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MERGERS FORCE USAIR INTO DELAYED TAKEOFF

MERGERS FORCE USAIR INTO DELAYED TAKEOFF

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With a slew of monopoly routes and a fortress hub in Pittsburgh, USAir appeared to have a license to make money in the 1980s. It didn't do much marketing. It didn't buy jumbo jets. It didn't offer first class service. It wouldn't even give customers an extra bag of peanuts.

While other carriers were mired in red ink, USAir earned a profit in every year except one following deregulation.So confident were the company's executives that they undertook one of the biggest airline combinations in history in 1987, acquiring both Pacific Southwest Airlines and Piedmont Aviation Inc. The two mergers made USAir the nation's sixth largest airline, and left it with dominant market shares in Pittsburgh, Philadelphia, Baltimore, San Diego, Charlotte, N.C., and Dayton, Ohio.

The mergers, however, also meant that USAir no longer had things quite so soft. Forced out into the rough-and-tumble arena of national competition, it suddenly had to worry a whole lot about the industry's really tough players.

Moreover, in absorbing two successful carriers into its system, USAir adopted what it called a ``Mirror Image' strategy of making them do everything exactly its way. In this, USAir gave up some of the very elements that made the target airlines successful.

On the West Coast, USAir has been getting clobbered in a five-way battle with AMR Corp.'s American Airlines, UAL Corp.'s United Airlines, Delta Air Lines and low-cost Southwest Airlines. It has had to retreat in a number of West Coast markets, and many of its Western routes are now unprofitable. In Philadelphia, USAir is having trouble with Midway Airlines and Eastern Airlines. To compete, it has had to cut fares to below profitable levels. (Overall, though, the airline says that it is still maintaining its market share.) Nine days ago, USAir announced plans to furlough 3,600 of its employees, including 500 managers. The layoffs, which represent about 7 percent of its work force, are among the largest ever in the industry. USAir also said it was scaling back its capacity growth projections to a maximum of 2 percent next year from a previously projected 6 percent. Its stock - already hurt by the disclosure of a $113 million deficit in the first six months - has plunged from a high of $54.75 last summer to Friday's $XXXXX close on the New York Stock Exchange.

USAir ``ran into problems when it began to venture out beyond its area of natural advantage; now it is really quite exposed,' says Alfred Kahn, former chairman of the old Civil Aeronautics Board and a pioneer of deregulation. Faced with intense competition from sophisticated rivals, the airline ``strikes me as being a rather clumsy giant,' he adds.

Matters could grow even worse in coming months. That's because USAir is more vulnerable than other carriers to rising fuel prices. Its short-hop route system burns up more fuel because its jets spend less time at cruise altitude. Half of its 400 jets are more than 10 years old, and these planes are much less fuel-efficient.

The carrier recently mothballed six of its oldest Boeing 727s and says it may ground as many as 49 older 727s and 737s in the next 16 months. It has also postponed taking delivery of 12 new aircraft. A maintenance official says the airline may try to sell some of its older airplanes. If so, it will do in a weak resale market.

USAir also has almost completely missed out on the high-growth international market where traffic has risen a healthy 16.9 percent so far this year, compared to 3 percent domestically. While other carriers have been adding overseas flights as quickly as they can get government approval, USAir has service only to London and Frankfurt. So it is especially vulnerable to a U.S. recession.

Against this backdrop, pressure is mounting on Edwin O. Colodny, USAir's reserved, bespectacled chairman, to improve matters. Colodny - who said last week that he expects to retire next year after reaching 65 in June - is quick to acknowledge that USAir has had its problems. ``There's no way for me to say that our management didn't make a single mistake,' he says, citing failure to pursue one foreign route more aggressively. But he also blames the pressures the entire industry has been under, the heavy discounting in some markets, and the weakening U.S. economy.

``All of these things have come together,' he says. ``Growth has just disappeared.' Hence, the cutbacks: ``It's prudent for us to trim back when we don't see the market growing. I can't promise that 1991 would be profitable. Unless something in our economy changes dramatically, I can't see that happening.'

USAir has plenty of problems besides the economy. Government regulators, for example. Justice Department trust-busters are pressing it for information about its Pittsburgh operations as part of an investigation into whether USAir is blocking other airlines from starting service there. USAir denies any wrongdoing.

Staffing practices The Federal Aviation Administration also is pressing Colodny to revise pilot training and crew staffing practices after training and crew staffing practices after USAir Flight 5050 skidded off the runway at New York's LaGuardia Airport a year ago, killing two passengers. The flight had paired a new captain with a newly hired co-pilot. USAir says it has addressed all of the FAA's concerns.

Whether Colodny's cautious management style is suited to quick turnarounds may be another question. Given to micro-managing, the publicity-shy ex-lawyer even chooses the pictures for the covers of flight schedules. He insists that senior managers sign off on department expenditures of over $1,000.

When USAir decided to go to two classes of service on all routes last year, it moved very cautiously, offering only single row of first class seats on many flights. And while USAir jumped into the merger game in a big way, Colodny was one of the last airline chief executives to pursue a major acquisition. ``Basically, he was forced into it,' says an industry official, because other carriers had already gobbled up their competition.

Some in the industry believe that the company's years of insulation from major competition gave USAir executives an inflated opinion of their operating style. This was particularly damaging when USAir bought PSA and Piedmont. Rather than learning from the two carriers , it appears, USAir simply imposed its own way of doing business.

