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A MAGAZINE FOR AIRLINE EXECUTIVES

Ta k i n g

y o u r

a i r l i n e

OCTOBER 2003

t o

n e w

h e i g h t s

EXTREME AIRLINE MANAGEMENT

A conversation with …

David Siegel, CEO, US Airways INSIDE

Traditional carriers launch low-fare subsidiaries

How airlines weathered "the perfect storm"

Cathay Pacific Airways’ crisis management process

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industry

Extremely I

t is probably a large understatement

bankruptcy process, the airline was able

to say that the 19 months that David

to successfully restructure itself — “we

Siegel has led US Airways have been

looked at our strengths and weaknesses

eventful. In March 2002, when he

and devised a way to leverage our

assumed the helm of the airline after

strengths and turn our weaknesses into

leaving his post as chief executive offi-

assets,” Siegel said. A US$240 million

cer of Avis Rent A Car System, Siegel

equity investment from the Retirement

faced a daunting task — reinvigorating

Systems of Alabama Holdings LLC, and

an airline seeking to reposition itself

a US$1 billion loan, US$900 million of

to better compete in a radically trans-

which was guaranteed by the U.S. Air

formed industry.

Transportation Stabilization Board, gave

Facing continued losses in the aftermath of the events of Sept. 11, 2001, US

Photo by Derek Pedley

Prepared for the Future

A conversation with David Siegel, president and chief executive officer of US Airways

US Airways the liquidity it needed. Modified labor agreements with the airline’s unionized employees helped

Photo courtesy of US Airways

March, as scheduled, US Airways “ Incompleted its ‘fast track’ emergence from bankruptcy. ”

significantly reduce costs. Through bankruptcy, the airline also was able to address other key issues, such as achieving the distress termination of the

US Airways has seen its operations take off after rapidly completing a corporate restructuring.

defined benefit pension plan for its pilots,

Airways, the seventh largest airline in

which was underfunded by US$2.5 billion,

Under Siegel, the airline announced

the United States, began seeking ways

and replace it with a defined contribution

the ambitious purchase of 170 regional

to improve liquidity, increase revenues

plan to supplement the Pension Benefit

jets from Bombardier and Embraer. US

and reduce its costs, which, at the time,

Guaranty Corp. payout.

Airways signed codesharing agreements

were among the industry’s highest. As

In March, as scheduled, US Airways

with Lufthansa German Airlines and

the pressure to restructure mounted, the

completed its “fast track” emergence

United Airlines and was approved to

airline in August 2002 filed for Chapter

from bankruptcy. Now, the rejuvenated

join the Star Alliance. These measures

11 bankruptcy protection, which

airline, which earlier this year was

significantly impacted the airline’s bottom

shielded the airline from creditors, giv-

ranked first in the annual Airline Quality

line. In the second quarter, the airline

ing it time to reorganize. Through the

Rating, is aggressively competing.

reported a net income of US$13 million,

october 2003

39


industry

Extremely I

t is probably a large understatement

bankruptcy process, the airline was able

to say that the 19 months that David

to successfully restructure itself — “we

Siegel has led US Airways have been

looked at our strengths and weaknesses

eventful. In March 2002, when he

and devised a way to leverage our

assumed the helm of the airline after

strengths and turn our weaknesses into

leaving his post as chief executive offi-

assets,” Siegel said. A US$240 million

cer of Avis Rent A Car System, Siegel

equity investment from the Retirement

faced a daunting task — reinvigorating

Systems of Alabama Holdings LLC, and

an airline seeking to reposition itself

a US$1 billion loan, US$900 million of

to better compete in a radically trans-

which was guaranteed by the U.S. Air

formed industry.

