> Remarks of David Siegel > President & Chief Executive Officer, US Airways > To the Morgan Stanley Debt Investors Conference > New York, NY > > Good afternoon. Thank you for that nice introduction and for the invitation to speak with you > here today. > > I don?t have to tell anyone in this room that these are extraordinary times in the airline > industry, but for emphasis, let me just say that these are extraordinary times in the airline > industry. When I first joined with Northwest Airlines back in 1991, I had a senior manager pull > me aside one day to tell me: ?This is an unprecedented time for the industry. Never before had > we had the confluence of an economic downturn, overcapacity, high fuel prices, an industry > liquidity crisis, high labor costs, war and fears of terrorism. Take it all in,? he told me, > ?because you will never see anything like this again.? > > I only wish he would have been wrong. Or at least half wrong. Because a dozen years later, the > airline industry is grappling with the same set of circumstances ? magnified ? and now we have > the SARS epidemic too. > > So when I came to US Airways a little more than a year ago, it was with the full knowledge that > we had a steep mountain to climb. And beyond the lousy set of circumstances in our operating > environment, the world of commercial aviation has changed forever ? especially for business > travel, which has always been the cornerstone of our profitability. Business travel buying and > behavior patterns are part of this new world that is forever changed. Just as the NASDAQ at > 5,000 and the 28-year-old dot-com millionaires are a faint memory, so too, are the corporate > travel budgets that had no limits. > > Business travelers now shop with price in mind. Not to the extent of Aunt Martha who will only > fly when the fare falls below $200, but they are now bargain shoppers nonetheless. They stay > over a Saturday night. They book their travel 21 days in advance. They do all kinds of things to > save money that they would not have done in the go-go days of the ?90s. And, they are assisted > by perfect price information that is now available to each and every one of us via the Internet. > > At US Airways, our restructuring strategy recognized these and other factors of this new world > of commercial aviation. At the core was the requirement that we reduce our costs, because > airline revenues will likely never be generated at the rates they once were. We have to be able > to compete with all airlines ? large network carriers and small niche operators, full-service > and low-fare airlines alike ? and we have to be able to do so profitably. So lowering our cost > structure was critical. > > With the help and support of our employees, we have been able to do just that. Overall, we have > reduced our costs almost $2 billion on an average, annualized basis over the next seven years. > That includes more than $1 billion per year in reduced labor costs that were reached through > consensual negotiations, as well as reduced fleet, vendor, and other operating costs. > > Our strategy was also based on building a business plan, articulating it to our important > constituencies, and sticking to it. We looked at our strengths and weaknesses, and devised a way > to leverage our strengths and turn our weaknesses into assets. Some looked at our route network > and criticized us for being too concentrated in the east and too focused on smaller cities. > > We, on the other hand, looked at our network and saw something else: > The major carrier east of the Mississippi, where 60 percent of the nation?s population and > wealth reside. > Strong positions in the major business markets of Boston, New York and Washington, with > excellent facilities and slot holdings at the preferred airports of Logan, LaGuardia and Reagan > National, respectively. > A network of nearly 200 communities. We are the only carrier at 40 of them, and the number one > or number two carrier at two-thirds of them. > An active frequent flyer base of 4.5 million customers. > A growing route network to the Caribbean and an excellent transatlantic gateway at Philadelphia, > both which play off our strength on the east coast. > And most importantly, tremendously resourceful and loyal employees fully dedicated to customer > service. > Consequently, our business plan is built on a platform that seeks to leverage these strengths: > > We have maintained service to all but a handful of the communities we serve. > We are going to deploy more than 300 regional jets to better serve the small to medium-sized > cities of our network, and give us the ability to open new markets. > We have entered into an alliance with United Airlines, who?s strong Midwest, West Coast and > Asian presence complements our network in the east. > We have revamped our hubs at Charlotte, Philadelphia and Pittsburgh to improve their operations > and focus. > We have begun to rebuild our operations at Boston, New York and Washington, and will continue to > recapture the market positions that we gave up due to our cost structure, and the focus on our > proposed merger with United which limited our ability to compete. > Our entire restructuring ? as you would expect ? was designed for success. And from the > beginning, we stated very clearly to our stakeholders that we must restructure the company, and > that if we complete the process on a voluntary basis, we would do it through bankruptcy. So > filing for bankruptcy was not seen by us as a failure. Rather it was an alternative path to > execute the restructuring. > > So, when we did file for Chapter 11 