A mainline role model

By David Field in Phoenix 

Doug Parker has led America West's transformation into a low-cost network carrier, but the fuel crisis and tough competition still pose serious threats

To judge by the office wall lined with testimonials to his success in turning around a foundering carrier, Doug Parker's achievement at America West would seem secure and long established. After all, it is no small task to take a business that spent four years in bankruptcy, never firmly establishing itself in the marketplace, and then to recast it as a low-fare network airline that can make money while facing the mighty Southwest Airlines almost everywhere it flies.

The airline's ability to reinvent itself, to transform its basic business model radically while overhauling its entire operation, becomes all the more important as larger carriers struggle to find the right reincarnation. That includes attempts by bankrupt US Airways to follow suit and itself become a low-cost network carrier.

Indeed, Parker and other America West officials seem slightly peeved that neither the industry nor the markets have acknowledged their achievement of posting five consecutive quarters of profits, a record bested solely by the success of Southwest and JetBlue Airways.

It is, they stress, a long way from the airline's years of deplorable on-time performance, rapid executive turnover and labour strife. This is in addition to a just-below-the-surface reputation for questionable operating and safety practices. These date back to its 1991-4 period in bankruptcy reorganisation that culminated in a 1998 confrontation with the FAA and a subsequent $5 million fine, later negotiated down to $2.5 million.

By the time Parker took over as chairman and chief executive in September 2001, just days before the terrorist attacks, the airline was struggling to find its way and identify a strategy from its sporadic efforts that kept consumers confused about whether it was a discounter or not. Parker, who has just turned 43, had worked in finance and revenue management at the airline since 1995, after holding finance positions at American and then Northwest Airlines.

But when he took over, he says, he knew that a turnaround could not simply depend on a financial strategy. Every element of a four-part plan was interdependent, he says, from its restoration of operational integrity and reliability, to its cost-reduction, its need for a pricing philosophy, and an imperative to engage employees. "No one element is more important than the others but the need to engage employees runs across all of them. This is after all an airline that has had a history of not having the best labour relations when I took over," he says.

Some America West workers talk about previous management as "the dark ages" or "the bad old days". The new management team, which included experienced operational professionals from Northwest and TWA, stressed the need to let people know that they had the tools to operate a good airline. Parker says that constant communications, from quarterly web casts with workers to as many as a dozen employee "town halls" in a month, is a hallmark of the company.

Front-rank employees had to become more engaged in the operational turnaround that included reducing the number of aircraft out of service from nearly a dozen in 2000 to four two years later. In 2000, the carrier was cancelling about 6% of its flights, but by August this year, the completion factor was up to 98.8% of scheduled flights.

A fare departure
But it was the airline's restructuring of its fares, the first such move among US majors, that set it apart. In March 2002, America West cut most one-way fares, eliminated rules such as the Saturday-night stay on most ticket and cut walk-up fares by as much as 60%.

The result was an increase in yield of as much as 10 percentage points as travellers suddenly found that they could afford to trade up. Unit revenues rose by double digits as 2002 wore on, despite some nasty retaliation. The move made it clear the airline was a low-fare force. A similar fare approach has been adopted by Delta Air Lines at its Cincinnati hub and may spread across Delta's system, while others such as American have taken similar steps at major hubs.

In early 2003, the airline took another step that many others have since emulated, offering food for sale on board. Parker stresses that the fare policy and the food sales help differentiate America West from Southwest, its main rival at its Phoenix and Las Vegas hubs.

"We are a different product. We offer a first-class section, a major differentiator, and we offer airport clubs. We also offer a frequent-flyer plan that sets aside a higher number of seats for award travel than do competitors' plans. People ask how we can compete with Southwest, which has a close number two position at Phoenix and is number one at Las Vegas, ahead of us. The answer is that we are a different airline, a different offering, but one with competitive fares," he says.

Another differentiator from other low-cost carriers is the network of international codeshares that America West has developed, most recently with Virgin Atlantic, advancing a frequent-flyer link the two had had for several years. America West and British Airways also have a similar partnership. As of last month, America West launched codesharing with Royal Jordanian. For more Asian access, the carrier offers a frequent-flyer partnership with EVA Air of Taiwan, and with Northwest.

