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Author: Lott, Steve

ARRIVALS

America West/US Airways Merger May Close Gap With Low-Cost Carriers

Drilling down through all the talk about frequent-flier benefits and marketing pizzazz surrounding the US Airways-America West merger leaves two key questions: Will the combined carrier be able to cut expenses to the level of low-cost carriers (LCCs) and will it achieve a revenue advantage?

US Airways historically has racked up the highest costs of all U.S. carriers, while America West has controlled costs better than any other domestic operator with a traditional hub-and-spoke system. Thanks to two rounds in bankruptcy court, US Airways cut its costs to a level that approaches America West's, and a new analysis by Aviation Daily and partner Eclat Consulting shows those cuts will come closer to bridging the gap with LCCs than many thought.

All costs in the analysis exclude fuel expenses. While fuel is the biggest cost of the day, it is not a controllable expense unless a carrier has a strong enough balance sheet to hedge its fuel needs. In the past three years, which include two bankruptcies, US Airways' mainline domestic unit costs, excluding fuel, remained relatively constant when comparing fourth-quarter 2000 and fourth-quarter 2004.

The overall cost per available seat mile (CASM) is a misleading indicator, however, because the carrier achieved significant cost savings. Substantive concessions from its unions cut labor costs to 1.82 cents per ASM. It realized further savings from changes in maintenance processes, aircraft acquisitions and commission cuts. The overall CASM appeared flat as a result of increased regional capacity spread over fewer mainline ASMs. The added capacity brought was offset by equal increases in revenue.

The resulting decreases in mainline costs pared US Airways' mainline CASM, excluding fuel, to within 3.2 cents of Southwest's. The LCCs still have an advantage, but it is much smaller than four years ago. US Airways' domestic cost, combined with America West's system cost, reduces the Southwest cost advantage even further, to 2.25 cents per ASM, excluding any "synergistic" savings created by the merger.

The second major question is whether the merged airlines will be able to keep a revenue premium in the face of LCC competition. About 43% of America West's passengers are exposed to service from Southwest, and 26% of US Airways traffic has a choice to fly Southwest. Aviation Daily and Eclat found the merged carrier to have a 1.36-cent revenue advantage over Southwest, excluding regional partner revenue.

If the airlines can maintain that cushion, the RASM (revenue per available seat mile) premium will relieve some of the pressure to match Southwest's lower costs. Accounting for US Airways/America West's revenue advantage over Southwest of 1.36 cents and their cost disadvantage of 2.25 cents, the net differential is 0.89 cents per ASM, favoring Southwest. The gap shrinks even more if you assume that the combined entity will create additional revenue and reduce costs at US Airways as the airline adopts America West's higher utilization rates and fare structure.

Steve Lott is assistant managing editor of the Aviation Week Group's Aviation Daily. Eclat analyst Aaron Taylor contributed to this report.

GRAPH: STAGE ADJUSTED UNIT COSTS

GRAPH: STAGE ADJUSTED UNIT REVENUE

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By Steve Lott

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