US Airways, Still Losing Altitude, Hasn't Hit the Ground -- Yet

An airline with such high costs can only survive and prosper if it can generate high yields.
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By now,

US Airways'

(U) - Get Report

announcement that it won't post a profit for the quarter is old news. The airline filed an 8-K, in addition to sending a letter to institutional investors after the close of trading Tuesday with the cheery news.

Many readers want to know whether or not this is the bottom and wonder what else can happen.

We don't think this is the bottom for US Airways and we'd be surprised if the airline posted a profit for the fourth quarter. As we have said, US Airways is reaping the rewards of management mistakes -- an overly aggressive growth plan that stretched resources beyond the breaking point -- and the resulting deterioration of customer service.

As a result, passengers are booking away from the airline if they have a choice, while competitors continue to eat away at the airline's high-yield routes by offering lower fares.

An airline with such high costs can only survive and prosper if it can generate high yields. When those high yields begin to disappear -- which is what fare competition, overcapacity at Dulles, rapid expansion and poor service will do -- then those high costs eat you alive.

Also, keep an eye on US Airways' mechanics, who are in a 30-day cooling off period that ends Sept. 26. The company is putting out the word that "labor-related" maintenance slowdowns are contributing to its revenue shortfall.

That message, however, contradicts what we have heard from pilots, flight attendants, gate agents -- most everyone we have talked to at US Airways. To a person, the feedback we've been getting is that the mechanics were working their butts off to keep the airline flying.

Don't forget that it was US Airways management who bungled this maintenance issue. It decided to close maintenance facilities last spring -- even as the airline announced unprecedented growth plans.

We think those decisions -- more than a labor-related slowdown -- led to the situation the airline now finds itself in, in terms of maintenance-related issues.

Why is this important?

We have a sneaking suspicion the airline might just be willing to take a strike with the mechanics. Think about it. The airline could then lay a great deal of the blame on the mechanics -- thus diverting attention from the management issues involved.

We know it might sound nuts, but we could see this happening. Remember also that the airline's flight attendants are not a happy bunch either, as they have now been working almost three years without a new contract, and are threatening CHAOS-type work slowdowns if movement is not made in talks with the airline.

And finally, just our two cents about the news that US Airways has authorized yet another $500 million stock buyback.

If you recall, major stockholder

Tiger Management

touted these continuing stock buybacks last spring. Yes, this was about the same time that Tiger was touting the fact that it felt shares of US Airways had a 160 target price.

Our take at the time was that stock buybacks were not going to help an airline that was strategically a mess. In addition, call us silly, but we also think companies should buy stock back when the price is low -- not when it is at peaking highs.

But these continuing buybacks certainly seemed to keep Wall Street happy. As we all know, the buybacks helped keep those EPS figures higher than they would have been otherwise.

Well, think about this. As one reader pointed out to us Thursday, based on the June 30 10-Q filing, US Airways has spent $1.75 billion since January 1998 to purchase 30.4 million shares. In our humble opinion, this buyback scheme has not served the shareholders well. The average purchase price paid has been $57.57 a share. Shares of US Airways closed at 25 Thursday.

There is now $16.44 a share in cash in the company. Absent the repurchase program, there would now be $29.98 in cash per share, including the repurchased shares.

Another way to look at the US Airways' situation is, if it had not done the buybacks, the June 30 cash levels would be about $3.1 billion (including interest on the expended funds). The current market cap is $1.8 billion.

As our reader suggested, perhaps this was all just part of the

PUT

, or Prop Up Tiger, program.

Holly Hegeman, based in Dallas, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.