Fewer RJs In 2004, Bigger Ones Next Year

With the prediction that US Airways [UAIR] will be burning its cash reserves as well as jet fuel in the second half, the airline last week decided to slow the pace of new regional jets (RJs) coming on board.

The Virginia-based parent of US Airways and four regional carriers has now focused its efforts on meeting loan covenants by Sept. 30 so that it can avoid another trip to the bankruptcy court. The company is trying to convince its mainline employees to take another $800 million in wage cuts and it needs those deals by Sept. 30.

If US Airways does not have enough cash on hand to meet conditions attached to the $1 billion federal loan guarantee from the Air Transportation Stabilization Board, it could be in default. The company had $975 million in unrestricted cash on hand on June 30 - down just $3 million from March 30. When US Airways refinanced the loan guarantee earlier this year, it said the covenant conditions were waived for the second quarter.

Not only is the federal load guarantee in jeopardy, but the carrier is also required to meet conditions of the $4.3 billion in loans needed to finance its new regional jets. US Airways said that General Electric [GE], Bombardier [BBD] and Embraer [ERJ] have agreed to continue financing new jets through September. The loans were placed in jeopardy in the late spring when the bond rating services downgraded the carrier's outlook.

Last week, US Airways changed its order for Bombardier jets and stretched out the delivery of the jets by a year. The company will upgrade 23 50-seat CRJ 200s to a-yet-to-be determined combination of 70-seat CRJ 700s and 90-seat CJR 900s. The revamped order will be for 37 CRJ 200s and 48 of the larger planes. US Airways has asked Bombardier to delay the delivery of 19 planes from this year until later in 2005 and 2006.

By the end of June, Bombardier had delivered 29 of the original order of 85 planes.

No changes are apparently planned for the order of 85 Embraer 170s, of which 10 have already been delivered.

Wholly owned PSA is the primary carrier for the new Bombardiers and Midatlantic is flying the new Embraers.

It is not all doom and gloom at US Airways. The company earned $21 million, or 59 cents per share, in the second quarter compared to $13 million, or 25 cents per share, in the same period of 2003. However, the second quarter numbers should have been much better, said CEO Bruce Lakefield. "This nominal profit is insufficient and we will likely be faced with additional second half losses." He told analyst that he anticipates the company will be "burning cash" in the second half unless the wages are reduced.

"Despite posting a slight profit this quarter, our year-to-date loss of $143 million is unsustainable and the competitive environment continues to intensify," said CFO David Davis.

US Airways' small, and unexpected profit, is a "mixed blessing," said analyst Ray Neidl, of Blaylock & Partners. "It may make it more difficult for US Airways to obtain the 35 percent cost cuts that it needs to be competitive long-term."

In a cost-cutting move, US Airways will downgrade the hub service at Pittsburgh to a "focus city." When the original de-hubbing was announced in May there was speculation that regional carriers - both the company's own and code-share partners - would be flying a greater percentage of the flights (CRAN, May 17). With few details shared recently with Pittsburgh officials, that doesn't appear to be the case.

Effective Nov. 4, the carrier will fly 240 daily non-stop fights from Pittsburgh International Airport compared to the 373 it currently flies. The carrier will fly to 65 cities instead of 102.

The mix between turboprops, regional jets and mainline aircraft has not been sorted out, said David Castelveter, a company spokesman. The winter calendar will not be finalized before mid-August.

US Airways Express currently has 122 RJ flights, 144 turboprop routes and 107 mainline flights. The new schedule will drop the combination to 80 RJ routes, 90 turboprop flights and 70 mainline routes.

Ben Baldanza, the company's chief planner, said that both company-owned turboprops and the code-share partners would fly fewer routes. After November, the wholly owned units will be flying 25 turboprop routes and the affiliates will be flying 65, down from the current 91 routes.

Since June, four regional airlines have announced their intent to stop flying some turboprop routes. Shuttle America, Air Midwest, Trans States and Colgan are dropping routes that US Airways will not replace. "We don't tell the affiliates where to fly," Castelveter said. "If there is not much of an opportunity to operate them profitably, and knowing that we will have a major schedule change, the decision was made not to continue these flights on an interim basis."

At this point, Castelveter said there are two RJ routes that will be eliminated from Pittsburgh: Memphis and Milwaukee. Mesa Air Group [MESA] flies the Memphis route. PSA and Chautauqua Airlines share the flying duties on the Milwaukee route.

The Pittsburgh Regional Alliance is already talking to other carriers about picking up the Memphis and Milwaukee routes, said Ronnie Bryant, the group's president. The economic development group has been working since April 2003 to attract new air service to Pittsburgh. Armed with a list of priority business travel destinations, the group has been working to both maintain non-stop travel to critical business destinations that US Airways may be abandoning and recruiting low-fare airlines to compete on US Airways' exclusive routes.

When US Airways said it would abandon the Pittsburgh to Denver routes, he said, the community convinced United Airlines [UALAQ] to offer two daily wide-body flights to its Denver hub.

Since recruiting efforts began, Bryant said AirTran [AAI], American Airlines [AMR] as well as United have agreed to expand their Pittsburgh flights. In addition, he said, Independence Air will begin flying from Pittsburgh to Washington Dulles later this month.

"We are currently in different discussions with 12 different airlines," he said. "We have had conversations with both Southwest Airlines [LUV] and JetBlue [JBLU]. Southwest is now very integrated in Pennsylvania with it new Philadelphia operation. We are hopeful at some point of their interests here."

While the focus is on non-stop service, Bryant said the end result will be a mix of aircraft filling the void. "We are not keying in on one airline or aircraft type. Depending upon the length of the trip, an RJ may be very appropriate."

>>Contact: David Castelveter, US Airways, (703) 872-5116; Ronnie Bryant, Pittsburgh Regional Alliance, (412) 392-4555.<<