Could it be that Stephen Wolf has made a professional misjudgment? Remote as that possibility may seem, the question is at least being pondered now that US Airways' future hangs in the balance, precariously positioned between either becoming the global carrier Wolf so dearly wants or the second-tier US 'regional' he so clearly dreads.
Ultimately, as he is prone to do, Wolf might still get his way, but even he could not have predicted the sheer length of time during which a total stalemate would reign between the management and the unions at this troubled airline. Wolf's confession to employees earlier this year, nearly 18 long months after he took the helm, that the airline had achieved 'no progress whatsoever' towards putting in place a competitive cost structure was probably one of the most difficult admissions he has ever had to make. Even more startling, for a man who scorns public displays of emotion, Wolf says he will be 'heartbroken' if his dream for US Airways fails to materialise.
He regards himself, with much justification, as a rebuilder of airlines. To be remembered instead as the man who railroaded US Airways into the US north-east corner would be a personal blow. So why has he taken on this highly-charged challenge and what are his chances for success?
In January last year, Wolf ended a semi-retirement to become chairman and chief executive officer at the then-named USAir. As chief executive at United Airlines until 1994, he had hammered the airline into shape before apparently stepping out of a 30-year career in the industry and joining US investment management company Lazard Freres. But shortly after joining in August 1994, he was appointed advisor to the chairman of struggling Air France. And after a relatively quiet spell in Paris, he took up the helm at USAir in early 1996.
Within a month he had appointed Rakesh Gangwal president and chief operating officer. Gangwal joined the carrier from his position as vice president, planning and development, at Air France - a post he took up during Wolf's tenure there as advisor. The two had worked together at United and they wasted no time putting together a five-point business plan that would reshape USAir, give it a new name and transform it into the world-class, global carrier of their visions.
It was, according to Gangwal, a 'very troubled-profile company' that they inherited. It had acquired $2.9 billion in debt between 1990 and 1995, had a poor reputation for service and was being targeted in key domestic markets by low-cost carriers. As a badly sewn-together amalgamation of several US airlines, including Allegheny, Piedmont and PSA, it also suffered from internal disputes.
As challenges go, Wolf seems to have found that combination of woes irresistible. 'Wolf saw it, and still sees it, as an airline that has a lot of potential if those challenges can be overcome,' says Philip Baggaley at Standard & Poor's. 'I'm sure he was attracted to that.'
The business plan put together to remedy US Airways' many ills is described by analysts as 'classic Wolf' and has them purring their approval. The airline needs to become one of choice, not of convenience; there should be a company culture change; an ageing, expensive and hodge-podge fleet must be rationalised; the route network must expand; and, most fundamental of all, the airline must achieve a competitive cost structure.
On the first two points, Gangwal and Wolf have much to be pleased about and they lavish superlatives on what has been achieved by the company's 42,000 employees over the last 18 months. The airline made a record profit of $263 million last year and climbed dramatically in the US Department of Transportation's rankings of on-time arrivals, customer satisfaction and other performance monitors. But it is on the last point - the cost structure that Gangwal insists they 'cannot take a pass on' - that so much has come unhinged. Despite the good news, the executive duo say they are being forced to put on hold company growth and aircraft acquisitions because they are unable to reduce baseline costs which are among the highest in the industry and are crippling the airline's chances of standing up to growing competition from low-cost operations such as Delta Express, Southwest Airlines and ValuJet.
Just one example highlights the problem that Gangwal and Wolf fear the airline will keep facing in its prime markets over the next few years. Between November 1995 and February 1996, US Airways earned a $182,000 profit serving the Baltimore-Providence route in the northeast corner of the US, even though load factors averaged just 53 per cent. But for the same period one year later, despite load factors that increased to 65 per cent, the airline lost $2 million. The reason? Southwest Airlines had moved onto that route, reducing average fares from $107 to $53. US Airways' cost structure cannot support those fare levels.
Chief among Wolf's targets when he set about reducing costs was labour, beginning with the pilots. However talks with the pilots' union, the Air Line Pilots Association (Alpa), have dragged on for some 16 months, and Wolf finds himself in the somewhat humiliating position of having to admit that he is no nearer an agreement than he was when he first joined the company. Consequently, he is also unable to confirm a $14 billion, 400-aircraft order placed with Airbus last September, a deal which is contingent on having a competitive cost structure in place.The airline has already lost delivery slots on 57 of those A319s and A320s that were due to be delivered between now and 1999, something Gangwal describes as 'nothing short of a shame and a tragedy'. Wolf says the moment any agreement is reached, he will be on the telephone to Jean Pierson, managing director at Airbus, to try and claw back some of those '99 or maybe even '98 deliveries, but as each day goes by the prognosis looks bleak.
Also on hold is a $500 million plan to purchase the prestigious USAir Shuttle service that ferries high-yield passengers between Washington D.C., New York and Boston - which American Airlines is also chasing - and a $300 million expansion plan for the airline's Philadephia hub. Frozen too, are plans to establish a new midwest US hub and to find a new international alliance partner after breaking its link with British Airways. With so much on hold, Gangwal says that the inability to reduce costs is now 'starting to paralyse our company'.
Gangwal further warns that the company is unable to move forward with its $1.5 billion widebody purchase plans. 'Discussions with Boeing and with Airbus have lost all legitimacy because we are unable to confirm our narrowbody order,' he says. Gangwal claims that if they are unable to affirm their narrowbody order with Airbus by 30 September, the manufacturer will cancel the deal.
Thus, Gangwal and Wolf have set the clock ticking in a frustrated attempt to shatter the deadlock and give the issue some sense of urgency. If the aircraft deal is cancelled, then a new and dramatically different business plan will be drawn up - one that will see US Airways, albeit resplendent in its new livery, retrenching into the north-east and becoming a short-haul carrier, or 'regional' - Wolf spits out the word with obvious distaste.
