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US Airways by the numbers: A pilot's perspective
February 25, 2005 / Vaughn Cordle, CFA
The Pittsburgh Tribune has been running a series of articles that has been getting a lot of attention
from US Airway's pilots and employees. The negative feedback reflects a misunderstanding of
some of the numbers and the fact that one reporter did not disclose that I was a pilot for United. For
the record, I did disclose this relationship. The reporter involved with the two headline-grabbing
articles, which did not fully represent what I said in the interviews, is no longer with the paper.
My conclusion at the time was that US Airways would fail in 2005 because of the company's
exceptionally over-leveraged balance sheet, noncompetitive cost structure, high fuel costs, poor
liquidity, declining yields, and its ever-increasing competitive environment.
The company bought itself time with the relief provided by ATSB and GE and there is a window of
opportunity for the airline to survive given a competitive cost structure, improved labor relations, and
lower fuel costs. Air Wisconsin's recent equity investment and new labor agreements provide
desperately needed cash and cost reductions. The amount of equity raised will determine, in large
measure, whether or not they can survive.
US Airway's pilots apparently believe that "pilot costs" are the same as "pilot pay." They are not.
Many mistakenly believe that the total costs per pilot number in 2004, $241,000, is wrong because
the average pilot takes home considerably less - $155,000 on average. New pay cuts will reduce
average pay to approximately $128,000.
Interestingly, Southwest is now at the top of the hourly pay table and US Airways and United are now
at the bottom. Hourly and monthly pay rates are not the same as total costs per pilot and this is
where the confusion exists. Narrow body hourly pay does not include the higher wide body averages.
February 25, 2005 / Vaughn Cordle, CFA
The Pittsburgh Tribune has been running a series of articles that has been getting a lot of attention
from US Airway's pilots and employees. The negative feedback reflects a misunderstanding of
some of the numbers and the fact that one reporter did not disclose that I was a pilot for United. For
the record, I did disclose this relationship. The reporter involved with the two headline-grabbing
articles, which did not fully represent what I said in the interviews, is no longer with the paper.
My conclusion at the time was that US Airways would fail in 2005 because of the company's
exceptionally over-leveraged balance sheet, noncompetitive cost structure, high fuel costs, poor
liquidity, declining yields, and its ever-increasing competitive environment.
The company bought itself time with the relief provided by ATSB and GE and there is a window of
opportunity for the airline to survive given a competitive cost structure, improved labor relations, and
lower fuel costs. Air Wisconsin's recent equity investment and new labor agreements provide
desperately needed cash and cost reductions. The amount of equity raised will determine, in large
measure, whether or not they can survive.
US Airway's pilots apparently believe that "pilot costs" are the same as "pilot pay." They are not.
Many mistakenly believe that the total costs per pilot number in 2004, $241,000, is wrong because
the average pilot takes home considerably less - $155,000 on average. New pay cuts will reduce
average pay to approximately $128,000.
Interestingly, Southwest is now at the top of the hourly pay table and US Airways and United are now
at the bottom. Hourly and monthly pay rates are not the same as total costs per pilot and this is
where the confusion exists. Narrow body hourly pay does not include the higher wide body averages.
The critical difference between a low-cost airline's and a legacy's costs can be explained by the
difference in asset and labor productivity, which is a function of the business model and collective
bargaining agreements. Younger airlines have not been in business as long as the legacies and
this gives them a distinct labor cost advantage. Moreover, low-cost airlines do not have expensive
pension plans and large numbers of retirees to support.
Non-labor financing costs - rents and interest expense - are higher at the legacy airlines because
they never retained enough earnings in the past. US Airways is in bankruptcy because their
balance sheet could not handle the losses and costs were too high given the stronger and lower
cost competition and high fuel costs.
It should be noted that DOT's 2004 data are based on the first 9 months of 2004 using 2003 pilot
counts, which is how they calculate pilot costs with partial year data. Full year numbers for 2004
will be available in March.
The airlines with the highest labor costs - in all of its forms - in the past have had the highest costs
and the most over-leveraged balance sheets. As of January, 31, 2005, US Airway's retained
earnings account was a negative $2.8 billion. It should be noted that the retained earnings value
was a negative $4.6 billion at the end of 2002, which was the year before the first bankruptcy. This
number represents the cumulative losses and profits from day one of operations. Southwest as a
contrast has a retained earnings value of $4.1 billion as of Dec 31, 2004.
The following charts illustrate why US Airways is in trouble and in bankruptcy for a second time
within two years. Of course it is not all about labor, however, these costs are the largest variable
and controllable costs. Hypothetically, if US Airways had market average labor costs over the last
decade, they would not be in bankruptcy today.
difference in asset and labor productivity, which is a function of the business model and collective
bargaining agreements. Younger airlines have not been in business as long as the legacies and
this gives them a distinct labor cost advantage. Moreover, low-cost airlines do not have expensive
pension plans and large numbers of retirees to support.
Non-labor financing costs - rents and interest expense - are higher at the legacy airlines because
they never retained enough earnings in the past. US Airways is in bankruptcy because their
balance sheet could not handle the losses and costs were too high given the stronger and lower
cost competition and high fuel costs.
It should be noted that DOT's 2004 data are based on the first 9 months of 2004 using 2003 pilot
counts, which is how they calculate pilot costs with partial year data. Full year numbers for 2004
will be available in March.
The airlines with the highest labor costs - in all of its forms - in the past have had the highest costs
and the most over-leveraged balance sheets. As of January, 31, 2005, US Airway's retained
earnings account was a negative $2.8 billion. It should be noted that the retained earnings value
was a negative $4.6 billion at the end of 2002, which was the year before the first bankruptcy. This
number represents the cumulative losses and profits from day one of operations. Southwest as a
contrast has a retained earnings value of $4.1 billion as of Dec 31, 2004.
The following charts illustrate why US Airways is in trouble and in bankruptcy for a second time
within two years. Of course it is not all about labor, however, these costs are the largest variable
and controllable costs. Hypothetically, if US Airways had market average labor costs over the last
decade, they would not be in bankruptcy today.
Higher productivity...
Results in lower costs...
And, noncompetitive costs over time...
...Especially labor, results in less retained earnings, which in turn...
Leverages up the balance sheet and drives up finance costs
Noncompetitive costs require noncompetitive pricing, which
results in lost market share over time
results in lost market share over time
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