US Airways Group, Inc. History

Company Perspectives:

US Airways Group, Inc. is the parent corporation for US Airways mainline jet and express divisions as well as several related companies, all in the air transportation industry. From the company's beginnings in 1939 as All-American Aviation, Inc., the present-day US Airways is the inheritor of a number of famous names in U.S. aviation. US Airways has been an aviation innovator, particularly in the building of alliances through code-sharing.

Key Dates:

1937:

All American Aviation is incorporated.

1939:

All American Aviation begins mail deliveries.

1953:

All American becomes Allegheny Airlines.

1967:

Allegheny turns feeder routes over to smaller carriers.

1968:

Lake Central Airlines is acquired.

1972:

Mohawk Airlines is acquired.

1979:

Allegheny is renamed USAir.

1986:

USAir buys Pacific Southwest Airlines.

1987:

USAir merges with Piedmont Airlines.

1993:

British Airways acquires 25 percent of USAir.

1997:

USAir is renamed US Airways, ends British Airways alliance.

1998:

US Airways buys Shuttle Inc., launches MetroJet.

2000:

United proposes merger.

2001:

United deal is canceled; US Airways begins restructuring.

2002:

US Airways files bankruptcy; Retirement Systems of Alabama acquires 37.5 percent holding.

Company History:

US Airways Group, Inc. (formerly USAir Group, Inc.) is a holding company for several commercial airlines, of which US Airways (formerly USAir) is the largest. Through its fleet of about 300 jets, US Airways provides service to 95 destinations. In addition to its flagship carrier, which generated 87 percent of the parent company's operating revenues in 2001, other subsidiaries operate a regional feeder network under the US Airways Express name. US Airways is strongest in the Northeast, and has had international success with transatlantic and Caribbean routes.

Mail Delivery Origins

The company was originally incorporated in Delaware in 1937 as All American Aviation, Inc. by a glider pilot named Richard C. du Pont, of the Delaware du Ponts. On May 12, 1939, the airline began to deliver mail around the mountains of Pennsylvania and West Virginia. Since many communities did not have airstrips, the company devised a system employing hooks and ropes that enabled the mail plane to drop off one mailbag and pick up another without landing. Du Pont's method brought regular mail service to a number of once-isolated communities and was widely imitated. Later, All American began transporting passengers on its limited network. Despite the addition of more destinations the airline remained a small operation, serving many remote communities throughout the Alleghenies.

When the United States became involved in World War II, du Pont went to work on the Army's glider program in California. The mailbag snare he developed was adapted by the Army's Air Corps and used to rescue downed pilots behind enemy lines. Du Pont also helped to develop a glider that could be picked up by an already airborne airplane, a system that was used in the evacuation of Allied troops from the Remagen beachhead in Germany. Du Pont was killed in a glider crash in 1943.

After the war, All American Aviation changed its name to All American Airways; in 1953 the name was changed again to Allegheny Airlines. That same year the government chose Allegheny to operate shuttle services between smaller eastern cities and major destinations served by larger airline companies. Allegheny was provided a subsidy to operate these services to communities that otherwise would have had no air service.

The company experienced a period of healthy growth for several years in the 1950s and 1960s. The old DC-3s it was flying were replaced with new Convair 440s, Convair 540s, and Martin 202s. The operations and maintenance base was also relocated from Washington, D.C., to a modern complex in Pittsburgh. Allegheny began buying jets in 1966. In 1968 the company acquired Lake Central Airlines and in 1972 purchased Mohawk Airlines.

Concurrent with this steady growth, Allegheny was obliged to operate the government-assigned "feeder" services, but starting in 1967 Allegheny began subcontracting these routes to smaller independent carriers. The independents were able to make a profit on the routes because they had lower costs, they were not unionized, and their equipment was better suited for the rural "puddle jumper" routes, while the government was happy to release Allegheny from its obligations and discontinue the subsidies. Since the independents fed passengers mostly to Allegheny, the company itself had become a large regional airline.

Despite Allegheny's growth, passengers had a low opinion of the airline, which had acquired the nickname "Agony Air." The company's on-time record was poor, its customer service was described as unpleasant, and flight cancellations were common. In many cities the airline had a monopoly on air service, so there was little incentive to improve customer relations.

