US Airways, So Far, Surmounts Labor Issues

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PHOENIX, Ariz. ( TheStreet) -- For all the talk that its 2005 merger with America West did not succeed, US Airways ( LCC) is having a pretty good year.

So far, shares are up 127% for the year, leading the industry. US Airways reported a $243 profit, its best third-quarter ever and the second-best quarter at post-merger US Airways. (Net income was $305 in the second quarter of 2006.) The third quarter's 11.7% pre-tax margin gain was the industry's best. Moreover, on Nov. 8, the carrier said it will recall 80 pilots and 420 flight attendants. Recalls are always a triumphant event at an airline.
US Airways

Still, the carrier's image is tarnished by continuing conflict among its pilots , who remain deeply divided by a controversial 2007 arbitrator's ruling on seniority integration. As the battle winds its way through the courts, many in the airline industry cite the failed integration as a template to avoid at all costs.

For instance, in a Nov. 1 letter to United ( UAL) pilots, Wendy Morse, who heads the United chapter of the Air Line Pilots Association, made it clear that in the merger with Continental , she wants to keep salary negotiations and seniority integration separate. "The reason for separating JCBA negotiations and the SLI process is to avoid a repeat of the US Airways/America West merger debacle," Morse wrote.

In general, US Airways management has sought to steer clear of the seniority integration battle, although the airline finally succumbed and filed a case in July, seeking direction from the court before proceeding with contract talks. The two pilot groups still work under separate concessionary contracts negotiated with ailing carriers; management's filing pleased former America West pilots but angered pilots from pre-merger US Airways.

James Ray, spokesman for the U.S. Airline Pilots Association, said the carrier's case enables further delays after a U.S. Appeals Court asserted in June that the seniority ruling need not be explicitly followed. (This is not the view of former America West pilots.) "There is no reason they cannot negotiate aggressively now," Ray said. "This pilot group kept the airline from extinction during the hard times and the airline is making record profits."

In a September interview, Stephen Johnson, US Airways corporate counsel, said "the company is in the untenable position of having to continue negotiations with USAPA and inevitably having to take one side or the other on seniority and that's something we're just not willing to do." Without a court ruling, the company will be sued by one side or the other once a long negotiation process is completed, he said.

Speaking at a Nov. 17 investor conference, CFO Derek Kerr barely mentioned labor negotiations. But he emphasized that since the merger, one reason for US Airways' success has been operational improvements. "Operations have been our focus since our consolidation in 2005," he said. "Without a good operation, you will not be able to make profits."

Kerr's charts indicated that in 2007, US Airways had the worst rankings among network carriers in all four operational categories tracked by the U.S. Department of Transportation: on-time departures, on-time arrivals, mishandled bags and customer complaints.

The carrier attacked the areas one by one and moved up to first or second best in three categories. Now, Kerr said, the focus is on decreasing the number of customer complaints. No other carrier has shown such consistent four-category improvement since 2007.

In other areas of improvement, US Airways has been less distinct from peers. Like them, it has benefitted immensely from diminished capacity and newfound fee revenue. In the case of US Airways, Kerr noted, $500 million in 2010 fee revenue includes about $475 million in bag fees. Purchases of preferred seats provided about $25 million.

Although classified as one of four remaining legacy carriers, US Airways is in fact an outlier, neither a global carrier with a vast international network nor a low-cost carrier. This is why each of the last four CEOs -- Steven Wolf, David Siegel, Bruce Lakefield and Doug Parker -- has pursued merger efforts. Only Lakefield was successful, securing the 2005 merger with Parker's America West as well as the labor costs reductions and financing that enabled the carrier to emerge from bankruptcy.

Since the merger, the airline "has been profitable for exactly the reason they predicted it would be," said Mike Flores, president of the US Airways chapter of the Association of Flight Attendants. "They put together two smaller carriers under one management group, improved the operational metrics -- which had been below industry standards -- and produced the product at a lower cost than competitors do.

"But when you have open contracts with two large labor groups, at some point these low-cost advantages are going to disappear," said Flores.

In the case of flight attendant negotiations, Flores said the two sides have reached agreement on most contract sections and have arrived at economic issues. During the week of Dec. 6, the company is expected to respond to flight attendant proposals.

A key remaining issue, Flores said, is that the US Airways contract includes job protections in event of a merger, while the America West contract, still in place, does not. "East flight attendants are not going to lose these protections, so they will have to be extended to the west," he said. "That has the company rattled."

In the past, Parker has said US Airways' lower costs compensate for a 10% revenue disadvantage to larger competitors with better hubs. He said a merger with a larger carrier can eliminate that disparity.

But unions don't want to wait. "We do the same job on the same type of aircraft" as others, Flores said. Added Ray: "It's high time this management team steps up to the table and gives their pilots a contract that is on par with those at other major airlines."

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

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