US Airways aims to put doom, gloom behind it

05-05-2002

Full disclosure: As a regular passenger, a shareholder, a city resident, and travel editor of a newspaper in a region where US Airways controls nine of every 10 flights, I am interested in knowing how well the airline is riding out the economic turbulence of recent years.

Fortunately, I don't have to depend entirely on news reports.

As a shareholder, I recently received my copy of its 2001 Annual Report, along with an invitation to the 2002 annual meeting on May 15 at Washington's Capital Hilton Hotel.

I suspect that for the vast majority of shareholders, including me, this document, with all of its facts and financial figures, is so dense that even looking through it is a daunting task. Forget about analyzing it to make an informed investment decision or considered vote on proxy issues.

Still, one doesn't have to be blessed with a head for numbers or the patience for fine print to make some observations about the airline's past, present and future.

For shareholders too busy to dip a toe into the report and readers who don't get a copy, here are some snapshots from it:

First, the realities of what we'll call organizational geography and hard numbers.

With its corporate headquarters in Arlington, Va., and its charter in Delaware, US Airways is the largest airline in terms of departures at its three hubs: Charlotte, Philadelphia and Pittsburgh. It is also the largest carrier in Boston and Reagan National in Washington, with substantial operations at LaGuardia in New York. All told, it served 93 airports in the continental US, Canada, Mexico and the Caribbean, Belgium, France, Germany, Italy, Holland, Spain and England (Gatwick and Manchester).

US Airways figures it carried 56 million passengers in 2001 on its 342 aircraft, which ranked it the nation's sixth-largest airline in terms of revenue passenger miles. At the end of the year, it employed 35,200 people (down significantly from the 43,467 of 2000) while its subsidiaries employed another 5,700.

Higher costs, lower revenues, record losses

It's no surprise that 2001 was a terrible year financially for US Airways, as it was for all air carriers, buffeted by a weakening economy and temporarily grounded by the events of Sept. 11.

US Airways suffered more severely than others because it offered so much service to Reagan National, which was closed weeks longer than other airports.

In 2001, the percentage of paying passengers on any US Airways flight decreased from 70.3 percent in 2000 to 68.9 percent, while its break even figure rose from 73 percent to 80.8 percent.

Translated into round figures, US Airways' operating income decreased by $1.18 billion, and its overall costs exceeded its revenues by $2.117 billion. That works out to a loss of $31.59 for each of its 65 million shares, as compared to a loss of $2.47 per share in 2000 and a profit of $2.69 per share in 1999. Losses in the first three months of 2002 were even larger.

Yet, at year's end, the airline reported cash reserves of $1.08 billion, including $264 million in grants from the Airlines Stabilization Act and $188 million of federal taxes which it collected but didn't pay until Jan. 2002.

In addition to that huge drop in passenger traffic, the other significant financial drain continued to be the high cost of operations. For example, on May 1, most pilots received a 17 percent wage increase.

Last year, it cost US Airways 12.46 cents per mile flown by every seat in its fleet.

That means it cost roughly $225 to fly a passenger from Pittsburgh to the West Coast.

By comparison, Delta Airlines reported operating costs of 10.14 cents per seat/mile, while Southwest operated its fleet for 7.54 per seat mile, costing them only $135 to fly a passenger the same distance.

All this negative news translated into the value of US Airways stock plummeting almost 90 percent last year. At the end of 2000, buoyed by the prospect of a merger with United Airlines, common stock sold as high as $48 per share, but it was as low as $4.15 a share during the fourth quarter of 2001. Recently, shares have been trading in the range of $5.50.

Some bright spots?

Although the company's operating revenues declined, certain revenue categories actually rose, but this was not necessarily good news for passengers.

For example, change and cancellation fees were up significantly, reflecting the increase from $75 to $100 in the fee charged every time a passenger with a restricted ticket had to change their plans. Also increased were fees for transporting animals, either in the passenger cabin or baggage compartment.

Ticket distribution cost is another brightening aspect of the airline's financial picture. During 2001, travel agencies sold approximately 80 percent of US Airways tickets. But the commissions paid to travel agents since 1999 fell from 5.7 percent to 2.8 percent last year. Because commissions have been eliminated from most domestic tickets, that figure is likely to fall even further in 2002. The down side, of course, is that passengers who use travel agencies have seen their booking fees rise significantly.

Not surprisingly, there has been a surge in the number of electronic reservations. In 2001, electronic ticket sales represented 76 percent of all sales, and roughly half were made through www.usairways.com.

An obligation to frequent fliers

One facet of US Airways annual report that held steady was the airline's frequent traveler program.

The airline reported that its passengers had accumulated mileage credits for 6.817 million free flight awards, up 500,000 from the previous year.

Even though that figure excludes accounts lacking sufficient mileage for a minimum reward and discounts those with excessive amounts of mileage, this represents a potential liability of $89 million to US Airways.

But because US Airways tightly controls the number of seats it makes available for frequent flyers, about 1.1 million per year, it is in no danger of depleting its stock of frequent fliers.

Rather, at the present rate, it has a backlog of six years and growing. After all, the longer people hold on to unredeemed awards, the less likely it is they'll ever be used.

Yet it might be a good time to dramatically increase the number of seats available for frequent flyers. Yes, the airline has been reducing its departures to increase the number of passengers on flights. But if, on average, 30 percent of the seats on a flight are empty, using them to work off that $89 million liability makes sense. In addition to encouraging folks to travel, it would also do wonders for its customer relations.

But not all is doom and gloom.

A new management team is evolving at US Airways and is making great strides in adjusting to the new realities. It continues to have an excellent operating record, an improving reputation and considerable goodwill. One indication of its vitality is its expanding number of destination cities.

Although no one can predict the future, there are plenty of reasons to believe the little airline that could will negotiate a safe and profitable passage through these turbulent times.

Just a few observations.

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