Transportation Stabilization Board, gave

Facing continued losses in the aftermath of the events of Sept. 11, 2001, US

Photo by Derek Pedley

Prepared for the Future

A conversation with David Siegel, president and chief executive officer of US Airways

US Airways the liquidity it needed. Modified labor agreements with the airline’s unionized employees helped

Photo courtesy of US Airways

March, as scheduled, US Airways “ Incompleted its ‘fast track’ emergence from bankruptcy. ”

significantly reduce costs. Through bankruptcy, the airline also was able to address other key issues, such as achieving the distress termination of the

US Airways has seen its operations take off after rapidly completing a corporate restructuring.

defined benefit pension plan for its pilots,

Airways, the seventh largest airline in

which was underfunded by US$2.5 billion,

Under Siegel, the airline announced

the United States, began seeking ways

and replace it with a defined contribution

the ambitious purchase of 170 regional

to improve liquidity, increase revenues

plan to supplement the Pension Benefit

jets from Bombardier and Embraer. US

and reduce its costs, which, at the time,

Guaranty Corp. payout.

Airways signed codesharing agreements

were among the industry’s highest. As

In March, as scheduled, US Airways

with Lufthansa German Airlines and

the pressure to restructure mounted, the

completed its “fast track” emergence

United Airlines and was approved to

airline in August 2002 filed for Chapter

from bankruptcy. Now, the rejuvenated

join the Star Alliance. These measures

11 bankruptcy protection, which

airline, which earlier this year was

significantly impacted the airline’s bottom

shielded the airline from creditors, giv-

ranked first in the annual Airline Quality

line. In the second quarter, the airline

ing it time to reorganize. Through the

Rating, is aggressively competing.

reported a net income of US$13 million,

october 2003

39


industry

industry compared to a net loss of US$248 million

Alliance. We also needed regional jets

already phasing out turboprops.

for the year-previous period.

to improve our service to the dozens

However, we believe there will continue

of smaller cities that we serve. We

to be limited uses for turboprops in our

secured financing earlier this year and

system, especially to very small markets.

Siegel, who also previously served including president of the Continental Express subsidiary, recently discussed US Airways’ successes in preparing for the future. Question: It appears US Airways was able to successfully use the bankruptcy process to restructure the airline.

Q: The current conditions of the

Photo courtesy of US Airways

as an executive with Continental Airlines,

The New Revenue Reality

industry have led many airlines to

Multiple factors, including the rise of low-cost carriers, fare transparency and diminished passenger segmentation, have put an irreversible downward pressure on airfares.

“think outside the box.” Is this just a reaction to extreme circumstances, or do you believe this will become a vital part of the culture of the industry in the future?

By Steve Hendrickson | Ascend Contributor

Would you consider bankruptcy suc-

A: We have been thinking outside the

cessful for your airline? What were the

box for the last 19 months since I got

benefits? Were there any drawbacks?

here, completing a fast-track reorganiza-

Answer: When I made the decision

tion under Chapter 11 protection. It has

L

to join US Airways, I realized that the

made US Airways a more competitive

company needed to permanently reduce

airline with US$1.9 billion lower annual

its costs and restructure, ideally outside of bankruptcy. However, the responsible path to take was one that prepared us for the option of reorganization under the protection of Chapter 11. Our plan

Under the leadership of Siegel, US Airways has formed alliances with Lufthansa and United, been accepted into the Star Alliance and announced the purchase of 170 regional jets from Bombardier and Embraer.

was well thought-out, and we were

ately, most airlines have focused

reactions to an unprecedented shift in

pearance of premium-fare levels histori-

their attention on cutting operating

the industry’s passenger revenue equa-

cally paid by most business travelers.

costs, in many cases as a survival strat-

tion. This “new revenue reality” is driving

The two-tiered revenue model of old

egy. Indeed, several carriers have found

nearly all of the industry’s current efforts

is rapidly deteriorating, bringing fare

costs, reduced debt and a well-regarded

significant internal opportunities to

to effect dramatic change.

levels toward a new, less stratified mix

business plan. Undoubtedly, the take-

reduce expenses, improve efficiencies

away is that any business initiative

and lower overall unit costs. For others,

demand as a percentage of nominal gross

requires consensual participation by

cost pressures from external factors

domestic product fell by more than 26

all stakeholders and total commitment

such as oil prices, airport security pro-

percent from 2000 to 2002. Historically,

by every employee in the organization.

grams and various forms of government

the industry’s revenues maintained a

average fares fell so far so quickly is to

In the U.S. domestic market, total

of price points.

