US Airways owns a variety of planes: 767s, 737s, and 727s, A330s, and A320s (22). The variety of aircrafts allow for more flexibility, versatility, mobility in passenger load options, and operating costs. A wide variety of planes provide the flexibility of matching the load capacity with the area of demand. The company attempts to match the aircraft to seat supply and route demand to increase the load factor. “This type of aircraft offers great flexibility since it has smaller capacity, is significantly more efficient to operate, and has a shorter turnaround time than larger aircraft” (22). If a route has less demand, a smaller aircraft can be used to increase capacity in order to meet the breakeven point of the aircraft. This helps US Airways reach their primary goal: “…to move load factor above the breakeven point into the profit range” (21).
The wide variety also allows for expansion and exploration into other routes because different size planes are readily available. The agreement between US Airways and Airbus allows modernization of their old aircraft to the new A320s (22). The new A320s are more fuel-efficient and replace the older aircraft with younger assets. The average age of US Airways’ planes as of 2001 are 9.1 years to 9.6 years (16). The younger assets require less expenditure for repair and maintenance (Assets, ACT 161).
Another benefit of having a variety of planes and excessive assets is to use the excess as leverage to free up money. The planes can be sold along with their lease in order to free up cash to pay debts and relieve some of the current expenses and costs (Leases, Debt, Expenses, ACT 161).
US Airways uses the hub system which “…ideally allows any airline to fly passengers to any destination on the globe…The hub system also allows airlines to feed passengers from small markets into the carrier’s transcontinental and international routes, thus allowing competition in these markets as well” (20-21). The hubs are bunched together geographically on the East Coast allowing for market domination. The close market can promote lower expenses because ticket sales can be lowered with less interference from outside competition (Product Pricing, BUS 340). “By offering the lowest priced fares to a destination, an airline hopes to lure customers from competitors and even increase the amount of overall passenger traffic by attracting passengers who would not have considered air travel under a higher pricing structure” (21). Once market domination of the East Coast is prosperous, then the financial advantage can be used to integrate, expand and dominate westward.
US Airways’ short international express flights are making the most profit for the company. The flights from Washington, D.C. to New York and Baltimore to Boston are convenient routes for East Coast businesses. “…Revenue may be generated…by increasing profitability on the core routes to cover underperformance on other routes” (21).
Businesses and US Airways’ consumers have strong brand loyalty to the air carrier. Although there has been a decline in air travel demand due to a slow economy and low consumer confidence, US Airways’ consumers reveal their loyalty through website comments (See Appendix A, pp.40-42). Customer satisfaction is high even though US Airways’ financial position is declining.
Airbus also opened an avenue of revenue and lowered operational costs by: lowering training costs, providing better fuel efficiency, lowering maintenance costs and providing longer operational ranges. The A320 Airbus aircraft offers more flexibility and reduced employee training costs and crew expenses (22). One way to improve their financial position is to decrease losses in operational expenses.
US Airways is aware of their current market decline and financial instability. This is deemed a strength because the company is using their position to implement changes and new organizational plans to correct the situation. The government passed legislation that freed US Airways of some of its expenses by “federalizing security.” The September 11 terrorist attacks pushed Congress to pass legislation and provide $14 billion to the airline industry (26).
Other actions that freed up cash are: consolidation of flights, a 23% cut in service, and decrease in routes. The postponement of shipping, and deferment of new A320s and A330s freed up cash. Also, the failed merger between United and US Airways provided $50 million to US Airways.
US Airways provides strong competition to its competitors: Southwest, Delta Airlines, Jet Blue, Spirit Airlines, and Air Tran Airway to name a few. US Airways uses marketing to beat competition with fare reduction. “Fare wars” allow airlines to compete for market share and market dominance (Product Pricing, BUS 340). Offering low prices can draw in customers and increase load capacity (21). Fare reduction is the most common form of competitive strategy used by most airlines.
