US Airways Circling the Wagons

The carrier's finances improve, but it falls behind in its plan to achieve sustained profitability.
By Eric Gillin ,

Updated from 8:26 a.m. EST

The red ink at

US Airways

(UAIR)

isn't running as deep as it was a year ago, but the carrier is falling behind in its postbankruptcy restructuring plan, weighing the sale of assets while asking disenchanted labor groups for even deeper sacrifices.

Bankruptcy enabled US Airways to drastically improve fourth-quarter results, with the carrier announcing a net loss of $98 million, or $1.82 a share, 87.7% lower than the net loss of $794 million, or $11.67 a share, it had a year ago. Net results include proceeds from US Airways' sale of its share in Hotwire, an online travel agency, and without unusual items, losses came in at $129 million, off from the year-ago loss of $352 million.

"Throughout the year, we made progress in reducing our losses, but regrettably, we are behind in our plan for achieving sustained profitability," said David Siegel, company CEO and president, in a statement. "We continue to face the cost and revenue challenges confronting the legacy carriers. Absent special items, none of these carriers reported a full-year profit."

Revenue was a bright spot, coming in at $1.76 billion, up 9.3% from last year, with passenger revenue per available seat mile, or PRASM, a measure of the revenue generated by flying a paying customer one mile, up 7.4% to 10.83 cents.

Also, US Airways had better balance between supply and demand in the fourth quarter. The carrier saw traffic, measured in revenue passenger miles, increase by 8.2%, while capacity, measured in available seat miles, rose just 2.3%. The end result is that US Airways filled 71.2% of its seats in the quarter, up 3.9 percentage points from last year.

Total operating expenses for the quarter came in at $1.84 billion, a 17.2% improvement from last year, but still not in line with revenue. Cost per available seat mile excluding the price of fuel and unusual items, came in at 10.22 cents, down 7.2% vs. last year, but still higher than other legacy carriers. In comparison,

AMR

(AMR)

, parent of American Airlines, had unit costs of 9.36 cents in the fourth quarter.

Indeed, management said expenses remain too high, despite the company's restructuring under Chapter 11 bankruptcy protection, and needs to cut costs by another 25% to remain competitive. As a result, US Airways will review every aspect of its operation to find ways to cut costs.

"Everything is on the table, from distribution costs, to labor costs, to how we schedule the airline," said CFO Neal Cohen. "In the fourth quarter, for example, our labor expense for mainline operations accounted for 42% of total revenue, compared to an average of 33% for the low-cost carriers."

The comment about labor costs, which were down 10.7% in the fourth quarter over last year, comes as the carrier renegotiates contracts with labor unions, which have chafed at management demands for deeper cuts after slashing their own pay and canceling their pension plans last year. On Dec. 16, pilots represented by the Air Line Pilots Association called for Siegel and Cohen to resign. Less than a month later, flight attendants represented by the Association of Flight Attendants sued the company for breach of contract.

Some of the enmity between unions and management has abated in recent weeks. On the conference call discussing earnings, the company said it had reopened negotiations and made progress with work groups and planned to meet with them again on Friday afternoon. "We all share the same common objective: the long-term success of US Airways," said Al Crellin, executive vice president of operations.

The situation is critical. US Airways said it needs to make changes to meet government terms on a $900 million loan guarantee from the Air Transportation Stabilization Board, which backs a $1 billion loan that helped the carrier emerge from bankruptcy last year. At the end of the fourth quarter, the carrier said it had $1.84 billion in cash, $1.29 billion of that unrestricted, and was in discussions with the ATSB to stay in compliance with the loan terms.

While US Airways aims to cut costs, it's hedging its bets, retaining Morgan Stanley to explore the sale of assets, like its East Coast shuttle operations and slots in hub markets. American,

Delta

(DAL) - Get Report

,

AirTran

(AAI)

and

JetBlue

(JBLU) - Get Report

have all bid for the shuttle, which includes gates, slots and aircraft deliveries along the Boston-New York-Washington, D.C. routes.

With a failed $300 million bid to buy the shuttle in 1997, analysts say American may be the frontrunner. But in the last six years, the value of the shuttle has declined and analysts say US Airways will receive between $100 million and $150 million.

"The shuttle business changed a lot. In general there's smaller capacity on the shuttle. We and competitors are using smaller planes, there are fewer planes ready to roll up, and total business travel in the corridor has changed some," said Ben Baldanza, senior vice president of marketing for the carrier. "Right now, we feel it's performing acceptably."

US Airways said that no decision had been made on the asset sales, but noted that the company must do something this year to right the ship. For investors who have pinned their hopes on a post-bankruptcy resurrection on par with American's reversal of fortune, it remains unclear exactly how the beleaguered carrier will get there.

On Friday, shares rose on optimism that US Airways had turned a corner with labor and will be able to meet loan covenants, even if it means the carrier must sell assets to do so. US Airways shares rose 40 cents, or 9.5%, to $4.60.

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