways must keep a minimum of $1 billion of cash on hand through June; cash flow must be equivalent to fixed charges in the first six months of this year; and the company must meet a specific debt to cash flow ratio in the same period.

Standard & Poor's analyst Philip Baggaley said the latter two covenants "may be difficult to meet, depending on operating performance during the first half of the year."

Write to Susan Carey at susan.carey@wsj.com

Updated January 12, 2004

http://online.wsj.com/article/0,,SB1...ess_whats_news

[E_MYK]

There's no way US Air is going to be able to compete with Southwest when they start flights in May. Remember US Air was planning on getting rid of their Pittsburgh hub, they'll just get rid of Philadelphia instead. They'll probably be able to get more for the gates at Philadelphia than they would if they sold Pittsburgh. This is going to be good for everyone that flies out of Philly, be prepared for ticket prices to drop like a rock once US Air's strangehold on the airport is broken. We'll probably see AirTran step up flights if US Air leaves and maybe JetBlue will pick up a few of the gates. There may be an issue with international routes, not sure who would want those, maybe some more European airlines, KLM and such.

US Air probably isn't going to be around much longer its clearly the weakest of the old school airlines. Plus their unions would rather lose their jobs than give up concessions.

[eldondre]

if they sell philly they've given up arleady. i highly doubt they will try to operate out of pitt instead nad most analysts agree. they are more likely to sell off charlotte than philly. their int'l flights are out of philly and that is probably their msot profitable line. I wouldn;t mind seeingthem give up a few gates for domestic but US Air is somewhat competitive on int'l flights. While I liked Lufthansa (free wine), US Air's direct flight to madrid would have been woth the extra $100.

[Brian P]

Originally Posted by E_MYK

US Air probably isn't going to be around much longer its clearly the weakest of the old school airlines. Plus their unions would rather lose their jobs than give up concessions.

That's so funny, sad, and true. The unions would rather lose their jobs than give concessions, modernize, and try to work with the company. Think steel industry as another perfect example of this.

[E_MYK]

Originally Posted by eldondre

if they sell philly they've given up arleady. i highly doubt they will try to operate out of pitt instead nad most analysts agree. they are more likely to sell off charlotte than philly. their int'l flights are out of philly and that is probably their msot profitable line. I wouldn;t mind seeingthem give up a few gates for domestic but US Air is somewhat competitive on int'l flights. While I liked Lufthansa (free wine), US Air's direct flight to madrid would have been woth the extra $100.

US Air does get a lot of revenue from PHL but that will change when the low fare carriers invade. If they pull out their domestic flights then their international routes will suffer to some extent as well because they lose the connections. If they can compete domestically in Pittsburgh and Charlotte then it may make sense for them to consolidate their international flights out of those two locations and just provide connections to Philadelphia. Maybe they'll try to do a point to point international system by selling off their domestic routes in Philadelphia and keeping their european and carribean routes. If thats the case then only travellers from the Philadelphia area will be supporting those routes and that may not be enough.

Its all theory and I'm not very familiar with the ins and outs of the airline industry, but it will get interesting when Southwest comes. I am looking forward to some lower prices. The rare occasions that I do travel out of the area I end up flying out of Newark because the flights are cheaper.

[E_MYK]

Originally Posted by Brian P

That's so funny, sad, and true. The unions would rather lose their jobs than give concessions, modernize, and try to work with the company. Think steel industry as another perfect example of this.

It is both sad and funny. There was a need for unions when this country had no such thing as labor laws, minimum wage, etc. but in this day in age it just seems that they do more harm than good to everyone involved. I believe in letting the free market decide where labor is needed and how much that labor is worth. If you aren't happy with the pay in your career then you should change careers by either getting an education, furthering your education, or learning a new trade/craft.

[cc]

Originally Posted by E_MYK

If they can compete domestically in Pittsburgh and Charlotte then it may make sense for them to consolidate their international flights out of those two locations and just provide connections to Philadelphia.