The current CEO David Siegel is a strong asset to US Airways. He is a strong negotiator and a good salesman. Siegel is known in the industry as a “master dealer.” Siegel will be a strong force as a leader for US Airways. The reorganization plan includes recruitment of new management and board members (Appendix B, pp.43-45). Change and leadership can be a strong force in the success of a company. A good CEO can make or break a company. Sam Walton is an example of a CEO that made a company what it is today. Leadership and management have a direct impact on the success of a company (HR communication, BUS 420).
US Airways acquired approximately 400 Airbus planes since 1999. Some of these planes were purchased and others leased. Although excessive assets can be considered a strength for most airlines, for US Airways, it is a weakness. US Airways is paying a large amount of money for its leased planes, most of which are not being used. This directly affects the load factor, the percentage of filled seats on any given flight (21). However, US Airways’ main goal “…is to move “load factor” above the breakeven point into profit range” (21). US Airways’ inability to fill the seats is unprofitable for the company. The company is unable to produce at the breakeven point and, as a result, supply will not equal demand on the flights that they are trying to use (Supply and Demand, ECN 101). This causes the company to have a high overhead. The high overhead was a result of the growth of the company. The company grew too big in a short amount of time, which caused its supply to exceed its demand.
US Airways has an excessive number of planes to use for the few passengers that are boarding its planes. The load factor below breakeven causes most of the flights to be unprofitable. US Airways merged and acquired too much property within a short amount of time. However, the cancelled merger with United Airlines in 2000 caused the airline to put a stop to its growth. However this turned out to be a good idea for the airline, which was already experiencing problems in the financial area.
Most airline companies use a hub system that allows them to carry passengers around the globe (20). However, the hub system has changed and now causes passengers to make stops at various hubs and board transfer flights. US Airways follows this type of system, but its hubs are smaller than other airline hubs. Not as many planes can fit into them, which creates a bottleneck for the transfer of passengers (21).
Another weakness of US Airways’ hub system, is its East Coast locations, some of these include: Baltimore, Washington, D.C., Philadelphia, and Pittsburgh. These hubs are located too geographically close to one another on the East Coast. By using this type of hub system, US Airways cannot defend itself and its route system from competitors (21). If US Airways relocated some or most of its hubs, it would be able to create a more efficient hub system. This allows the company to possibly move off the East Coast and expand into the West, which would allow US Airways to compete more efficiently with its major competitors. If they decided on this course of action, it would require the company to create a different strategy of both management and marketing.
Rakesh Gangwal’s unexpected resignation in 2001 is a weakness of US Airways. Gangwal’s chief strengths under the current conditions were his attention to detail, airline industry, economics, and critical requirements (26). Stephen Wolf, a master dealmaker, replaced Gangwal. Gangwal was unable to make the company more successful and financially stable. Looking at the daily operations of the company was not one of Wolf’s strengths (26). This could be the main reason why US Airways does not have a contingency or vision plan. If the company is unable to look into the future or see the outlook of how its decisions will directly affect the company, it will be unable to choose any course of action that will create a stronger company.
Not only did US Airways have to deal with the unexpected resignation of CEO Gangwal, but with poor employee morale as well. After the September 11 incidents, and with business already declining, US Airways laid off 25 percent (11,000) of its employees (23). After the layoff, most of the employees still working lost many of their benefits and other incentives for working hard. In the end, this created a team of employees that had lost their desire to work hard for a company that they knew was having problems surviving.
