Fool Plate Special: Turbulence at US Airways Intensifies

An Investment Opinion

Turbulence at US Airways Intensifies

By Warren Gump (TMF Gump)
September 15, 1999

US Airways (NYSE: U) filed a letter to analysts and investors with the SEC yesterday after the markets closed, warning that operational problems would cause the airline to post a loss during the current quarter and hurt the next quarter as well. This quarter's expected loss falls well shy of the $0.84 per share profit that analysts were expecting and the $1.51 earned in last year's third quarter. The company and analysts were already anticipating reduced second half profit because of a slowdown in scheduled service growth, customer service problems, and rising oil prices.

An unusually high number of flight cancellations exacerbated the above-mentioned problems to create the company's loss this quarter. In its SEC Filing, the company said that an average of 130 flights a day were canceled during July and August, representing 6.4% of its flight schedule. No explanation for these flight cancellations is given, but it is well known that the company has had significant labor problems, which could have sparked a worker slowdown. This speculation is supported by the company stating, "We firmly believe that once our major labor negotiations are completed, our operational difficulties will largely be behind us."

Canceling flights and losing immediate revenues (many customers immediately move to another airline to get to their destination in a timely fashion) is one issue. Far more damaging -- and lingering -- is the tarnished reputation such problems bring. If you've been on a couple of US Airways flights that were canceled for non-weather-related reasons, you're probably going to avoid booking your next flight on the airline if another reasonable choice is available.

The current flight cancellation problems are not the first major glitches endured by US Airways passengers recently. Over the past year, they have also been burdened by problems caused by the conversion to a new information system. I can personally attest to these issues. The airline canceled one of my flight reservations this spring, despite the fact that it had issued me a physical ticket and I had given an agent a travel voucher to pay for the trip. Those types of experiences quickly erase any loyalty that has been built up in the past -- and they apparently affected lots of people.

Airlines are one of the most cyclical of the cyclical stocks. Due to the high fixed costs of airplanes, labor, and support services, their profits shift dramatically on relatively slight fluctuations in revenues. To achieve success in such a market, it is imperative to have strong management that can quickly address problems that crop up. Even with ideal leadership, the industry's lackluster history of value creation makes it questionable whether a buy and hold investor should consider any industry player (Southwest Airlines (NYSE: LUV) being a possible exception). If a management team in such a volatile industry can't successfully fly through a buoyant economy, though, just think how bad the ride might become during less-than-ideal conditions.

The company did try to throw out a bone to investors, announcing plans to repurchase an additional $500 million worth of stock as "a reaffirmation of [the US Airways Board of Directors'] belief in the company's long-term prospects." I'll let the company spend its money rather than my money on US Airways stock.