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 The Brancatelli File

joe THE BANKRUPTCY BOYS
GO THEIR SEPARATE WAYS


BY JOE BRANCATELLI

May 11, 2006 -- From the moment in early 1996 that former United Airlines boss Stephen Wolf took over as chief executive of what was then called US Air, the destiny of the two carriers has seemed inextricably bound.

As suppliers of reasonably priced, quality air travel, they were travesties, suffering regular operational meltdowns and careening from concept to concept without any regard for their frequent flyers. Financially, they were boondoggles, squandering tens of billions of dollars and destroying shareholder equity with near-criminal speed. They had incompetent top managers--sometimes sharing and recycling the same self-aggrandizing fools--who pursued their own agendas instead of tending to the best interest of their airlines and their customers. They shared alliances, shared codes, danced an obscene merger tango and were the first Big Six carriers into and out of bankruptcy in the post-9/11 era.

But this week, ever so slightly, the paths of the Bankruptcy Boys began to diverge. United Airlines and its carefully scripted crew of managerial misfits kept on truckin' toward chaos and collapse. US Airways, now merged with and run by what used to be the America West braintrust, began showing some tentative but undeniable signs of intelligent life.

Let's start with United Airlines, if only because it was the first of the two to report its first-quarter earnings. The delusional crew of empty suits who've run United through the longest and most expensive bankruptcy in transportation history on Monday were reporting the first real numbers since exiting Chapter 11 on February 1.

It was a nightmare performance. For the first three months of this year, the airline's losses were marginally higher ($306 million) than the similar period last year ($302 million). And that was the good news.

In rapid-fire succession, while claiming virtually everything was on-track with its laughable plan of reorganization, United's bosses were forced to admit to a litany of failures:
    · Fuel costs have risen far beyond what the airline idiotically predicted just a few months ago and United has no hedges in place to insulate it against the rising prices.
    · Non-fuel operational costs rose by 3 percent when the airline and security analysts had been expecting a decline. United's chief financial officer did begrudgingly admit that he was "dissatisfied" and announced another crash program to cut $400 million from operations, which are already stretched far beyond rational norms.
    · The revenue premium that United executives were confidently predicting would result from its bewildering collection of service propositions and fleet types has not developed. In fact, United's revenue is growing more slowly than any of its Big Six competitors.
    · Two of those brilliant ideas, the all-coach Ted and the three-class, transcon p.s., turn out not to have "legs" after all. Despite the airline's earlier claims that both concepts were ready for new markets, United's marketing wazir admitted on Monday that the products are "relatively stable" and expansion is not in the cards.
    · United's move to outsource some of its information-technology needs and maintenance work has led to higher, not lower, costs.

Within hours of Monday's earnings announcement and a surreal conference call with the airline industry's usually credulous security analysts, two Wall Street wags downgraded United's overpriced, two-month-old UAUA stock. The market responded in kind: United lost 8.9 percent of its value by the close of business on Monday. The stock dropped less dramatically on Tuesday and Wednesday, but slide another 2.6 percent today.

Worse, at least for us frequent flyers, United appears to be coming apart at the seams again on a day-to-day basis. After boasting about its improved on-time performance throughout most of 2005, cash-strapped United has been trying to squeeze out extra flying on its aging fleet by reducing the "turn" time between flight segments. The results have been disastrous. During the last four months for which the Transportation Department has released figures (December, 2005, through March, 2006), United has finished 13th, 15th, 10th and 19th among the 20 or so tracked carriers.

United's solution to its precipitous decline in on-time performance? Try to shave about eight minutes more from turn times in the coming months.

And if you've flown United lately, you also know that its planes are dirtier and there are lots of broken and non-functioning items on the aircraft. It's so bad that United has embarked on an emergency campaign to repair its decrepit fleet. And the service offered by United's overworked flight crews is uneven at best.

On Tuesday, however, US Airways blew United's woes right off the metaphoric front page. It reported one of the rarest occurrences in commercial aviation: a first-quarter profit. It wasn't a lot--just $5 million when you discount some extraordinary charges and credits--but 1Q profits of any kind are always miraculous. It's especially impressive in US Airways' case since it includes merger-related costs.

Even more miraculous, US Airways claims it will make a real profit for all of 2006. That, too, would include merger costs and the rampaging cost of fuel, factors that US Airways management had been excluding in earlier claims about its 2006 financial performance. Put that into some perspective: No Big Six carrier has been profitable since the year 2000. And no carrier named US Airways has been consistently profitable during the last decade.

Wall Street, already in love with US Airways' new stock (LCC) and trading it near record highs recently, went berserk on Tuesday. It jumped LCC by more than 9 percent and it closed at a mind-boggling $51.63. It dipped below $50 after today's trading, but remember that US Airways was selling at just $20.40 a share when LCC debuted in late September.

Of course, US Airways' sudden revival is something of a smoke-and-mirrors job. The management has taken all of the benefits of the merger--the revenue enhancements and the cost efficiencies--and punted on the thorniest issues, especially fleet rationalization, hub reorganization, fare simplification and union issues.

And its remarkable revenue growth--the US Airways part of the merged carrier racked up a mind-boggling 27 percent increase in revenue per available seat mile in the first quarter--has come at a cost. Rather than simplify and flatten fares, which is the strategy that saved America West from disaster four years ago, the America West folks who run US Airways now chose to keep US Airways' rococo fare structure in place for that short-term revenue boost.

That decision has given Southwest Airways free rein to expand at US Airways' Philadelphia hub and the carrier's still-formidable former hub in Pittsburgh. It has also allowed AirTran Airways and JetBlue Airways to invade Charlotte, US Airways' largest, most overpriced and previously impregnable "fortress" hub.

US Airways also scrapped its hub-simplification efforts at Philadelphia because dismantling the old "flight bank" system resulted in a short-term revenue drain. Returning to the banking system there boosted revenue, but once again shattered operations. Philadelphia is back near the bottom of the on-time ratings and that will surely lead high-yield business travelers to seek less-disruptive connecting itineraries elsewhere.

So US Airways' nascent health needs to be watched closely. The issues most important to us as frequent flyers--union peace, rational fares, consistent in-flight service--have yet to be addressed. These are the proverbial chickens that could come home to roost with alarming rapidity during the rest of the year.

What do the divergent paths of the Bankruptcy Boys mean to us long-term? Your guess is as good as mine. But tune in next week and the week after that. Nothing except United's continued corporate lunacy seems to last too long these days.

Copyright 1993-2006 by Joe Brancatelli. All rights reserved.