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Acting on High Hopes : Struggling USAir Places $5-Billion Order for Jets

November 07, 1996|JAMES F. PELTZ | TIMES STAFF WRITER

USAir Group on Wednesday ordered at least 120 new Airbus Industrie jetliners valued at $5 billion, a bold statement by the struggling carrier that its fortunes are going to improve.

The nation's sixth-largest airline said it also might buy an additional 280 planes from the European aircraft maker over the next decade, all in order to replace virtually its entire fleet and lower its operating costs.

For now, however, there's no mistaking that USAir remains a bloated, debt-laden airline, albeit one that has shown modest improvement this year, largely because the entire airline industry is enjoying one of its best years on record.

USAir has yet to overcome the big problem that's led the airline to lose more than $3 billion since 1989: Its operating costs, especially its labor expenses, are much higher than those of its competitors.

USAir, based in Arlington, Va., serves 200 destinations--including several major California cities--but its route system is focused on the Northeast and Atlantic Seaboard, where its hubs include Pittsburgh, Philadelphia and Charlotte, N.C. The airline currently operates 390 airplanes, a hodgepodge fleet of Boeing, McDonnell Douglas and Fokker aircraft.

In recent years, other airlines have worked out new, lower-cost contracts with their labor unions to become more competitive. USAir has not. That means its rivals can cut ticket prices and still turn a profit much more easily than USAir.

USAir is in negotiations with its major unions to find a solution, but so far there's been no progress. Even Stephen M. Wolf--the former United Airlines chief that USAir hired as its chairman in January to end the deadlock and turn USAir around--said the big Airbus order is contingent on USAir's "achieving a competitive cost structure."

A USAir spokesman, Richard Weintraub, declined to comment on when that might happen, except to say, "We continue to be in discussions" with the unions.

But Wolf is running out of time because the competition is rushing at USAir from all sides.

Lower-cost rivals, including Southwest Airlines and Delta Express--a new short-haul service created by Delta Air Lines--have begun encroaching on USAir's biggest markets in the East. Another discount carrier, ValuJet Airlines, is back in the skies after being temporarily grounded for safety problems earlier this year.

ValuJet's problems, in fact, helped improve USAir's results. In the first nine months of 1996, USAir earned $236 million on revenue of $6.1 billion.

USAir's balance sheet--even by the highly leveraged standards of the airline business--is also cause for concern, because USAir is hobbling along with nearly $3 billion in long-term debt.

So why is Wolf placing billion-dollar orders for new planes?

"He's using this as a carrot to the work force," said Raymond Neidl, an analyst with the brokerage firm Furman, Selz in New York. "He's saying: 'Listen, we're going to do all of these great things if we can get competitive. We're doing our part by getting a cost-efficient fleet.' "

The Airbus order would certainly help lower USAir's costs. With a newer, simplified fleet, USAir would save money on pilot training, maintenance and spare parts.

But will USAir's powerful unions do their "part" and reach new contracts that lower USAir's labor costs?

"That's the million-dollar question," Neidl said.

USAir's unions Wednesday did indicate their willingness to find a solution. The airline's announcement of the Airbus order included statements from several union leaders, including Capt. Robert P. Gaudioso of the Air Line Pilots Assn., who said, "We are committed to working together with our management" to reach a pact.

Also, Airbus reportedly is offering flexible financing terms so USAir can pay for its jets. And analysts certainly don't discount the ability of Wolf, who's known for his tough-minded approach to labor, to fix USAir.

They noted, for instance, that it was Wolf who masterminded the historic employee buyout of United Airlines in 1994, in which workers got ownership control in exchange for wage concessions.

That pact, in turn, lowered United's costs to the point where United was able to launch its short-haul Shuttle service along the West Coast to compete head-to-head against Southwest. Now, Wolf and USAir face a similar situation in the East, where Southwest and other discount rivals are streaming in.

USAir stock rose $1.25 a share to close at $19.375 in New York Stock Exchange composite trading Wednesday.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Flying Higher

USAir Group's historic order for Airbus jetliners follows gains in the airline's earnings and stock price this year. But USAir's costs remain far above those of its rivals, a big liability when air travel weakens.

Comparing Expenses

Major airlines' "cost per available seat mile," the industry's main gauge of operating expenses, in cents, for the quarter ended Sept. 30:

USAir: 12.44

American: 8.72

Delta: 8.71

United: 8.62

Continental: 8.60

Northwest: 8.47

Southwest: 7.52

Stock price

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