There are various reasons why US Airways has been losing customers for a couple years. One major reason is that, after September 11, it stopped flights to numerous locations. Without a variety of locations that a customer can fly to and depart from, the customer base began to decrease because other competitors had the locations and flights customers wanted. Also, without these locations, US Airways is unable to compete with the airlines that were flying to more locations. US Airways is failing to use an aggressive approach to compete with other airlines. Without a stronger approach, many customers choose to take other airlines because their names are more recognizable, and they have more locations to which they can fly. An example of this is with Southwest Airlines, US Airways’ major competitor. Since US Airways has locations only on the East Coast, Southwest took over most of the West Coast. Southwest has non-stop flights, which most customers enjoy more. “…Southwest forced US Airways to essentially abandon its service to north-south California routes” (24). They also entered the market in Baltimore, one of US Airways’ hubs. This caused US Airways to eliminate 51 of its 75 mainland routes. If US Airways had been more aggressive against its main competitor, these routes would never have been abandoned.
Although plane crashes do not occur very often, there is still a chance one will happen. With all the problems that US Airways has been experiencing over the last few years, an unexpected plane crash of any sort would put the company out of business. While there is no way of ensuring that US Airways will never experience a plane crash, it is in its best interest that they should not. Not only would US Airways lose an asset, but they would also lose many of their repeat customers and many new ones as well. Since September 11, many people are still anxious about flying and watching another plane crash would push most people over the edge. This would cause many people to drive to their destinations, or cause them to just stay at home. If this happened, it would cause US Airways to lose more money, pushing them further into bankruptcy or out of business all together.
Each of the weaknesses explained above has been a direct influence on US Airways’ filing for Chapter 11 bankruptcy (Bankruptcy, BUS 371). Since 2000, after the failed merger with United Airlines, they have lost a total of $7.81 billion in assets and $7.83 billion in liabilities, most of which occurred in 2001 after the September 11 incident; a total of 2.11 billion in 2001(Appendix C, pp. 46-47).
The airline industry is one that is affected by many external factors. A change in fuel prices, by mere pennies, can force companies into bankruptcy. Even with the amount of debt that US Airways has acquired, it has many opportunities available. With strategic planning, help from the government, and a little luck, US Airways could once again see profits, market dominance, and growth internationally.
One opportunity that is available to US Airways is the use of point-to-point flying instead of their already established hub-and-spoke flight patterns. There are many positive outcomes from this change. Customers prefer to get on one plane and arrive at their destination, rather than have a layover. There would be more profit from this type of system because less fuel would be needed, fewer employees, and fewer airplanes. Costs would be lowered, therefore; ticket prices could be lowered. Fewer layovers and the lowered ticket prices could increase the number of customers flying with US Airways. The hub-and-spoke system worked for US Airways when it was seeing profits and there was more people flying. Today, it is costly, inefficient, and more of a burden on time-conscious travelers. This change will not happen overnight. It will take up to a year to change the type of system used. Changing one flight at a time can do this.
Changing from a hub-and-spoke system to a point-to-point system is an internal opportunity. However, it’s highly dependant on many external factors. Some of these factors include money from the government and investors, the views and attitudes of the customers, the cost of fuel, and the economy. One downside to this change is the transition of the employees. Many employees are trained and prefer the already established system. “Resistance to change can be considered the single greatest threat to successful strategic implementation” (D 254).
Another opportunity that would improve US Airways’ current condition is a partnership with a financially stable company (Partnerships, BUS 130). There are many companies that could become a partner with US Airways, one such company is FedEx. There are many obvious benefits from this action. The greatest advantage would be financially. With some solid financial backing, US Airways will be able to get back on its feet quicker. The idea of a partnership would prove beneficial for US Airways. If the government wants to keep perfect competition and avoid monopolies, then they would grant more funding and loans to US Airways.
Without governmental funding, US Airways would have been another business that failed. When US Airways was in the middle of hard times in July 2002, the government granted them a federal loan of $900 million (See Appendix D, pp. 48-50). One downside to governmental funding is company image (Consumer Perception, BUS 340). If they keep receiving outrageous amounts of money, consumers will start to see US Airways as a money pit. After the September 11 tragedies, the government aided the airline industry monetarily. Following the aftermath of September 11, people were upset that their tax dollars went to independent companies. Without airline companies, our country would simply shut down.
