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Despite Fast Growth, America West Says Its Profit Is Slumping

Earnings: The carrier cites its aggressive fare cuts and aircraft maintenance problems for the expected plunge in quarterly results.


America West Airlines said Monday its profit this summer is slumping because of deep fare cuts and unexpected maintenance problems.

The Phoenix-based carrier said earnings in the quarter ending this month would not match the $22 million it earned a year earlier, even though its planes are crowded.

That's because America West's profit is being shaved by the airline's aggressive price-cutting, and by unanticipated costs related to its program of sending airplane-maintenance work to an outside firm.

America West, with hubs in Phoenix and Las Vegas, has been one of the nation's fastest-growing carriers since it emerged from a bankruptcy reorganization two years ago. It has prospered in part by flying lots of bargain-hungry vacationers and hurried business people in the middle of the night, when many other airlines are idle.

And until this summer, America West--which flies to 90 destinations, including Los Angeles, Burbank, Orange County and San Diego--had helped pace the robust performance the airline industry has enjoyed in 1996.

The carrier posted its best quarterly profit ever in the three months ended June 30. It was also aggressively pursuing a two-year growth plan, launching service to new cities and flying more often on existing routes.

But after June 30, America West's prospects dimmed. Wall Street looked askance at the repeated fare wars involving America West--many of which the carrier itself initiated. Reports of America West canceling flights also began surfacing, largely because the airline was experiencing maintenance delays.

Its price cuts "were more aggressive than they needed to be" for America West to stay competitive, said James M. Higgins, airline analyst at Donaldson, Lufkin & Jenrette Securities Corp. in New York.

Hence, although the airline's load factor--that is, the percentage of its seats filled--was an excellent 75% in August, its yields--or average ticket prices--"were below expectations," the airline said, without providing details.

All the while, America West's publicly held Class B stock has been sliding, plunging more than 40% since late June. After the airline's prediction Monday, the stock lost an additional 37.5 cents a share, to $12.75, in New York Stock Exchange composite trading.

The decline has been a particularly bitter pill to swallow for one set of investors: Those who bought a secondary offering of 7.2 million shares that America West sold in February for $19.50 apiece.

America West has been cutting costs to boost profit, but one big cost-paring step has created problems.

In December, the airline farmed out its heavy aircraft maintenance work to Tramco Inc., a unit of B.F. Goodrich Co., and laid off 500 of its own maintenance workers. The action was intended to save the airline $35 million over five years.

But on several occasions, the repairs have taken longer than expected, forcing America West to cancel or delay flights because it had an insufficient number of aircraft available.

Those disruptions cost the airline $5 million to $6 million in lost revenue during the quarter, said Richard Goodmanson, America West's chief operating officer.

In an interview, Goodmanson conceded that the airline's transfer of maintenance work to Tramco should have been smoother, and "we regret not having planned it as well as we should have, and not providing the right level of oversight" to make the switch efficient.

In addition, the Federal Aviation Administration recently took issue with America West's maintenance. While asserting the airline is safe, the FAA said the airline needed more maintenance oversight, in part because certain existing managers are overworked.

Goodmanson disputed that anyone is overworked, and said many of the violations involved record-keeping, training records and other bookkeeping items. Regardless, America West has hired more than 50 maintenance personnel since June, and last week it named a new senior vice president to oversee its maintenance.


Stock Drop

America West Airlines' Class B stock has fallen sharply as the carrier has grappled with fare wars, higher fuel prices and maintenance problems. Weekly closes and latest:

Monday: $12.75

Source: Bloomberg Business News

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