That won't work. Pittsburgh was their main hub until 2002 and Charlotte was their second hub. The only reason they grew the Philadelphia hub was because they wanted to use it as a base for their proposed international flights (it just so happened that PHL worked out so well for them that they decided to base a substantial number of domestic services there as well). If US Airways thought they could successfully run PHL's current portfolio of international flights out of PIT or CLT they would have done so and not bothered with expanding the PHL hub (which was and still is technically the no. 3 hub in the US Airways system). As it stands, neither PIT nor CLT have the population base to justify a demand for international services beyond what they have now. Only PHL does. While some of this demand comes from connecting passengers who can connect elsewhere (thus it wouldn't matter whether the services is based at PIT or PHL), don't underestimate the value people have for non-stop services and how fungible connecting services are. In short, origin and destination passengers are what rule the day when it comes to an airline deciding where to base a route and PHL simply has much higher O&D than PIT and CLT combined.

Originally Posted by E_MYK

Maybe they'll try to do a point to point international system by selling off their domestic routes in Philadelphia and keeping their european and carribean routes.

There's virtually nothing to sell as far as domestic routes out of PHL are concerned. US Airways doesn't own the rights to fly those routes since, as I understand it, all those routes are open to any airline willing to fly them. A competing airline can simply start flying those routes without having to pay US Airways anything. The only domestic routes that can be sold are those to slot-restricted airports such as Reagan National and Laguardia (hence why they're contemplating selling their Shuttle) and to airports that have no more open gates like Boston.

Originally Posted by E_MYK

If thats the case then only travellers from the Philadelphia area will be supporting those routes and that may not be enough.

I agree that without a hub it is doubtful how much PHL can support internationally. I think just about all the Carribean destinations except San Juan, Cancun, and Santo Domingo and those served by Air Jamaica will be gone. AA will probably expand their San Juan and Santo Domingo services to fill the shortfall and some airline will definitely pick up Cancun. With Europe, I think AA might return to serving PHL-LHR (London Heathrow) since they already own rights to this route (Heathrow is one of the few trans-Atlantic routes where you have to have rights); Air France will probably add one more daily flight to Paris to make up for US Air's; and Lufthansa will add one more daily to Frankfurt and will add a Munich flight (taking over US Air's). KLM will likely return to serve Amsterdam and Alitalia (if they can get over their own financial problems) will take over the Rome service (and perhaps add Milan). Aer Lingus might enter PHL to service Shannon and Dublin (they were thining about this before but US Airways scooped them by starting service earlier). Madrid, Manchester, and Glasgow are likely gone for good, however. Nevertheless, if the officials at PHL play their cards right they can retain PHL as a decent international port. After all Boston has managed to retain a strong portfolio of European, Carribean, and, in the past, Asian flights despite not being a hub airport.

[cc]

By the way, it is ironic but I think the demise of US Airways might actually bode well for PHL finally landing a trans-Pacific flight which, unlike every other major metro area in the U.S. except Miami, it has never had. None of the Asian carriers are big enough to be able to move far enough down their list of potential U.S. destinations to where PHL might come into play. Only U.S. carriers are big enough. That said, none of the major U.S. carriers which serve Asia (which is to say all of them except U.S. Airways) was willing to commit an international flight to PHL because it was so dominated by U.S. Airways. Back when US Airways had an agreement with AA they would funnel traffic to Chicago to serve AA's routes. Now that US Airways has an agreement with United, they still funnel traffic to Chicago to serve United's routes. Without US Airways, there would be more incentive for a carrier (most likely Northwest which does not currently serve Asia from the East Coast) to simply fly trans-Pacific direct from PHL. NW would be a good fit too since they're getting new shipments of A332s which can cover the long distance efficiently and are small enough that they won't fear that a plane may leave PHL half empty (which it would if they used the Boeing 747s they typically use). I think it would be a good tradeoff for PHL to have to sacrifice some European routes (with the demise of US Airways) in order to get an Asian route since not having an Asain route is like a person having only one arm. For Philadelphia to be an player in the global economy it must be efficiently connected to both Europe and Asia. Every other major metro area (except Miami) is or has been.