Both PSA and Piedmont had already shown their profitability and customer appeal. Piedmont, headquartered in sleepy Winston-Salem, N.C., had attracted a loyal following with its southern hospitality and outstanding service. PSA had wooed West Coast fliers with a playful style that allowed flight attendants to begin safety briefings with lines like, ``In case you haven't been in an automobile since 1962, this is a seat belt.'

Balancing tickets Piedmont had what many in the industry believed was a more sophisticated ticket pricing system, which balanced full-fare and discount tickets more profitably. USAir scrapped the Piedmont system and still uses only its own. ``The revenue differential was astounding' - and lower - on many flights, says one former Piedmont executive.

Colodny says making practices uniform was necessary to running the big airline.

His most immediate problem is USAir's unusually high labor costs, and they too are related to the merger. Labor costs have climbed to 4.13 cents per available seat mile from 3.57 cents before the merger. Meanwhile, the carrier's yield, or revenue from ticket sales, dropped to 16.55 cents per available seat mile in the first half of this year from 17.29 cents in the like period last year.

USAir's labor costs are high because the airline, anxious to insure labor peace, gave PSA and Piedmont workers hefty wage hikes after the merger. The move cost USAir an additional $100 million annually, at least, according to former Piedmont executives. Some customer service agents who earned about $14,000 at Piedmont now earn at least $20,000 at USAir.

With mechanics and flight attendants in contract negotiations, Mr. Colodny has a chance of tackling the problem soon. USAir may have to revert to using Piedmont's more flexible work rules. At Piedmont, customer service agents earning about $6.75 an hour also worked on the tarmac, directing aircraft in and out of their gates. At USAir, a mechanic earning a minimum of $18 an hour performs this job. USAir had to hire an additional 400 mechanics to service the same number of Piedmont flights because of this rule.

Colodny may also have to ask USAir employees for greater flexibility. At Piedmont, many employees were cross-trained so that gate agents could load bags when necessary. Moreover, USAir flight attendants, on average, work two to three fewer days a month than Piedmont's did, for much higher wages.

USAir's labor costs are high even when compared with the rest of the industry. At United, entry-level aircraft cleaners earn $6.83 an hour; the job pays $10.94 an hour at USAir. Getting the unions on board promises to be a big challenge, but Colodny is optimistic. ``We expect to achieve some changes,' he said. ``We certainly hope to improve our labor costs.'

Industry analysts say USAir will also have to become more sensitive to marketing trends and customer preferences. When USAir cut the old Piedmont practice of serving passengers whole cans of soda, instead of just a cupful, Piedmont frequent fliers put their foot down. Cost-cutting was one thing, but this was downright stingy, they wrote to the Charlotte Observer. Chastened, USAir started handing out the cans again.

Passing of cookies noted Passengers on Piedmont had also come to love the baskets of granola bars, cookies and crackers handed around in first class and the snacks served on flights of less than two hours. When USAir cut that admittedly minor service, complaints again flowed in. Back came the baskets, but minus the expensive cookies.

USAir's experience with PSA also taught it that hewing to a not-invented-here philosophy can cost you in the end. PSA used to hand out cold snacks - a quick and easy service - on its short-haul California routes. USAir changed those to hot meals. But, encumbered by trays and the need to heat meals, flight attendants couldn't keep up with the short-haul schedule. Several flights wound up circling airports while the crew frantically tried to collect trays and stow away carts.

So USAir is back to cold snacks on those flights. It still, however, hasn't reinstituted PSA's practice of letting passengers buy tickets on board or in coupon books. ANd gone now are the smiling faces PSA had painted on the nose of its planes. George Shortley, PSA's former chief financial officer, says that was a big marketing mistake. ``That was one of the most recognized trademarks in California,' he says.

Colodny says USAir had to take the smile off because it wanted all the planes to look alike. ``It's very difficult to have a smile on everywhere,' he says.

USAir has also been wrestling with its on-time performance and its baggage service. It chalked up one of the worst records in the industry most of last year and part of this year. Part of the problem stemmed from having to integrate employees of all three carriers - a daunting task, as other merged airlines have also discovered. USAir now operates 17 bases from which crews are drawn - over twice as many as industry leader United.

The complexity of that structure was quickly apparent. In the early months of the merger, it wasn't unusual for pilots to show up for a flight, only to find they were scheduled on a plane they weren't certified to fly.

USAir says it has worked out its crew scheduling problems. Its on-time performance has also improved. It was fifth best in the industry in June, the last month for which statistics are available. However, in some cases, USAir simply added minutes to the scheduled arrival time. The flight that used to be scheduled to leave New York's LaGuardia at 6:10 p.m. and reach Charlotte at 7:58 p.m., for example, is now scheduled to leave at 6:15 but arrive at 8:15. USAir says it revised scheduled to make them ``more realistic.'

In the end, USAir, now that it has joined the big leagues, is wrestling with many of the same problems plaguing other major airlines: how to keep service good and meet customer demands while holding costs down. But in Colodny's mind, critics who say the company just isn't used to competing are wrong: USAir has had to fight for market share in the past. And while he says he's disappointed by the company's recent performance, he suggests that some of the criticism of late hasn't been all that fair. ``It's easy to criticize when you're not making money,' he says.

After 33 years with the company, Colodny now faces some of his biggest tests - in his last year. His announcement that he plans to retired in 1991 (a firm date hasn't been set) lays to rest widespread speculation that he might stay on. But whether he will be able to see the beginning of a turnaround at USAir by then is uncertain. In an interview, even Colodny seems doubtful. ``It would be better to have a happy ending' to his career, he says.

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