But one area in which America West lags behind Southwest is internet use; at Southwest the majority of tickets are sold over the web, and about 57% of revenues come through online sales. At AirTran Airways, the online sales rate is about 65% and at JetBlue the figure is almost 100%.

By contrast, at America West, according to Scott Kirby, executive vice-president for sales and marketing, it may be growing rapidly from the high teens last year but is just 22% for its own site and another 18% for other online sites. It costs the airline about $2 to process a booking on its own site. Kirby says the airline is seeking to boost the rate through such measures as best-fare guarantee, last-minute specials, and custom web-based tools such as HPagentlink, a "highly robust" tool that allows direct agent bookings, and AWAcorpLink for direct corporate bookings.

But America West remains committed to using the travel trade as a key sales channel because it needs the exposure it gets through the agents, whose America West tickets average 20% higher yields than those sold directly. Using the agents, however, forces it to pay the costs of the global distribution systems (GDS).

"We are paying up to $15 to a GDS on a fare like the $58 tickets we sell between Phoenix and southern California, one of our most commonly sold fares. Expedia and Travelocity end up being our most expensive outlets," Kirby says. "If the GDSs could see the long-term advantage of lower fees that would bring in higher volumes, we'd all be better off."

Everywhere cost-cutting is high on Parker's agenda. The airline has made it a priority in every area, from steps such as shutting a money-losing mini-hub at Columbus, Ohio, saving about $25 million through to selling advertising on boarding pass jackets for a $250,000 gain though the first quarter of 2005. Converting the airline's material-planning inventory to a "min-max" philosophy that keeps far fewer items on hand, has also saved about $16 million in a year.

All of these were part of a commitment to save on corporate purchasing, while capital expenditures fell from a budgeted $200 million to about $180 million this year. The airline has also outsourced heavy maintenance to Timco and others, but Parker insists: "We don't outsource quality assurance. We have our own quality assurance people on site. You work very closely with them."

Competitive pressures ahead
But America West's reinvention is still to be tested by unending upward fuel costs and waves of competition in a pricing environment that all concede is irrational. When America West moved to cut costs by increasing aircraft utilisation, the step brought it into some heavy competitive territory. It launched transcontinental services last year in a bid to cash in on these usually lucrative routes and to get more hours of flying in a day. However, this prompted a strong competitive response from American and others, that resulted in pulling down yields on the five cross-country routes it now flies. Jamie Baker, aviation analyst at JP Morgan, calls the transcontinental situation "a crisis".

In its recent schedule revisions, America West added heavily on routes between its two main hubs and southern California, with Las Vegas getting increased service in 11 markets. The airline has begun flying to Central American and Caribbean markets, with flights between Phoenix and San Jos‚ in Costa Rica, becoming profitable within their first year.

The carrier adds a number of Mexico cities from Las Vegas, Oakland, San Francisco and Los Angeles this autumn. Parker says: "We're looking for beach markets where there isn't a lot of nonstop low-fare competition." But, he says, aircraft utilisation, at 11h a day, is "pretty much peaking and it will be difficult to get it up much higher, but we will be growing with new markets. We can't let the other low-cost carriers move ahead".

To that end, America West began negotiations in October on a possible deal with troubled ATA Airlines, the Indianapolis-based group, formerly known as Amtran. It would either buy all of the business or key assets such as its Chicago Midway hub, or its new Boeing 737s and 757s. ATA has 14 gates at Midway, where it is larger than the main competitor, constant rival Southwest. Washington consultant Jon Ash says that such a move "would balance out the system". He says it is vital for the airline to expand eastward. Morgan analyst Baker has said America West's "route network sorely requires optimisation".

But growth is an area in which Parker would, by virtue of a financial officer's prudent outlook, move cautiously. His personal project since taking over has been cleaning up the airline's balance sheet, a task that become all the more daunting after the 2001 attacks dried up most airline financing. In fact, weeks before the attacks, America West was close to final agreement on a $200 million unsecured loan, a deal which promptly fell through.

