US Air Places Bigger Bet on Philadelphia

With its plan to buy Delta foiled, the airline's Philly hub takes on a greater role.
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A week after its bid for

Delta

(DALRQ)

collapsed in January,

US Airways

(LCC)

signaled its change of course by applying to fly between Philadelphia and China.

The application for a Philadelphia/Shanghai route showed that US Airways, foiled in its bid to acquire a hub at the world's busiest airport in Atlanta, would continue to rely on Philadelphia as its best hope for garnering a stronger position in international markets. Had the merger bid succeeded, the airline would most likely have continued Delta's pursuit of an Atlanta-Shanghai route.

The China application makes several statements. The first is a competitive one to Delta, considered a strong frontrunner to win the single scheduled 2008 China route authorization.

Another is to the Transportation Department, which will award additional China routes going forward. If Delta gets the 2008 route, then US Airways will make a strong case in 2009, since Philadelphia will be the biggest U.S. city without nonstop China service and US Airways will be the only surviving legacy carrier with no China routes. "We've got to throw our hat in the ring," US Airways president Scott Kirby told reporters last week at the airline's annual media day.

A third statement is to Philadelphia airport authorities, who have given the impression that they favor

Southwest

(LUV) - Get Report

over US Airways ever since Southwest began serving the city in 2004. It says that US Airways can do things for Philadelphia that Southwest never dreamed of.

CEO Doug Parker said US Airways will also consider flying between Philadelphia and Tokyo's Narita Airport, noting: "If you have planes flying to Shanghai, then Narita is the next step."

In a further effort to serve Asia, US Airways said last week that it had strengthened its relationship with Star Alliance partner Singapore Airlines, signing a code-share agreement that allows for connections with Singapore flights in Los Angeles, New York and San Francisco.

Additionally, the carrier has gradually boosted European service from Philadelphia. It added flights to Milan, Lisbon and Stockholm in 2006 and will add Athens, Brussels and Zurich in 2007.

An Underserved Market

To be sure, Philadelphia had long frustrated executives at the former US Airways, acquired in 2005 by America West Airlines, which then assumed its name.

Philadelphia is the nation's fourth-largest metropolitan area and the largest metropolitan area with a single airport. Yet Philadelphia International is only the 15th-busiest airport, partially as a result of inadequate infrastructure. For instance, it is the largest airport in the world with no inground fuel system, requiring that fuel be delivered to airplanes by truck.

US Airways' effort to upgrade passenger service levels at Philadelphia has been ongoing since a meltdown over the 2004 Christmas holiday, when thousands of bags were not turned over to passengers at the end of their flights.

The old US Airways began to fix the problems but was hampered by a lack of money. The new US Airways spent nearly $3 million to upgrade its facilities and equipment at the Philadelphia airport in 2006 and says it will spend more than $4 million in 2007 and about $20 million in 2008.

Meanwhile, Parker told reporters that US Airways will continue to take risks, despite the failure of the Delta bid. "In this business, so many people are afraid of taking a risk and coming out wrong," he said. "Most people play it safe, which we'll never do."

So far, the approach has worked for shareholders in the former America West, which took the US Airways name after a 2005 merger. Parker said a $1,000 investment in America West stock on Sept. 20, 2001, would have grown to $11,396 on March 14.

During the same period, a $1,000 investment would have grown to $3,429 at

AirTran

(AAI)

, the second-best-performing airline. It would be worth less than $3,000 at every other major airline, according to US Airways' compilation.

Despite the merger's success, Parker noted that his company tried three other schemes that did not work out so well.

A 2004 bid for bankrupt ATA failed. But Parker said allies at GE Commercial Aviation Services, a partner in the bid, suggested a similar effort might succeed at bankrupt US Airways.

Also in 2004, US Airways sought to increase its transcontinental flying. It abandoned the idea when competitors chopped fares. "We said a lot of things about how 'we're here forever,' and then we went away," Parker said.

The 2006 bid for Delta didn't work either, although Parker still believes it should have. "Those guys are going to come out

of bankruptcy, and they're going to make

United

(UAUA)

look good," he said.