Usair's Frighteningloss Of Altitude

When D. Scott Mitchell began mapping out a trip to visit friends in Washington, D.C., the 42-year-old Buffalo (N.Y.) executive was debating whether to fly via USAir--his regular airline--or make the eight-hour trip by car. Then an ad for Continental Airlines Inc.'s new low-fare service caught Mitchell's eye, and he quickly snapped up round-trip tickets for himself and his wife for $157 each. Mitchell admits he didn't bother checking fares at USAir. "I didn't think they could come anywhere near," he says. The rub for USAir Group Inc.: the Arlington (Va.) carrier had a $125 fare at the time, 20% less than Continental's.

It's a tale that shows just how hard USAir is working to become competitive--and how little it's getting for its efforts. Beset by low-cost rivals such as Continental and Southwest Airlines Co., USAir is struggling to pare back the industry's highest operating costs (chart). Yet any progress it makes is threatened by new woes. It was hit by one blow on May 17, when 7,700 of the airline's ground-service workers--fearful of layoffs--voted to unionize. Then, on May 23, British Airways PLC Chairman Colin Marshall announced that unless USAir can drastically reduce its costs, he is mulling a write-down of his $400 million investment, dampening chances that BA will serve as USAir's financier of last resort.

For USAir, the consequences of all this could be dire. With a deficit that now exceeds $1 million a day, many analysts believe the airline--which has lost a total of $2.4 billion since 1988--could run out of cash by early 1995. "USAir is on the critical list," says Michael K. Lowry, president of Aviation Forecasting & Economics Inc., who predicts losses of up to $600 million this year on revenues that should hit about $7 billion.

USAir executives are quick to dismiss any talk of a cash crunch. Reports of USAir's death "are premature," says Chairman Seth E. Schofield. "There is not an immediate liquidity crisis." Schofield believes USAir's $370 million in cash on hand plus $150 million from receivables should be more than enough to sustain it as it tries to restructure. "We are at the point where we expected to be at this time," he says.

Indeed, even bearish analysts concede that USAir could pull back from the brink. They see Schofield's May 12 decision to postpone delivery of 40 Boeing Co. planes valued at $1.9 billion and cancel options on an additional 76 jets as a start. And some analysts say if it gets concessions from workers, the airline could raise more money on Wall Street.

Yet even Schofield acknowledges his task is daunting. His job won't be done, he says, until "we have permanently and fundamentally changed our cost structure." The 37-year company veteran recently initiated talks with the airline's four unions on ways to slash costs. He won't say how much he hopes to save, but union sources say USAir wants to cut labor costs by 20%, or more than $500 million annually.

NO FEAR. The unions, however, may not be in a giving mood. They're fuming that on May 20 the carrier switched its remaining freight- and mail-handling operations from its own employees to a subcontractor--a move intended to save $10 million a year. "It was an unconscionable act," rages Victor Mazzocco, an assistant general chairman of the International Association of Machinists, which may represent the ground workers. Wall Street analysts believe USAir could have to cede at least 30% ownership to employees in exchange for job and pay cuts and changes in work rules.

Schofield, meanwhile, is trying to make USAir's operations more efficient. In July, the carrier plans to expand "Operation High Ground," an effort to turn around USAir's planes within 25 minutes, vs. the current 45 minutes. Schofield says the program, now in effect for 22 short routes, will be expanded to 100--the equivalent of giving the carrier 12,000 more seats to sell.

Even that may not be enough, though. With low-cost rivals able to fly into nearby underused airports, some consultants believe the carrier should consider scaling back its hub-and-spoke system in favor of the shuttle system used by low-cost rivals.

USAir followers, however, say they don't sense the atmosphere of fear at the airline that prompted Northwest Airlines Inc. and Trans World Airlines Inc. to take drastic survival measures. "Company management is in incredible denial," says one bond analyst. If the sea of red ink doesn't produce the crisis mentality that's needed, it's hard to see what will.

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