The Big Fall To understand how revenues and

committed to a fast-track emergence.

announced an order for almost 200

With the recent plane orders and expan-

taxation have proven more difficult, if

fairly tight correlation with the broader

understand the basic remixing of ticket

As I’ve said many times before, when

planes that have started arriving and

sion plans announced by Southwest,

not impossible, to manage or influence.

economy, but clearly, something has

prices being sold to travelers. The mar-

we came to the conclusion that we had

will continue through 2006.

AirTran and jetBlue, it is abundantly

changed in that relationship. Contributing

ket for trips between the east and west

to execute our plan with a Chapter 11

Q: Speaking of your purchase of

clear that low-cost competition will

to this historic drop is the near disap-

coasts of the United States provides a

filing, we jumped into the pool to swim

regional jets from Bombardier and

only grow. So now, every mature

startling example of this phenomenon.

some laps, get in shape and then get

Embraer, what led to this decision?

carrier including US Airways, needs

This corridor is characterized by a large

out. And while we had some difficult

A: One of the key elements of our reor-

to deal with this new reality.

set of long-haul origin and destination

challenges along the way, we remained

ganization plan was to generate additional

Q: With all the changes you’ve made,

markets, which use numerous competing

on track. Bankruptcy reorganization is

revenue through a substantial increase

are there more to come? How different

mid-continent hubs. For example, the

effective for reducing costs, but there

in regional jet flying. We couldn’t afford

will the US Airways of 2005 be from

Boston, Massachusetts, to Portland,

are many gut-wrenching decisions that

not to take that step.

the airline of today?

Oregon, market has no nonstop flights,

are part of the process.

Q: What role will these new aircraft

A: We have a history as a strong busi-

but there are more than 50 daily con-

Q: If “necessity is the mother of inven-

play in strengthening your airline?

ness carrier during the week, and we are

necting choices possible in each direc-

tion,” what innovative new thinking has

What kind of impacts will adding so

now exploring new ways to deploy our

tion via 18 hub operations offered by

emerged at your airline to overcome

many new aircraft have on your airline?

fleet for the different kinds of demand

seven operating carriers (and even more

perhaps the most challenging conditions

A: The new RJs will serve three main

we’re seeing on weekends. We’ve nearly

if codeshare offerings are included).

in the history of the airline industry?

purposes. They will allow us to replace

doubled our weekend service to the

A: We are focused on proven strategies

turboprop aircraft that customers prefer

Caribbean, from 40 weekday flights to 75

any of the largely undistinguishable

and tactics. We said we needed marketing

less than jet aircraft; initiate service to

on Saturdays. Clearly, a reinvigorated

connecting points, has come to typify

alliances, and we have done that. Our

new “thin” demand markets that even-

economy will ultimately determine when

the commodity nature of such routes.

alliance with United Airlines is already

tually could grow to warrant mainline

corporate and individual customers

Up to 2000, significant portions of

very successful, and we’ve begun our new

aircraft; and re-deploy current mainline

change their current buying behavior

the market paid vastly differing fares,

international agreement with Lufthansa.

flying that does not need larger aircraft

and, by extension, some of the moves

Early in 2004, we will join the world’s

to other markets that do require more

we make. We just need to stay focused

leading airline partnership, the Star

capacity, such as the Caribbean. We are

and execute our plan.

40 ascend

But the sudden focus on belt tightening is merely one of the most visible

This type of journey, through

The average fare among coast-to-coast journeys fell more than 25 percent from the third quarter of 2000 to the third quarter 2002 leading to a drop in revenues of about 29 percent even though the market overall experienced only a 4 percent traffic decline.

which reflected strong market segmentation. However, in the past two years, the price spreads have begun to disap-

october 2003

41


ExtremelyPreparedForTheFuture_OCT_2003