US Airways Group, Inc.

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US Airways Group, Inc.

2345 Crystal Drive
Arlington, Virginia 22227
U.S.A.
(703)872-7000
Fax: (703) 872-5307
Web site: http://www.usairways.com

Public Company
Incorporated :1937 as All American Aviation, Inc.
Employees :41,393
Sales :$8.69 billion (1998)
Stock Exchanges :New York
Ticker Symbol :U
NAIC :481111 Scheduled Passenger Air Transportation

US Airways Group, Inc. (formerly US Air Group, Inc.) is a holding company for several commercial airlines, of which US Airways (formerly USAir) is the largest. US Airways is a leading carrier of passengers in the eastern United States and the sixth largest airline in the country. It ranks first or second in departures at a number of important hubs, including Charlotte, Pittsburgh, Philadelphia, Baltimore/Washington International, Boston’s Logan International, NewYork’s LaGuardia, and Washington, D.C.’s Ronald Reagan Washington National. Through its fleet of nearly 400 jets, US Airways provides service to more than 100 airports in the United States, Canada, Mexico, France, Germany, Italy, the Netherlands, Spain, the United Kingdom, and the Caribbean. In addition to its flagship carrier, which generates about 90 percent of the company’s operating revenues, US Airways Group also operates regional airlines under the US Airways Express, US Airways Shuttle, and other names. It also launched a low-cost, low-fare carrier in 1998, MetroJet.

Mail Delivery Origins

The company was originally incorporated in Delaware in 1937 as All American Aviation, Inc. by a glider pilot named Richard C. du Pont, of the Delaware du Ponts. On May 12, 1939, the airline began to deliver mail around the mountains of Pennsylvania and West Virginia. Since many communities did not have airstrips, the company devised a system employing hooks and ropes that enabled the mail plane to drop off one mailbag and pick up another without landing. Du Pont’s method brought regular mail service to a number of once-isolated communities and was widely imitated. Later, All American began transporting passengers on its limited network. Despite the addition of more destinations the airline remained a small operation, serving many remote communities throughout the Alleghenies.

When the United States became involved in World War II, du Pont went to work on the Army’s glider program in California. The mailbag snare he developed was adapted by the Army’s Air Corps and used to rescue downed pilots behind enemy lines. Du Pont also helped to develop a glider that could be picked up by an already airborne airplane, a system that was used in the evacuation of Allied troops from the Remagen beachhead in Germany. Du Pont was killed in a glider crash in 1943.

After the war, All American Aviation changed its name to All American Airways; in 1953 the name was changed again to Allegheny Airlines. That same year the government chose Allegheny to operate shuttle services between smaller eastern cities and major destinations served by larger airline companies. Allegheny was provided a subsidy to operate these services to communities that otherwise would have had no air service.

The company experienced a period of healthy growth for several years in the 1950s and 1960s. The old DC-3s it was flying were replaced with new Convair 440s, Convair 540s, and Martin 202s. The operations and maintenance base was also relocated from Washington, D.C., to a modern complex in Pittsburgh. Allegheny began buying jets in 1966. In 1968 the company acquired Lake Central Airlines and in 1972 purchased Mohawk Airlines.

Concurrent with this steady growth, Allegheny was obliged to operate the government-assigned “feeder” services, but starting in 1967 Allegheny began subcontracting these routes to smaller independent carriers. The independents were able to make a profit on the routes because they had lower costs, they were not unionized, and their equipment was better suited for the rural “puddle jumper” routes, while the government was happy to release Allegheny from its obligations and discontinue the subsidies. Since the independents fed passengers mostly to Allegheny, the company itself had become a large regional airline.

Despite Allegheny’s growth, passengers had a low opinion of the airline, which had acquired the nickname “Agony Air.” The company’s on-time record was poor, its customer service was described as unpleasant, and flight cancellations were common. In many cities the airline had a monopoly on air service, so there was little incentive to improve customer relations.

