Wrapped up in the story of today’s US Airways, a result of the merger between the twice-bankrupt airline of that name and America West, is everything that has gone wrong with the airline industry in recent years—and some signs of hope.
The airline industry as a whole was already slumping before the Sept. 11, 2001, terrorist attacks. US Airways Inc. subsequently went in and out of bankruptcy twice before it merged with America West in September 2005. America West suffered through 10 quarters of losses, stretching back to 2000, before returning to profitability in 2003, but lost money again in 2004 and 2005. Overall, however, America West was closer than US Airways to the low-cost airline model that has been relatively successful in the industry in recent years.
Now the combined company, US Airways Group, is showing signs of a quick turnaround. In July, it reported a quarterly profit of $305 million, excluding $35 million in transitional expenses related to the merger, and projected that it would make a profit for the full year 2006. Like other airlines that reported more optimistic numbers this summer, US Airways was seeing the results of years of effort to reduce costs and improve efficiency—partly by using information technology to drive down expenses associated with sales, customer service and maintenance.
Computer systems have remade parts of the airline industry several times over, starting with the advent of online reservations systems in the 1960s and continuing today with systems that manage gate assignments, track maintenance and manage crew schedules. But as airlines increasingly drive toward self-service customer service, the quality of those self-service systems is becoming a big factor in how many customers an airline has and how satisfied they are.
Both US Airways merger partners followed this industry trend, and now together they need to work to apply self-service technologies to their best advantage.
Of course, information-technology improvements are one part of a larger story that also includes the salary and benefits reductions US Airways forced on pilots and other workers during its bankruptcies.
“I.T. is never going to fly the airplane for you, but it definitely can help you run the business,” says US Airways chief information officer Joe Beery, who was previously the America West CIO.
US Airways is also benefiting from structural changes in the airline industry, particularly a change in the relationship between supply and demand. As a whole, the airlines have cut back on the number of planes they fly and the number of routes they travel, eliminating excess capacity in the market and reducing the need for cutthroat competition. In other words, it’s become possible for the airlines to raise prices in step with the increase in fuel costs and other expenses without as much risk of being undercut by their competitors. And with demand remaining relatively constant, price increases translate into better revenue.
According to an August 2006 report from the U.S. Department of Transportation, airline capacity has dropped 5% over the past year, the percentage of seats filled rose from 74% to 77%, and fares are up 12%.
The theory behind the merger was to let the Tempe, Ariz.-based America West management team, with its greater experience in low-cost airline operations, take charge of the larger US Airways, which had a big East Coast presence and flew internationally, while taking advantage of the cost reductions US Airways achieved the hard way during its bankruptcies.
The merger is still new enough that US Airways Group was reporting some financial metrics separately for the two formerly independent companies in the first quarter of 2006. For example, cost per available seat mile (CASM), a measure of costs compared to capacity, was 8.76 cents for America West and 11.44 cents for US Airways. By comparison, the Department of Transportation reports an average CASM of 8.7 cents for the airlines it classifies as low-cost carriers, versus 12.5 cents for the traditional network carriers. So, US Airways Group still has some work ahead to do if it wants to move the overall operation into the low-cost category.
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