The Ups and Downs at US Airways

Even as it gets a break from its bankruptcy judge and recovers from a holiday sick-out, it still faces big problems that could ground it

By Lorraine Woellert

Those who thought the worst holiday-travel fiasco in memory would doom US Airways (UAIRQ ) were wrong. On Christmas Eve, hundreds of the struggling airline's employees called in sick, forcing the bankrupt carrier to cancel 455 flights over four days. Thousands of stranded travelers spent Christmas at the nation's airports, and mountains of misdirected baggage piled up.

The grueling episode took a toll on US Airways' bookings for the next few days, but reservations have since bounced back, and the Arlington (Va.) outfit is returning to what passes for normal these days. There are other reasons for optimism: GE Capital (GE ) threw US Airways a lifeline in December when it negotiated a lease and financing deal that freed cash and will save the airline $80 million a year. It's also in talks to ease the terms of a $900 million federal loan guarantee.


  While a few hundred employees nursed their sick-out in December, their unions were pitching in to keep US Airways aloft. On Jan. 5, the airline was set to win $94 million in concessions from its 5,200 flight attendants. When all the final deals are in place, the carrier that once had the industry's highest labor costs will have slashed $1 billion in labor expenses. "Airlines are hard to kill," concedes Kevin Mitchell, chairman of the Business Travel Coalition, a lobbying group.

One big wild card remains. US Airways and its 9,000 mechanics remain at loggerheads, and on Jan. 6 a bankruptcy court judge abrogated the labor group's existing contract and replaced it with a pact that will shave about $300 million a year from mechanics' pay and benefits. The International Association of Machinists said earlier that if the judge canceled the current agreement, the union will put the court's contract to a vote of its members.

What would happen next is anyone's guess. If mechanics give a thumbs-down to the court-imposed deal, a wildcat strike could erupt, a move that would make the Christmas meltdown look like a day in the park. "If [the mechanics] believe US Airways is a lost cause, they have nothing to lose by shutting it down," says Vaughn Cordle, CEO of AirlineForecasts, a consulting group in Washington, D.C. "There are enough disgruntled employees, particularly machinists, that they could put US Airways into liquidation."


  A number of employees might not care what happens to the nation's seventh-largest carrier, but plenty of others are rooting for US Airways to pull through. Major travel agencies, for one, aren't giving up on it. "Travelers need options," says Laurie Alexander, a spokesman for Carlson Wagonlit Travel in Plymouth, Minn. "If we were to steer travelers away, we would not be helping their cause."

Airline executives might gripe that excess capacity is driving down profits, but planes aren't flying empty: Load factors for the industry are approaching levels not seen since before September 11, 2001.

Even without labor upheaval, however, a safe landing for US Airways is far from guaranteed. Wary customers are rushing to cash in their frequent-flier miles. And when the carrier kicked off its annual winter "Sun Fares" sale to southern climes on Jan. 4, the fares were startlingly low -- $49 one-way from Philadelphia to Tampa, for example. The sale is less about turning a profit than filling empty seats during the slowest travel time of the year.


  The deep discounts point to one of US Airways' biggest challenges: Competing with low-cost rivals such as Southwest Airlines (LUV ) and AirTran Holdings, which are taking advantage of the legacy carrier's fragile condition to gain a footing in its key markets. On Jan. 5, Southwest said it would begin service in Pittsburgh, where US Airways is the dominant carrier, in May.

It will take more than the free coffee and Tastykakes that execs handed out to New Year travelers to bring the outfit back. But the death knell hasn't yet sounded for US Airways.

Woellert is a correspondent in BusinessWeek's Washington, D.C., bureau

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