Emerged As USAir in 1979

Fortunately for Allegheny its chairman and president, Edwin Colodny, had previously served with the Civil Aeronautics Board (CAB). This experience provided him with the knowledge to acquire and protect the company’s right to fly to certain destinations, and to successfully raise fares. Before any of his policies could be put into effect, however, the Airline Deregulation Act of 1978 was passed. Vigorously opposed to the passing of this act, Colodny argued that permitting all airlines to freely enter into any market would allow the larger airlines, with their vast resources, to raid markets served by smaller companies with the intention of driving them out of business. This did not happen. Instead, the larger airlines used their new freedom under deregulation to contend with each other, while regional operators such as Allegheny were virtually unaffected. Deregulation also provided new opportunities for regional airlines. For the first time, Allegheny was allowed to operate long-haul routes to Texas and the West Coast. With such an opportunity, the company clearly required an improvement upon its “Agony Air” reputation. Colodny decided to begin with a new name. He chose “USAir” over several other names, including “Republic Airlines” (which was later used by the old Minneapolis-based North Central Airlines). Allegheny officially became USAir on October 28, 1979.

Under the name USAir the company launched an advertising campaign in which it claimed to “carry more passengers than Pan Am, fly to more cities than American, and have more flights than TWA.” This coincided with the inauguration of new routes to the Southwest, which were originally intended to prevent company jets from remaining idle during the traditional winter slump in the northeastern markets. In addition, USAir planned to implement a Pittsburgh-London route, but withdrew the application due to fears of “overambition.” According to Colodny, “overexpansion is the most tempting of all possible sins of airline managements under deregulation. And, if overdone, it can result in a serious bellyache. In designing a route system, a carrier must limit its ego.” As a result, the airline concentrated on consolidating its markets and strengthening its central Pittsburgh hub.

Colodny maintained that two-thirds of U.S. air travel was in markets of less than 1,000 miles, and USAir made it a point to concentrate on developing these local markets. The short duration of these flights, however, meant that the airplanes had to make more takeoffs and landings, which in turn increased maintenance costs. In the late 1980s the company flew DC-9s, B-727s, 737s, 757s, 767s, as well as several smaller aircraft for its express fleet subsidiaries. The average age of its 446 planes was nine years, one of the lowest averages in the industry.

The airline’s on-time record significantly improved as a result of strict attention to scheduling and the “first flight of the day” standard, which prevented late starts from pushing back the whole day’s schedule. The airline also perfected a system of efficient bad-weather maintenance. These measures contributed to what company officials claimed was the second lowest number of complaints to the CAB (Delta was first) based on passenger volume.

In order to remain competitive with other airline companies that were merging to form even larger companies, the USAir Group announced in December 1986 that it would be acquiring Pacific Southwest Airlines (PSA) for $400 million. The announcement surprised many industry analysts because USAir’s predominantly East Coast airline network had few integration points with PSA, which was concentrated along the West Coast. First operated as a subsidiary of the USAir Group, PSA was later absorbed by USAir. The merger increased the amount of traffic on USAir by 40 percent and gave USAir landing rights in a number of cities on the West Coast.

Company Perspectives

The tools of a “Carrier of Choice” and “World-Class Global Carrier” —the aircraft, the information technology systems, the airports and training facilities —are in place. The issue before us is how we use those tools. If we use them in the months and years to come with the same skill and determination as we have used the tools available to us in the past three years, US Airways will define “World Class” in aviation, and that is precisely our intention.

Early 1990s Downturn

Nevertheless, USAir entered 1992 battered by a poor economy, as well as the fallout from a trouble-ridden merger with North Carolina-based Piedmont in 1987. The company had suffered three consecutive years of net losses (the largest in 1990, at $454 million), the forfeiture of many domestic routes, fierce price wars, and a series of staff reductions and wage freezes. Agis Salpukas, writing for the New York Times, declared: “USAir continues to bleed, but at a much slower rate. Costs have been cut, through a mix of layoffs, deferred orders of new planes and the closing of overlapping facilities.” According to Salpukas, the company, if not yet sound financially, had nonetheless succeeded in refurbishing its public image. “No longer—or, at least, not so often—is the carrier referred to as Useless Air because of problems with flight delays, lost luggage and surly employees.” Meanwhile Colodny retired in 1991, with Seth Schofield taking over as CEO.

On March 22, 1992, US Air suffered a tragedy when Flight 405, bound from LaGuardia to Cleveland, crashed into Flushing Bay within minutes after takeoff. Twenty-seven people, more than half of the flight’s passengers, were killed. The crash, under investigation by the National Transportation Safety Board, was precipitated by a blustery snowstorm and problems involved in deicing planes at LaGuardia once they had been cleared for takeoff.