protection, it wasn?t a great shock to our customers or > employees. We did not lose market share during this restructuring ? in fact, we actually > recaptured market share once we filed for bankruptcy protection, after experiencing a small > decline last May when we first uttered the possibility of the ?B? word. And, according to the > Department of Transportation monthly consumer reports, our employees have delivered the most > consistent customer service over the past two years, and we?ve even led the industry during most > of this restructuring period. > > Throughout this process, we maintained a consistent message and vision, and stuck to our plan > built around lowering costs, increasing revenues and improving liquidity. When we came to the > conclusion that we had to execute our plan with a Chapter 11 filing, we jumped in the pool to > swim some laps, got in shape, and then got out. We didn?t fall or get pushed in by accident, > only to flail around searching for a way out. And while we had some challenges along the way, we > remained on track. With some minor tweaks, the plan of reorganization confirmed by the court is > pretty much the same plan that we articulated to our employees last spring. > > For your benefit, however, I thought it would be useful to share with you some of my thoughts on > why we were successful in this sprint through bankruptcy. According to BankruptcyData.com, our > case was the fastest-ever successful bankruptcy organization of a large, publicly-traded > company, but that?s probably why we faced some doubters when we filed on August 11 and announced > our fast-track ambitions. > > The fact was that we had little choice. Ultimately, the target date was decided for us because > the agreement with the bank that handled all of our VISA and MasterCard transactions was set to > expire last December 31, and they would only extend the agreement until March 31. Since we could > not replace the credit card processor until after emergence, it was a deadline that was pretty > simply understood. So everything we did and every decision we made was done within the context > of the overall question, ?Does this allow us to stay on track with our March 31 deadline?? > > If you will indulge me, let me now share with you Siegel?s Seven Suggestions for Success, Speed > and Sanity in managing a Chapter 11 process. > > First, I remembered something my mentor, Gordon Bethune of Continental Airlines taught me: ?The > sickest patients need the best doctors.? So we hired the very best restructuring advisers in the > country. That meant hiring John Luth and the Seabury Group who have a proven track record of > success, and have since taken their well-earned reputation across the border to help Air Canada > with its current restructuring. > > Second, we set up a team-oriented process that involved all of our senior management and > completely integrated our lead financial and legal advisers into the team. The company?s > executive committee plus advisers started each day with a restructuring meeting in which the > events and accomplishments of the previous day, the priorities for that day, and the issues and > potential problems for the future were identified and discussed. Early on we even met twice a > day ? in the morning, and again in the afternoon. Our various departments did not operate in > silos from which people made independent decisions or were kept out of the loop. Marketing, > labor relations, operations, finance, legal and public relations leaders of the company came > together each day and participated in finding solutions. Everyone understood the tasks. And the > effort was enhanced from the collective wisdom, experience and skills that were brought to my > conference room each morning. > > Third, we went into bankruptcy with exit financing already lined up. The federal loan guarantee > program established after September 11 provided us with the first tranche. The promise of that > $1 billion loan then gave us leverage to find both a DIP lender and equity plan sponsor ? > originally a $200 million equity investment by Texas Pacific Group, later replaced by the $240 > million investment from the Retirement Systems of Alabama ? both with a $500 million DIP > facility as part of the package. But the initial involvement of TPG ? the premier private equity > firm in aviation ? brought us expert advice and instant credibility in the marketplace. > > Fourth, we communicated consistently, constantly and clearly to all stakeholders. We didn?t tell > employees one thing, and elected officials something else. Our legal filings didn?t contradict > what we told the news media. Our marketing communications complemented what we told our > creditors committee. Now I?m not saying that everyone heard the same thing, because that is > something we can?t always control. But we did not create crises by springing surprises or > delivering conflicting or inconsistent messages. > > Fifth, we purposely interlocked various milestones in the case to force discipline on the > process. Our draws on the DIP were tied to the federal loan guarantee process. Our negotiations > with labor were governed by deadlines in the court process. There was no room for error, so we > built an air-tight process that didn?t let anyone think that a deadline could be changed. It > made for some very long nights and a few rough mornings, but ultimately, it kept us on track. > > Sixth, we put a human face on the company. It was our bankruptcy counsel Jack Butler?s wise > advice that the senior management team actively participate in the legal proceedings. So we were > at