The winding down of Continental Lite has helped USAir increase yields and bounce back into profitability, and the airline now has agreements with three out of its four unions. However, the proposed employee board representation has thrown up a potential conflict with partner British Airways.
Investors in USAir, including BA, have been heartened by USAir's apparent success in reaching agreement with employees to provide up to half of the $1 billion in annual savings it needs. The third of four unions to sign new contracts, the flight attendants, agreed in May to $53 million in wage concessions and work-rule changes, adding to the $191 million wage reduction package from the carrier's pilots and $131 million from maintenance workers. In return, employees will get a 20 per cent equity stake in USAir and three seats on the board. The union memberships and shareholders must still ratify the agreements.
However, BA does not like the idea of employees exercising influence at such a high level. 'We disagree with direct union representation on the boards of companies,' due to 'the probability of conflicts of interest,' says BA chairman Sir Colin Marshall. His concern has raised questions about BA's long-term commitment to a restructured USAir, although the alliance brought BA $100 million of benefits in the year to 31 March. The union shareholdings could also dilute BA's interest, and BA is unlikely to invest more money.
USAir president Frank Salizzoni says the carrier's financial planning does not assume another cash infusion from BA. The Continuous Improvement Programme is expected to turn in $414 million in annual savings. But some remain to be confirmed, including $35 million which will only come if flight attendants agree to the removal of the no-furlough clause. 'We will try to get rid of "the clause" somehow,' he says.
USAir is 'cutting costs and back on track,' according to Salizzoni. He says that in March the airline turned in a $59.3 million operating profit and a $42 million net profit - the best one-month performance for USAir since 1989. This is expected to lead to second-quarter profits.
Much of the turnround is due to the pullout of Continental Lite, which attacked USAir's main US east coast operation and particularly damaged the Charlotte hub. When the low-fare competitor entered the region, yields dropped substantially and USAir was not expected to respond. But in a strategically important move USAir not only matched, but undercut Lite. 'We both lost our shirts,' Salizzoni admits.
The next step is to strengthen Charlotte by pushing Continental out of the nearby Greensboro hub altogether. 'Yields are back up. American is out of Raleigh-Durham. If we can get Continental out of Greensboro it will make Charlotte very profitable,' says Salizzoni.
USAir's fragility was underlined by British Airways' May decision to write down half of its $400 million investment. The writedown was precipitated by an auditors report which questioned USAir's viability and did not foresee a return of value to the equity investment in the near future. US accounting rules require a provision to be made when a diminution of value is likely to last for longer than 12-18 months, and BA felt that it would be prudent to include the provision in its UK accounts as well.
Source: Airline Business