Following encouraging news from market analysts that USAir would bolster its East Coast presence with the acquisition of a minority stake in the Trump Shuttle (renamed USAir Shuttle) and major slot expansions at LaGuardia and Washington National, British Airways PLC (BA) announced in July 1992 that it had arranged to form a strong alliance with USAir and would purchase a 44 percent stake in USAir for $750 million. Colin Marshall, chief executive of the profitable BA, intended to create a dependable feeder market of overseas routes through the U.S. carrier. But American, United, and Delta Air Lines (the U.S. “Big Three”) vigorously lobbied against the deal and demanded enhanced access to the British market if the deal was to be approved by the U.S. government. In December 1992 the purchase was blocked. In early 1993 B A and USAir restructured their agreement into a $400 million BA purchase of 25 percent of USAir. This investment/alliance, under which USAir gave up its London routes, received U.S. government approval. The government also approved a code-sharing arrangement that enabled the partners to offer their customers a seamless operation when they use both airlines to reach their destination.

USAir continued to be beset by its high-cost operating structure, and posted losses in 1993 and 1994, marking six straight years in the red. It was also the subject of bankruptcy speculation in the press. Under Schofield’s plan to cut expenses by $1 billion a year and helped by a resurgent U.S. economy, USAir returned to profitability in 1995, posting net income of $119 million. In late 1995 Schofield, frustrated in his efforts to secure concessions from the company’s pilots, suddenly announced his resignation. In January 1996 Stephen M. Wolf, former chief executive of United Airlines, came out of semiretirement to become chairman and CEO of USAir. Wolf quickly brought in a former colleague of his at United, Rakesh Gangwal, as president and chief operating officer.

Became US Airways in 1997

Wolf and Gangwal made the attainment of union concessions a key to the company’s future. While negotiations continued, the company announced in November 1996 that the parent company would change its name to US Airways Group, Inc. and USAir would become US Airways, changes that took effect in February 1997. Around this same time, the company’s alliance with B A fell apart after B A announced an alliance with American Airlines, with lawsuits following. The US Airways-BA code-sharing deal expired in March 1997. In late 1997 US Airways finally reached an agreement with the pilots’ union on a five-year deal that established pay parity with the four largest U.S. carriers. With this concession in hand, the company was able to proceed with an order for 400 Airbus A3 20s, scheduled for delivery from 1998 through 2009. The new airplanes would enable US Airways to continue as a major airline, rather than being forced to shrink into a regional one.

A newly revitalized US Airways made a host of strategic maneuvers during 1998. The company purchased full control of US Airways Shuttle, in which it had held a minority stake since 1992; launched the low-cost, low-fare MetroJet carrier to help it compete against Delta Express and Southwest Airlines, which had encroached into US Airways’ core markets; reached an agreement with Airbus to purchase up to 30 widebody A330-300 aircraft for international flights; added to its transatlantic service with the debut of Philadelphia-London, Philadelphia-Amsterdam, and Pittsburgh-Paris runs; and, finally, entered into a marketing alliance with American Airlines involving linked frequent-flier programs and reciprocal airport lounge facility access. In May 1998 Gangwal became president and CEO of US Airways Group, with Wolf remaining chairman.

US Airways Group reported net income of $538 million in 1998, a reflection of its renewed strength. While the carrier had succeeded in cutting its high-cost structure and returned to the black, it faced severe challenges in a era of industry consolidation. Other major carriers were rapidly linking up through global alliances, and it seemed likely that US Airways would have to become more aggressive in this area if it wanted to remain a major carrier itself. By the late 1990s American Airlines had linked with both US Airways and BA, so it seemed possible that US Airways and BA would resurrect their partnership, perhaps creating an American-US Airways-BA trilateral alliance, which would certainly be a global airline power.

Principal Subsidiaries

US Airways, Inc.; US Airways Shuttle, Inc.; Allegheny Airlines, Inc.; Piedmont Airlines, Inc.; PSA Airlines, Inc.; US Airways Leasing and Sales, Inc.; USAir Fuel Corp.; Materials Services, Inc.; USAM Corp.