Another governmental opportunity is the fact that John McCain is proposing a change to the Railway Labor Act. This new proposal would make it hard for unions to get wage increases (See Appendix E, p.51). The proposal would lock union members in at a certain wage. The wage freeze would help to keep US Airways’ labor costs down.
An opportunity for every business today is the increase in consumer confidence (Consumer Confidence and Buying Power, BUS 341). Without consumers’ spending money, no company would survive. With the poor economy and September 11 tragedies, consumers are watching where they spend their money. As we move further and further away from September 11, people are starting to forget about terrorism and some risks that are involved with flying.
Another opportunity that US Airways can take advantage of is the fact that bond rates are high and interest rates are low right now. This would allow US Airways to refinance some of its debt to lock-in lower rates. US Airways could take advantage of high bond rates by selling bonds to investors. This would be a great opportunity because bonds are safer than stocks; in that they are secured and have a maturity date some years down the road (Corporate Bonds and Stocks, BUS 361).
Another industry wide opportunity is technology. US Airways can take advantage of outside technology. Simple advances, such as making reservations by the Internet, will help boost sales. New accessories are becoming available as well; these accessories would make flying more convenient. An example of a newly added accessory would be the complete workstation. More personal televisions, along with satellite radio, would be a welcomed attraction for flyers. This is extremely important to US Airways right now because with the addition of new accessories and technology, business travelers will insist on traveling with US Airways.
Not long ago, US Airways filed for Chapter 11 bankruptcy. To fulfill this, US Airways had to file a report on its debt and its expected courses of action. The continuation of this filing is a huge opportunity for US Airways to get its feet back on the ground. While filing for bankruptcy, US Airways will be protected from creditors. Along with the completion of this filing, US Airways will have some of their debt forgiven (Chapter 11 Bankruptcy, BUS 371 / ACT 162). This gives US Airways an upper hand when negotiating with the union. US Airways’ employees are among the highest paid in the industry (See Appendix D, pp. 48-50). With the approval of their Chapter 11 filing, the pilots union will be forced to work with lower salaries because of the condition that the company is in currently.
A final opportunity for US Airways is the promise of money after bankruptcy. The Texas Pacific Group has promised to provide US Airways with a $200 million investment in the new equity of the airline on its emergence from bankruptcy (See Appendix C, pp.46-47). This is money that US Airways does not have right now. However, if everything goes smoothly, it will have this money to further its investing. This allows leverage when finalizing finances. US Airways can take money away from investing and use it to pay off some debt because that money will be replaced upon the end of its bankruptcy.
A strategic plan is one thing that US Airways does not have, and because of that, US Airways is suffering. Opportunities in the airline industry are very uncertain. No one really knows if gasoline prices or consumer confidence will increase. Looking at US Airways’ past actions, it seems as if US Airways is going with a hit or miss theory. The company cut benefits and laid people off, that did not free up enough funds. So, now, US Airways is starting to cut some unprofitable flights. With all of its opportunities, even if it takes advantage of them, US Airways needs to be aggressive and regain market share. With spring and summer approaching, competition in the airline industry is only going to get tighter. The companies who take advantage of their opportunities and plan strategically will prove most profitable.
One of US Airways’ most important external threats is the current state of the world economy. The U.S. economy, which is believed to be in a recession, is one of the primary external forces that a company needs to focus on, especially if the business is one that has difficulty producing revenues in a downturn (External Forces, BUS 130, 230, 380).
As a subset of economy, the demand for air travel is a large threat currently facing US Airways. With the economy slowed, consumers with low disposable income or fixed income are unable to afford ticket prices, which drives the number of people willing to fly (demand) down (Discretionary Income, ECN 101). Demand becomes a threat because when demand is low US Airways will still incur high fixed costs with little revenue to cover the cost.