[E_MYK]

Originally Posted by cc

There's virtually nothing to sell as far as domestic routes out of PHL are concerned. US Airways doesn't own the rights to fly those routes since, as I understand it, all those routes are open to any airline willing to fly them. A competing airline can simply start flying those routes without having to pay US Airways anything. The only domestic routes that can be sold are those to slot-restricted airports such as Reagan National and Laguardia (hence why they're contemplating selling their Shuttle) and to airports that have no more open gates like Boston.

Doesn't US Air own or lease the gates at PHL? As I understood it that is the issue and why US Air has a monopoly on flights into and out of Philadelphia. When they talk about selling the hub I assumed they were talking about selling the rights to the gates at PHL.

You are absolutely right about Asia-Pacific flights. So many companies in the Philadelphia area are doing more and more business in that region of the world and yet PHL offers no flights there. Dupont recently announced they are adjusting their entire global footprint placing a lot more emphasis on that region. Seems that the departure of US Air from Philly would be good all around. Another airline would most likely hire those people who lost their jobs when US Air leaves and the competition will benefit the entire region.

[cc]

Originally Posted by E_MYK

Doesn't US Air own or lease the gates at PHL? As I understood it that is the issue and why US Air has a monopoly on flights into and out of Philadelphia. When they talk about selling the hub I assumed they were talking about selling the rights to the gates at PHL.

Yes, they control the gates and those can be sold. They can't sell the routes, however. Well I guess they can but there will be no buyers since there's no market value in the routes. Anyway, I suspect the first thing to be sold will be their wholly-owned US Express commuter subsidiaries (PSA, Piedmont, Allegheny, etc.) since they can sell those and still have code-share agreements with the buyers so that they can funnel traffic into US's hubs. Mesa Air (which already runs commuter routes for US Airways) has expressed interest in acquiring the US Express subsidiaries.

Originally Posted by E_MYK

You are absolutely right about Asia-Pacific flights. So many companies in the Philadelphia area are doing more and more business in that region of the world and yet PHL offers no flights there. Dupont recently announced they are adjusting their entire global footprint placing a lot more emphasis on that region. Seems that the departure of US Air from Philly would be good all around. Another airline would most likely hire those people who lost their jobs when US Air leaves and the competition will benefit the entire region.

What will make or break a non-stop to Asia from PHL will most likely be freight (freight can be carried on passenger planes) since freight traffic is more consistent than the vagaries of passenger travel (this is how Portland managed to land direct flights to Asia and Europe - on Northwest and Lufthansa - despite there not being enough passengers to justify such flights). Freight traffic will also be less dependent upon the need for a hub. I have no doubt that the amount of business this region does with Asia will sooner or later demand a non-stop to Asia. So far, no such thing exists. Even UPS doesn't go there from PHL. Anyway, once such a flight is established it'll serve as a pipeline driving more business to this region. I really think we are disadvantaged in the global economy by being one of the very few major metro areas without non-stops to Asia. Miami and Boston are the only others I can think of and Boston's services (to Tokyo and Seoul) are merely suspended due to the economy and 9/11. Time for PHL to get with it.
By the way, I have my money on Northwest to start such a service shoud such a service be started. They have the largest presence in Asia of all the U.S. airlines and have a hub at Tokyo through which they can funnel traffic from a PHL-Tokyo trunk line to other places. They operate Airbus A332s which are designed for going long distances on rotues which may not justify a jumbo jet like the Boeing 747. Also, as a legacy carrier in Japan, I believe they can add routes to and from Tokyo without having to go through the long process of having to go though a U.S.-Japan aviation treaty (part of the reason U.S. Airways never served Asia). Lastly, unlike all the other major carriers, they have no significant presence on the East Coast so a PHL-Tokyo flight will not compete against an existing flight of theirs. I think the one major thing holding them back from this service was US Airways dominance over PHL. If US Airways is out of the picture. PHL should really make a play for NW to start PHL-Tokyo services. Portland was able to land such a service despite a much lower O&D passenger base, not being a NW hub, and a competing Seattle to Tokyo NW service. If Portland can do it, surely PHL can.