What happened at US Airways? Was it just September 11th or were things already starting to unravel before the terrorist attacks?

· US Airways was in trouble before Sept 11, in fact UAL was trying to acquire it in March 2000 but the Justice Department frowned on the deal and it died in July 2001
· After Sept 11, Reagan National Airport – a major US Airways hub — was closed for 3 weeks. It eliminated 111 aircraft and forloughed 11,000 workers to save expenses but lost $2.1 b in 2001.
· US Air hired Dave Siegel from Avis in May 2002. He previously worked at Continental and Northwest. He got $900 mm in government loan guarantees contingent on cutting $1 billion in costs mostly from wage concessions
· In July, US Air defaulted on some lease payments and its debt rating was cut to ‘selective default’
· Siegel got $550 million in wage concessions but needs $290 mm more from machinists and communications workers so he filed for bankruptcy to get control of the process

Are the airlines doing enough to bring back business? They keep attempting these rate hikes when perhaps they should be doing more to attract customers...

· Airlines have lost $1.4 b so far this year and are facing many big challenges including a severe drop in business travel due to the recession, higher costs post Sept 11, more skittish banks and credit agencies, and Internet-enabled fare shopping.
· Cutting fares to attract business would probably hurt cash flow in the short run so airlines are resisting the urge to do that
· Only Southwest is in a position to take advantage of its competitors weaknesses. The others are just trying to conserve cash until the economy revives

Is United Airlines next?

· UAL is in serious financial trouble – seeking $1.8 b in governement loan guarantees
· UAL has not publicly discussed bankruptcy as a restructuring option but it has $8.5 b in debt and is losing billions

What do the Ch. 11 filings mean to the flying public? What do they mean to the airline industry?

· Chapter 11 filings generally do not interrupt service as long as the airline can get debtor-in-possession financing to keep paying its bills. US Airways reported a full flight schedule today following its announcement
· Other airlines have filed for bankruptcy and emerged in good shape such as Continental, Northwest Air, and America West
· Other airlines have simply perished such as Eastern, TWA, People’s Express
· If a competitor ceases operations, it is generally good for the remaining companies unless that competitor is really a complementary provider.

What is Southwest Airlines doing right?

· I am writing about Southwest in my forthcoming book – Value Leadership.
· Southwest does everything right: it is a one-hop airline versus a hub airline which means that it can turn around planes faster; it operates only 737s which are cheaper to maintain and operate; it saves hundreds of millions by selling tickets online; it operates out of somewhat remote airports; it does not offer food; and its ticket prices are low.
· But its biggest advantage is its culture that hires people for attitude, pays them a lower base salary, gives them profit sharing and stock, and motivates them to serve customers well and to cut costs.

Peter S. Cohan & Associates
Two Turner Ridge Road
Marlborough, MA 01752
Office: 508-460-9348
Cell: 508-361-3805
Fax: 508-485-9627
E-mail: peter@petercohan.com
Http://petercohan.com