However, within months it became the first carrier to win a loan guarantee from the newly created federal Air Transportation Stabilisation Board. That $429 million package, Parker admits, saved it and the airline has begun to repay the loan. The popular press has frequently held out America West as proof that government aid works. Since then, Parker has refinanced various loans and other financial instruments.

Cash is king
The financial discipline pushed the airline's cash position to a record high of $590 million at mid-year. Derek Kerr, the airline's senior vice-president and chief financial officer, explains: "Cash is king in our business and we have to be ready for the downturns."

Of course, no discussion of cost-cutting can ignore the elephant in the room, the oil price monster, and Parker regrets that the airline, like others, has not hedged its oil contracts more fully. As oil prices have gone up, its seat-mile costs have risen, with every one cent increase in the cost of fuel increasing the airline's operating expenses by $4.4 million on an annual basis. Its hedging for next year drops from 45% coverage for this year to 15% for the second quarter of 2005.

Citing the oil shock and per gallon increase of more than 40%, the airline said in October it would lose money in the third and fourth quarters this year. Unit seat costs had fallen steadily to about ¢7.72 per mile (¢4.8 per km), which without fuel would have been just over ¢6 per mile, but that steady quarterly improvement is ending, analysts say.

For Merrill Lynch analyst Mike Linenberg, the trend is a reversal, as America West's earnings had given him a string of upward surprises as costs dipped by almost 7% and the airline was, he estimates, posting operating margins of 3.4%. This was the same as American and slightly higher than Continental's, although lagging Southwest's margin of almost 13%, he notes.

Parker's insistence that improved service will keep revenues up had held true early in the year as revenue rose, often above industry rates of increase, but that has slowed. He had seen growth of as much as 9% for the year, but it will be no higher than 8%, with the fleet growing from 137 jets at year-end to 148 next year and then peaking at 160 aircraft.

He says that all costs except fuel will stay manageable despite newly agreed labour contracts. After several years of talks with its Air Line Pilots Association union, the carrier agreed a deal late last year. But the new rates cap at $138 an hour, starting at $118, which is better than Frontier's $157 hourly peak and certainly better than Southwest's rates of $160-$182 in hourly terms.

Union leaders insist they will catch up when the contract comes up for renewal in late 2006. Pilots and other union members protested when the airline's board awarded Parker a bonus of $1 million in addition to his $550,000 base salary for 2003 in a move to keep him at the airline.

As expectations of an annual loss grew in the autumn, some employees have again raised the issue. In fact, while crossing the ramp at Phoenix Sky Harbor airport, a baggage supervisor stopped Parker, saying it was wrong to award a bonus when the ramp operation could use more staff. Parker's response - that bonuses were irrelevant to the operation's needs - engaged the 20-year veteran for about 15 minutes. Parker, who cut his own pay after the 2001 attacks, and the supervisor agreed that "the most important thing is the operation". That core belief, Parker vows, will shape all future moves at America West.

 

Doug Parker Doug Parker was originally interviewed by Airline Business in August 2002, as America West was in the early stages of its transformation to a mainline low-fares model. Parker started out in 1984 with an economics degree from Albion College, Michigan. He followed up with an MBA from Vanderbilt University, Tennessee in 1986 before joining American Airlines as financial management officer. A fellow finance employee was Gerard Arpey, now American's chief executive. In 1991 he then moved to Northwest Airlines in the roles of vice-president (v-p), assistant treasurer and v-p for financial planning and analysis. Parker joined America West in 1995 as senior v-p and chief financial officer, adding schedule planning and revenue manage-ment to his duties in September 1997. He was named executive v-p in April 1999, having added sales and marketing, information systems and corporate affairs to his portfolio. He also served as president and chief executive of the Leisure Company, the vacation sales unit of America West Holdings. Parker stepped up to became chairman, chief executive and president at America West Airlines and its parent, America West Holdings, in August 2001. He is married with three children and he enjoys spending time with his family, running and watching baseball.

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Source: Airline Business