Mike Oakey of Alpa says the pilots are no keener on that option than Gangwal and Wolf, but insists that putting in place a competitive cost structure has nothing to do with pilots pay. 'We want to grow,' says Oakey. 'But our hands are tied because we are not the leadership. The people who can do something about costs are the leadership. We have to expand our networks - short-haul is expensive. But the pilots cannot do anything about that - that is a management decision. We want to see active growth, but our definition of growth means more jobs, more airplanes and more routes. We want to do everything Mr Wolf has said he wants to do.'
Oakey says the pilots find it hard to swallow demands for a pay cut at a time when US Airways is reaping record profits and all other US airlines are hiring or giving pay increases to their existing employees. It particularly rankles with them that the company is warning of furloughs for 103 pilots by the end of the summer as part of its contingency plans for downsizing. 'They talk of growth to the press,' complains Oakey, 'but they are physically downsizing the company.'
Alpa wants a 'modest' pay rise, believed to be around 3 per cent, instead of the 12.5 per cent pay cut that management is believed to be seeking from the pilots. Oakey argues that even if the pilots agreed to a 50 per cent cut, it would only reduce the airline's cost per available seat mile to around 11.6 US cents - still some 2.6 cents above the 9 cents level their competitors average - so the cost structure problem would not be resolved.
Nor does Alpa appear to believe management's statement that Airbus will cancel the aircraft deal in September. 'Continental, American and Delta have all signed long-term deals with Boeing. You are not going to tell me that Airbus is not interested in a 400-airplane deal with us,' says Oakey.
Alpa has come up with its own business plan in which it endorses the idea of setting up a low-cost, low-fare operation within the company- similar to Delta Express or United Shuttle - for those routes that face low-cost competition. But the plan also calls for cost reductions that do not 'negatively affect the pilots' income and worklife'; allows for 'moderate, reasonable' increases in pay rates; and also provides for career security and 'real opportunity for career growth and development'.
The fact that, so long into the negotiations, the two sides seem still to have such remotely diverse agendas, explains why Wolf has stepped up the pressure in recent weeks, reducing the choices to two stark alternatives, and even begun negotiations with the airline's other unions, although the original plan called for the pilots' contract to be settled first.
Wolf's successor at United, Gerald Greenwald, recently described his own management style as distinctly different from Wolf's because, he said:'I don't believe in putting a gun to people's heads.' This time, however, Wolf seems studiously to have avoided the shotgun approach until he could see no other way. It is only in recent times that his statements have included threats of furloughs, downsizing and withdrawal from those markets that have continued to lose money for US Airways - almost $2 billion since 1990 - despite reporting overall profits in the last two years. The main loss-leaders are Florida, the east-west transcontinental routes and the Baltimore hub.
Most analysts agree with the necessity and wisdom of Wolf's tougher approach. Standard & Poor's Baggaley says:'It would not have been wise to continue in the current form indefinitely. They are participating in a number of markets where they have lost a lot of money in the past and they might as well pull out of them altogether if they cannot get a competitive cost structure. The problem has been that there is no time-clock ticking as far as competitive pressures are concerned; they exist only as creeping incursions. There is a very real and large long-term [labour] problem, but no immediate deadline to encourage movement. Instead, it encourages people to procrastinate.' Baggaley speculates that the warning of furloughs in particular gives a sense of deadline and 'might help to spur action'.
Vivian Lee, an analyst at BT Securities in New York, also welcomes any pressure that can move negotiations forward, pointing out that US Airways has on average a 20-25 per cent cost disadvantage versus the rest of the US industry. 'With the launch of Delta Express and Southwest's continuing expansion, the competitive environment on the east coast has gotten tougher,' says Lee. So much tougher, in fact, that its head-on rivals have doubled the cost gap: 'In the markets where there is direct competition, US Airways' cost disadvantage is probably more like 50 per cent,' she adds.
But Lee remains sceptical of the chances for a happy ending, despite what she describes as 'Herculean' efforts by management. 'I still can't envision the deal that simultaneously encompasses management's requirements while being acceptable to the collective bargaining groups,' she says.
Analysts do not believe Wolf is bluffing when he says he will carve the airline into a 'regional' if agreement is not reached soon. Timothy Ross at SBC Warburg agrees with the chief executive's assertion that his hands are tied without a union deal and that shrinking the airline would remain the only option. 'It's a route he is being forced down,' says Ross. But some analysts, and even some insiders at Alpa, seem to expect that a compromise deal will be struck, perhaps later in the year rather than by the September deadline. However, that view ignores the firm stand taken by both Gangwal and Wolf, who insist they cannot afford to wait.They argue they are already losing ground to the other US majors that have lower cost structures in place, new aircraft being delivered and new alliances being forged. They say the company is at the crossroads, so decisions are needed now.
One US labour relations expert believes that Wolf's motive for taking on the US Airways challenge was largely personal - success a second time would prove that his achievements at United were not a one-off. Baggaley agrees: 'He has enough money not to need to do this. It is mainly the challenge that appeals, I think.'
The appeal of the task, however, will be vastly diminished if Wolf feels unable to initiate the expansion plan he originally took to the airline. 'When I joined the company, the first thing I did was to stop the rightsizing,' Wolf has told his employees. 'I have no interest whatsoever in returning to rightsizing, taking one aircraft out of the fleet or laying off one person. But that is inevitable if we cannot put in place a competitive cost structure.'
Wolf says he would not have joined the company if he had thought 'rightsizing' was the only option. He has not quit yet, but - win or lose - Wolf will probably make the challenge of US Airways his last in the industry. The stakes are high, from the top all the way down.
Source: Airline Business