Emerging As USAir in 1979

Fortunately for Allegheny its chairman and president, Edwin Colodny, had previously served with the Civil Aeronautics Board (CAB). This experience provided him with the knowledge to acquire and protect the company's right to fly to certain destinations, and to successfully raise fares. Before any of his policies could be put into effect, however, the Airline Deregulation Act of 1978 was passed. Vigorously opposed to the passing of this act, Colodny argued that permitting all airlines to freely enter into any market would allow the larger airlines, with their vast resources, to raid markets served by smaller companies with the intention of driving them out of business. This did not happen. Instead, the larger airlines used their new freedom under deregulation to contend with each other, while regional operators such as Allegheny were virtually unaffected. Deregulation also provided new opportunities for regional airlines. For the first time, Allegheny was allowed to operate long-haul routes to Texas and the West Coast. With such an opportunity, the company clearly required an improvement upon its "Agony Air" reputation. Colodny decided to begin with a new name. He chose "USAir" over several other names, including "Republic Airlines" (which was later used by the old Minneapolis-based North Central Airlines). Allegheny officially became USAir on October 28, 1979.

Under the name USAir the company launched an advertising campaign in which it claimed to "carry more passengers than Pan Am, fly to more cities than American, and have more flights than TWA." This coincided with the inauguration of new routes to the Southwest, which were originally intended to prevent company jets from remaining idle during the traditional winter slump in the northeastern markets. In addition, USAir planned to implement a Pittsburgh-London route, but withdrew the application due to fears of "overambition." According to Colodny, "overexpansion is the most tempting of all possible sins of airline managements under deregulation. And, if overdone, it can result in a serious bellyache. In designing a route system, a carrier must limit its ego." As a result, the airline concentrated on consolidating its markets and strengthening its central Pittsburgh hub.

Colodny maintained that two-thirds of U.S. air travel was in markets of less than 1,000 miles, and USAir made it a point to concentrate on developing these local markets. The short duration of these flights, however, meant that the airplanes had to make more takeoffs and landings, which in turn increased maintenance costs. In the late 1980s the company flew DC-9s, B-727s, 737s, 757s, 767s, as well as several smaller aircraft for its express fleet subsidiaries. The average age of its 446 planes was nine years, one of the lowest averages in the industry.

The airline's ontime record significantly improved as a result of strict attention to scheduling and the "first flight of the day" standard, which prevented late starts from pushing back the whole day's schedule. The airline also perfected a system of efficient bad-weather maintenance. These measures contributed to what company officials claimed was the second lowest number of complaints to the CAB (Delta was first) based on passenger volume.

In order to remain competitive with other airline companies that were merging to form even larger companies, the USAir Group announced in December 1986 that it would be acquiring Pacific Southwest Airlines (PSA) for $400 million. The announcement surprised many industry analysts because USAir's predominantly East Coast airline network had few integration points with PSA, which was concentrated along the West Coast. First operated as a subsidiary of the USAir Group, PSA was later absorbed by USAir. The merger increased the amount of traffic on USAir by 40 percent and gave USAir landing rights in a number of cities on the West Coast.

Early 1990s Downturn

Nevertheless, USAir entered 1992 battered by a poor economy, as well as the fallout from a trouble-ridden merger with North Carolina-based Piedmont in 1987. The company had suffered three consecutive years of net losses (the largest in 1990, at $454 million), the forfeiture of many domestic routes, fierce price wars, and a series of staff reductions and wage freezes. Agis Salpukas, writing for the New York Times, declared: "USAir continues to bleed, but at a much slower rate. Costs have been cut, through a mix of layoffs, deferred orders of new planes and the closing of overlapping facilities." According to Salpukas, the company, if not yet sound financially, had nonetheless succeeded in refurbishing its public image. "No longer--or, at least, not so often--is the carrier referred to as Useless Air because of problems with flight delays, lost luggage and surly employees." Meanwhile Colodny retired in 1991, with Seth Schofield taking over as CEO.

On March 22, 1992, USAir suffered a tragedy when Flight 405, bound from LaGuardia to Cleveland, crashed into Flushing Bay within minutes after takeoff. Twenty-seven people, more than half of the flight's passengers, were killed. The crash, under investigation by the National Transportation Safety Board, was precipitated by a blustery snowstorm and problems involved in deicing planes at LaGuardia once they had been cleared for takeoff.

Following encouraging news from market analysts that USAir would bolster its East Coast presence with the acquisition of a minority stake in the Trump Shuttle (renamed USAir Shuttle) and major slot expansions at LaGuardia and Washington National, British Airways PLC (BA) announced in July 1992 that it had arranged to form a strong alliance with USAir and would purchase a 44 percent stake in USAir for $750 million. Colin Marshall, chief executive of the profitable BA, intended to create a dependable feeder market of overseas routes through the U.S. carrier. But American, United, and Delta Air Lines (the U.S. "Big Three") vigorously lobbied against the deal and demanded enhanced access to the British market if the deal was to be approved by the U.S. government. In December 1992 the purchase was blocked. In early 1993 BA and USAir restructured their agreement into a $400 million BA purchase of 25 percent of USAir. This investment/alliance, under which USAir gave up its London routes, received U.S. government approval. The government also approved a code-sharing arrangement that enabled the partners to offer their customers a seamless operation when they used both airlines to reach their destination.

