US Airways

(UAIR)

is reportedly scrambling to look into a sale of assets, as relationships with labor unions go from chilly to arctic.

On Thursday night, US Airways' flight attendants, represented by the Association of Flight Attendants, filed a lawsuit against the company for furloughing 552 attendants, which the union said violates a collective bargaining agreement. Under the labor agreement, the union said US Airways must offer voluntary furloughs before eliminating positions. This isn't the first time this has become an issue. According to the union, US Airways attempted to violate the contract back in June when it forced attendants to take involuntary furloughs, only to be stopped by an arbitrator.

"Management seems to be unnecessarily creating problems with its workers at a very delicate time for the airline," said Perry Hayes, president of the union. "Hopefully, US Airways management will work with us instead of against us in resolving this major dispute. That will clear the way to finally resolve the management problems that are preventing this airline from turning around and winning the support of its workers."

US Airways needs the support of its workers in order to cut costs and meet government terms on a $900 million loan guarantee that backs a $1 billion loan that helped the carrier emerge from bankruptcy last year.

Meanwhile, media reports said this week that David Bronner, chairman of the airline, hopes to pull together a plan by mid-February to fix the airline by selling shuttle routes on the East Coast and select hub operations to raise cash, while negotiating wage concessions from labor groups. US Airways didn't return a phone call for comment.

Bronner, who is also CEO of the Retirement Systems of Alabama, which owns nearly 40% of US Airways, has said the company needs to do more work in order to remain competitive, especially with

Southwest Airlines

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debuting service in Philadelphia this spring, where US Airways maintains a hub.

By June 30, US Airways must meet a variety of loan covenants on the government loan guarantee, including meeting earnings benchmarks and having enough cash in reserve, and that is why the carrier is considering a sale of assets. But industry experts remain doubtful that the airline will be able to sell gates and slots at its hubs, or to convince a buyer to pay up for its East Coast shuttle routes.

"In terms of assets, they're not nearly that valuable," said Ed Tobin, senior airline analyst at eCLIPSE Advisors, an aviation consultancy. "The competition is very aware of US Airways' straits right now. Why buy something you can get for free in the future? There's some value in the shuttle, but the person who is most likely to be interested in the shuttle is American, and they already have a minishuttle."

As the pressure mounts on US Airways to right the ship, its relationship with unions has reached an all-time low. On Dec. 16, more than 3,000 pilots represented by the Air Line Pilots Association called for the resignation of CEO David Siegel and CFO Neil Cohen, saying the pair had mismanaged the airline and failed to capitalize on the $1 billion in annual wage concessions already granted by labor.

And while US Airways may be forced to cut more jobs and ask for more wage concessions, Jack Stephan, spokesperson for the pilots union, said the company had yet to reveal its plans to the union. Furthermore, Stephan said the asset-sale news could be an attempt to jump-start negotiations with the union, since management hasn't broached the idea with the board of directors, where unions have representation.

"If this was something they looked at in real seriousness, then why wasn't Bill Pollack

chairman of US Airways' chapter of the ALPA notified; he's a member of the board of directors," said Stephan. "If this was a strategic option, why was there no debate at the board level? That lends itself to suspicion. Here's a company that less then a week prior was talking about buying 60 Airbus aircraft."

And buying aircraft may have just gotten more expensive for US Airways. On Friday afternoon, Standard & Poor's lowered the company's credit rating to B- from B, citing the carrier's fiscal situation and the fact that selling assets may be difficult, since other airlines are cash-strapped.

Somehow US Airways must find a way to stay competitive, but investors looking to take a gamble on US Airways' recovery should note that only one analyst covers the airline, Ray Neidl at Blaylock & Partners. And according to Neidl, who rates the carrier a sell, US Airways' problems will only get worse. He expects the company, which lost $90 million in the third quarter, to lose $583 million in 2003, followed by $1.962 billion in 2004.

"The model isn't working. Their cost structure is too high, and the low-cost carries have become extremely aggressive," said Neidl. "If they cannot modify costs, then yes,

they could be forced into bankruptcy."

Ultimately, labor unions may be the only group that can save US Airways, but after suing the parent company and calling for the resignations of top management, such an outcome will require a great deal of fence-mending.

"It's very hard to put any credibility into this management group," said Stephan. "To be absolutely clear, the first thing they have to do is pick up the phone and call us."