The demand for business related travel has also fallen as businesses try to save cash during the downturn. “Business traffic comprises 50 percent of airline traffic but generates 65 percent of ticket revenue” (25). Employers are sending employees to fewer seminars, or sending one delegate to attend and teach the material upon returning instead of sending multiple employees. “An economy in recession requires less business travel,” and businesses are using cheaper methods in response to cash crunches (25). Web conferencing allows businesses to conduct meetings across the nation without having to fly employees to the site.
War with Iraq is an important threat because customers will be less likely to travel to international destinations for fear of being civilian targets. War with Iraq, a member of OPEC, will cause Iraqi oil exports to decline and supply to drop. In addition, the military will be using more oil to fight a war, affecting supply. The result of both a decline in exports and an increase in usage will be a rise in oil prices, and fuel expenses for US Airways (Supply and Demand, ECN 102).
Any company that competes internationally must focus on the current political issues abroad that may hinder business in the future. Businesses should develop contingency plans on how to operate internationally when political instability occurs in other areas of the world (Contingency Planning, BUS 230).
Oil and OPEC can be a threat to US Airways whether or not the United States goes to war with Iraq. OPEC has the ability to control production of 13 oil-exporting countries. This allows OPEC to move oil and, subsequently, fuel prices as it chooses. As stated before, because OPEC can control supply, they can cause the price of fuel to increase, costing US Airways more in fuel expenses (Supply and Demand, ECN 102).
Possible terrorist activity will greatly affect the number of people willing to travel domestically and internationally. The airline industry is still being affected by the September 11 terrorist attacks, which resulted in a large drop in air travel demand. If terrorist activity, across the globe, starts to become a problem again, US Airways will likely see a drop in ticket sales, which will cause revenues to decline.
US Airways’ most costly expense is the amount of money it pays for personnel. Unions have strong negotiating positions inside companies because of their ability to stop production or services with walkouts and strikes (Organized Labor’s Rights, BUS 372, 420, DSP 326).
A potential strike by union workers at US Airways is a critical threat to the company’s success. Strikes by the pilots union, flight attendants union, and mechanics union can cause stoppages on many of US Airways’ flight routes. These unions will strike if they feel they are not receiving fair pay, benefits, safe working conditions, and other possible rewards (Compensation Packages, Union Grievances, BUS 420, DSP 326).
The Air Line Pilots Association currently has a cap on the number of flights their pilots can fly on long region routes. The ALPA has limited the flights to address the pay equality of pilots who run these routes, which are on US Airways Express. The ALPA poses a threat if they continue to put pressure on US Airways Express, US Airways’ only current profitable division, because the higher labor costs will only add to US Airways’ cash problems.
The United States government, if they choose not to assist the airline industry any further, may be a threat to US Airways’ ability to turn the company around. Federal aid has been given to the industry in relief from the outcome from the September 11 terrorist attacks, which grounded all aircraft for a number of days causing the industry to lose billions in revenues. A stoppage in government aid may prevent US Airways from being able to emerge from Chapter 11 bankruptcy.
The current state of the economy has had similar effects on all major United States air carriers. All carriers have been using fare reduction pricing strategies to lure customers from rival airlines. This poses a threat because some carriers may have lower breakeven points allowing them to use a price leading strategy when pricing tickets (Price Leading Strategy, Breakeven, BUS 340, ACT 161). US Airways may not be able to cut fares as low as its competition because of its high breakeven point, caused by its large amount of overhead. Therefore, competitive forces could force US Airways out of business.
US Airways can try to affect only a few of these external threats. Any action taken by the company will not have any impact on the economy, but US Airways does have the ability to affect demand for air travel in some instances through fare reduction activities. US Airways also has the ability to negotiate with their unions, which they have minimal control over. The only other threat that US Airways can have a chance at eliminating is how the competition affects the company. The other threats are largely out of US Airways’ control, but still need to be watched to help US Airways with contingency planning.
Filed under Business