Upheavals in the domestic and international airlines industries have affected some of the most prominent names in aviation. Recent decades have seen the collapse of Pan American, Northeast, Braniff and Pioneer, among others. The financial dynamics which led to outright bankruptcy of these major carriers have been examined carefully by airline officials and new strategies are beginning to emerge to avoid such catastrophic destabilization of the industry.
One such strategy involves the merger of several smaller airlines, such as those quoted in the Cost Analysis chapter of our text. Both advantages and disadvantages exist, however, when consolidation of several intrinsically troubled carriers takes place, as US Airways ultimately discovered. By inheriting a number of already ailing firms, US Airways actually compounded its problems, having, for example, to maintain a fleet of aircraft which was far too diverse to be cost-effective. Sheer intellect had to be, and was, applied to a series of potentially crushing problems.
Competing carriers, especially Continental five years ago, began to encroach on US Airway's traditionally strong northeastern market, almost as if they sensed a struggling, badly structured firm. In fact, strong companies -- such as Continental or Southwest -- typically engage in a little "competitive intelligence" work and know, well in advance, how and to what extent then can undercut the competition. So, a year later, US Airways was in deep trouble, fighting off competitors and watching their market-share drop. Their 'yield' dropped, as did their public stock price by a dramatic 400%, forcing them into adopting desperate measures, such as wage roll-backs and abandonment of once lucrative routes.
Indeed, US Airways had serious cost-control problems, they needed to reorganize and restructure their operating patterns. It was a long road to solvency; and the last four years were often filled with obstacles. But Rakesh Gangwal, President and CEO of US Airways, noted in this year's Annual Report that impressive progress has been made on a number of fronts. Firstly, the fleet-diversity problem and its related maintenance nightmare, mentioned in our Cost Analysis chapter, have been resolved to the satisfaction of both Shareholders and Corporate Officers.
In the last three to four years, US Airways has increased its annual revenues by 16%, according to the on-line Annual Report. Passenger load was up some 8% in the same 3-year period and the company's profit tripled to slightly over 1 billion dollars. This is a magnificent improvement over the near-bankrupt status of the firm in 1995. US Airways was able to buy back over a billion dollars in common stock from the public in 1998 and still had over 1.2 billion in cash on hand, with a corporate indebtedness of only 2 billion dollars. Strong bargaining on the part of the firm's purchasing specialists resulted in very favorable terms for acquisition of new aircraft, which represents, apparently, most of the 2 billion dollar debt. But with gross revenue and passenger yield figures rising, this indebtedness is comparatively minor in comparison with profits on the order of one billion annually.
Some factors in the last two years over which US Airways has no control have improved. For example, there has been a sharp decrease in the price of aviation fuel, down from 61 cents per gallon to 46 cents. The price of fuel, although it fluctuates, is a reality which also confronts the competition. Yet, for a firm recovering from a major crisis five years ago, such a boon is a positive factor enabling, in part, US Airways to increase passenger income per mile (yield) which now stands, according to the current Annual Report, at 17.02 cents. This figure was in the vicinity of 18.8 cents in 1993, dropped during highly competitive moves by Continental, and then recovered.
Glancing at stock performance for the last five years, it is amazing how investor confidence in this corporation has been restored. Our text quotes US Airways stock as having dropped to a disturbing low of $4.88 per share in early 1995. Due to the reorganization and re-strategizing measures described above, however, in the last quarter of 1998, it was trading in the range of $34 to 59 per share, after reaching a third quarter high of $83. There still seems to be some volatility in US Airways stock prices, but investor confidence has been restored to the extent that the Corporation is certainly no longer perceived as on the verge of insolvency.
On-line news releases dating back into 1998 attest to the recent expansion of US Airway's routes and services. New service has been added, for instance, which now brings at least a half dozen European destinations into the company's route-system. Expanded passenger service to Florida and intensified flights in northeast corridors on MetroJets are also two features which have attracted new customers, and, just as importantly, have discouraged competitors. The financial dynamics are shifting more heavily, according to the President/CEO, in favor of US Airways particularly in large, lucrative domestic markets. Yet President Gangwal warns that competition is still there and that challenges must continue to be met:
The long-term success of US Airways seems dependent on continually revitalizing its outlook in relation to the existing competitive atmosphere in the airlines industry. The President / CEO of this corporation is optimistic and speaks in glowing terms of his firm's progress in the last two years. His enthusiasm, plus wise decisions made by upper-echelon management, should enable US Airways to continue to compete viably in highly prized US and European markets.