every court hearing. And we attended every creditors' committee meeting. Not just me. Or not > just our CFO or General Counsel. But the entire senior management team in various combinations > was in the courtroom and at the creditors? committee meetings. It didn?t convince anyone who > otherwise was a skeptic. But it did demonstrate that the management team was actively engaged > and fully committed to a successful restructuring. > > And finally, we kept our eyes on the prize. Every time someone raised the possibility of staying > in bankruptcy longer and looking for some way to extend the March 31 date, we ended up in the > same place: only after we emerged could we access the $1 billion federal loan and the $240 > million of new equity. There was a $1.24 billion pot of gold at the end of the rainbow, but it > was only available after bankruptcy. Ultimately, that was the absolute right call. With the rest > of the industry scrambling to deal with the impact of war, we now have a cleaned up balance > sheet, permanent cost reductions, and access to cash that our competitors don?t. > > All things being equal, reporting to you on what we have achieved is the easy part, despite the > grueling tasks we faced the last 12 months. The real trick is to try and predict where the > industry goes from here. Our restructuring was just the tip of the iceberg. Every other major > U.S. airline is struggling to develop and implement its own plan to lower costs and define its > future in the industry. Ultimately, it is in our interest to have a healthy industry, in which > supply, demand and price, labor and other costs are all in balance. But we?re a ways off from > the industry being there. > > This year marks the 25th anniversary of the Airline Deregulation Act. Consumers have clearly > benefited from an open market, through lower prices, better service and more competition. I > can?t say that airline investors have fared as well. > > But one of the more interesting aspects of the past decade is the impact of low-cost carriers on > the industry. The Southwests, JetBlues and AirTrans of the world have grown from niche players > to market leaders. And in the process, they have had a radical impact on all aspects of the > business, forcing numerous changes and efficiencies on the rest of the industry. Think about it: > > Low cost carriers ? with their low fares ? are the pricing leaders in the industry. > Simplified fleets of similar planes are now the standard, having replaced the literally dozen or > so aircraft types that we and most major airlines typically flew. > Distribution costs have been drastically reduced through the development and growth of > ticketless travel and the Internet. > Traditional network carriers struggle to achieve the labor costs and work rule efficiencies to > be competitive with the upstart carriers. > From your perspective as debt investors, there is also another important wrinkle that you should > be watching as you follow this industry. Specifically, the public debt associated with airport > financing. For I predict that airport costs are part of the next wave of aviation industry > restructuring. The seemingly insatiable public appetite for air travel led to the development of > too many planes and too many hubs chasing too few passengers. Furthermore, airports and airlines > built very expensive and elaborate facilities that transformed airports into destinations unto > themselves. And in the process, we lost sight of the fact that above all else, passengers want > airports that are efficient, convenient, and affordable, contributing to the overall desire for > low-cost air transportation. > > So just as airlines expanded too much in the last decade, so too have airports. And the debt is > coming home to roost, so to speak. My mentor Gordon also used to say ?You can?t win a horse race > with a 300 pound jockey.? Well, at our hub at Pittsburgh, it costs us close to $9 for each > passenger who uses that airport. And $8 of that $9 per passenger cost goes directly service the > $675 million debt of that facility. > > Now Pittsburgh is a great airport. But as impressive as it is, and as much as people like > connecting there to shop the stores of the airport mall, not one passenger is willing to pay us > extra for the privilege of connecting at our Pittsburgh hub. So when we look at comparable-sized > cities and hub airports like Charlotte, St. Louis or Cincinnati, the high debt load for > Pittsburgh International Airport really makes it an uncompetitive place to do business. > > Prior to our emerging from bankruptcy, we rejected our Pittsburgh facility leases, effective > next January, with the goal of renegotiating those leases and lowering our costs. I believe that > the issues at play at Pittsburgh will soon confront other airport and other airlines as the > industry continues to restructure. And as we have stressed to the Pittsburgh community political > and business leadership, it is really in the region?s interest to work with us to find a > solution. Whether it be to maintain our hub at Pittsburgh, or to attract other airlines to serve > or expand at the airport, making it a cost-competitive place to do business is going to be > critical for the future of Pittsburgh. And moving forward, investors are going to need to > carefully scrutinize plans for airport growth and development to make sure they are based on the > cost efficiencies that airline consumers now demand. > > Thank you. __________________________________ Do you Yahoo!? Yahoo! SiteBuilder - Free, easy-to-use web site design software http://sitebuilder.yahoo.com