USAir continued to be beset by its high-cost operating structure, and posted losses in 1993 and 1994, marking six straight years in the red. It was also the subject of bankruptcy speculation in the press. Under Schofield's plan to cut expenses by $1 billion a year and helped by a resurgent U.S. economy, USAir returned to profitability in 1995, posting net income of $119 million. In late 1995 Schofield, frustrated in his efforts to secure concessions from the company's pilots, suddenly announced his resignation. In January 1996 Stephen M. Wolf, former chief executive of United Airlines, came out of semiretirement to become chairman and CEO of USAir. Wolf quickly brought in a former colleague of his at United, Rakesh Gangwal, as president and chief operating officer.

Renamed US Airways in 1997

Wolf and Gangwal made the attainment of union concessions a key to the company's future. While negotiations continued, the company announced in November 1996 that the parent company would change its name to US Airways Group, Inc. and USAir would become US Airways, changes that took effect in February 1997. Around this same time, the company's alliance with BA fell apart after BA announced an alliance with American Airlines, with lawsuits following. The US Airways-BA code-sharing deal expired in March 1997. In late 1997 US Airways finally reached an agreement with the pilots' union on a five-year deal that established pay parity with the four largest U.S. carriers. With this concession in hand, the company was able to proceed with an order for 400 Airbus A320s, scheduled for delivery from 1998 through 2009. The new airplanes would enable US Airways to continue as a major airline, rather than being forced to shrink into a regional one.

A newly revitalized US Airways made a host of strategic maneuvers during 1998. The company purchased full control of US Airways Shuttle, in which it had held a minority stake since 1992; launched the low-cost, low-fare MetroJet carrier to help it compete against Delta Express and Southwest Airlines, which had encroached into US Airways' core markets; reached an agreement with Airbus to purchase up to 30 widebody A330-300 aircraft for international flights; added to its transatlantic service with the debut of Philadelphia-London, Philadelphia-Amsterdam, and Pittsburgh-Paris runs; and, finally, entered into a marketing alliance with American Airlines involving linked frequent-flier programs and reciprocal airport lounge facility access. In May 1998 Gangwal became president and CEO of US Airways Group, with Wolf remaining chairman.

US Airways Group reported net income of $538 million in 1998, a reflection of its renewed strength. While the carrier had succeeded in cutting its high-cost structure and returned to the black, it faced severe challenges in an era of industry consolidation. Other major carriers were rapidly linking up through global alliances, and it seemed likely that US Airways would have to become more aggressive in this area if it wanted to remain a major carrier itself. By the late 1990s American Airlines had linked with both US Airways and BA, so it seemed possible that US Airways and BA would resurrect their partnership, perhaps creating an American-US Airways-BA trilateral alliance, which would certainly be a global airline power.

In December 1998, US Airways contracted with Sabre Group Holdings to provide the airline's IT services for 25 years. The $4.3 billion deal gave US Airways the same computer reservation system as American Airlines.

US Airways' home markets continued to be assailed by low-cost carriers Southwest Airlines Co. and start-up JetBlue Airways Corp. The MetroJet unit was growing, though the company would not say whether it was profitable. By the summer of 1999, MetroJet was connecting 23 cities with 40 aircraft. US Airways was also expanding its transatlantic flights, flying to London's Gatwick Airport from Philadelphia and Charlotte. The Caribbean was probably the most promising area of growth.

United Merger Proposal: 2000

Its influence concentrated in the Northeast, US Airways was not truly a national airline. Chairman Stephen Wolf stated it needed a larger partner to avoid the fate of other mid-sized airlines like Eastern and Pan Am. United Airlines, then the world's largest carrier, announced plans to buy US Airways for $4.3 billion in May 2000. The deal would have created an airline with 145,000 employees and 500,000 passengers a day. US Airways' strengths along the East Coast would mesh nicely with United's cross-country routes. To fend off antitrust criticism, the companies planned to sell off most of US Airways' Reagan Airport (Washington, D.C.) operations to a newly formed, minority-owned airline, DC Air. Led by Black Entertainment Television founder Robert L. Johnson, DC Air would be operationally dependent upon United for at least its first few years.

However, the proposal was not enough to get past a Justice Department that was already moving to undo Northwest Airlines Corp.'s purchase of a controlling interest in Continental Airlines Inc. Opponents of the deal feared the merger would set in motion a major consolidation of the industry, reducing the number of dominant carriers from six to three. Further, United's powerful pilots' union opposed the deal over pay and seniority issues.

Although United invited American Airlines to take 49 percent of DC Air and 50 percent of the US Airways Shuttle--with the odd provision that it give its half of the Shuttle back should American's national market share pass United's by more than 7.5 percent. With opposition from lawmakers, the Justice Department, labor unions, Wall Street, and consumer advocates, the deal was called off in July 2001.

US Airways laid off 11,000 employees after the September 11, 2001 terrorist attacks and trimmed its fleet 25 percent to 310 aircraft. The MetroJet unit was abandoned. In the next year, the carrier would receive $320 million in federal aid to keep it afloat, as well as a $900 million loan guarantee, conditional upon the airline cutting costs $1.2 billion a year through 2008. US Airways lost $2.1 billion in 2001; business traffic, on which the airline depended, had begun a serious downturn early in the year.

Rakesh Gangwal resigned as US Airways CEO in November 2001. His role was taken over for a while by Chairman Stephen Wolf. Formerly head of Avis Rent A Car, David N. Siegel became the company's CEO in March 2002. He soon presented the "first draft" of a recovery plan that sought to make US Airways a lower cost carrier. The number of 50-seat regional jets (RJs) in the fleet was to be doubled to 140, and operated by MidAtlantic Airways, Inc., formerly Potomac Air, a subsidiary formed during the United merger discussions.

US Airways and its would-be merger partner, United, announced the two carriers were cooperating in a code-share deal in July 2002. This marketing arrangement allowed each to sell tickets on each other's flights, and to honor each other's frequent flyer programs. US Airways also had code-share arrangements with smaller operations Trans States, Chautauqua Airlines, and Mesa Air Group, which had invested in US Airways stock after 9/11. A new GoCaribbean alliance was also soon worked out with Caribbean Star Airlines, Nevis Express, and Winair.

Restructuring in 2002

US Airways filed for Chapter 11 bankruptcy protection on August 11, 2002. Soon, David Bonderman's Texas Pacific Group (TPG), which had bailed out Continental Airlines (while US Airways CEO David Siegel was employed there) and America West, provided $200 million to keep US Airways flying. If the reorganization were successful, TPG would own 38 percent of the carrier.

However, TPG was edged out at the last minute by Retirement Systems of Alabama, which acquired 37.5 percent of US Airways Group for $240 million. Retirement Systems, which had assets of $25 billion, also provided $400 million in debtor-in-possession financing. The airline continued to cut back staff and flights. The unions, concerned that US Airways successfully emerge from its bankruptcy, agreed to $900 million in labor cuts. The industry as a whole was dealt another massive blow in December, when UAL Corporation, parent of United Airlines, declared bankruptcy as well.

Principal Subsidiaries: Allegheny Airlines, Inc.; Material Services Company, Inc.; MidAtlantic Airways, Inc.; Piedmont Airlines, Inc.; Potomac Air, Inc.; PSA Airlines, Inc.; US Airways Leasing and Sales, Inc.; US Airways, Inc.

Principal Operating Units: US Airways Express; US Airways Shuttle.

Principal Competitors: AMR Corporation; Delta Air Lines, Inc.; JetBlue Airways Corp.; Southwest Airlines Co.; UAL Corporation.

Further Reading:

• Alexander, Keith L., and Seth Payne, "USAir: This 'Dog' May Be Having Its Day," Business Week, June 21, 1993, pp. 74, 76.
• Antonelli, Cesca, "US Airways Must Snare an Overseas Partner to Continue Profitable Path," Pittsburgh Business Times, April 17, 1998, p. 5.
• Arndt, Michael, and Lorraine Woellert, "Unfriendly Skies for an Airline Merger," Business Week, June 5, 2000, p. 50.
• Banks, Howard, "Canceled Flight," Forbes, April 16, 2001, pp. 54-55.
• Bond, David, "United, US Airways Cash in Merger Chips," Aviation Week & Space Technology, July 9, 2001, pp. 45-48.
• ------, "United, US Airways Try Again to Link Up," Aviation Week & Space Technology, July 29, 2002, p. 50.
• "Bronner Airways," Pensions & Investments, October 14, 2002, p. 10.
• "Champagne on Ice," Airfinance Journal, Business Yearbook 1999, pp. 4-6.
• Del Valle, Christina, "Brawl in the Cockpit at USAir," Business Week, September 25, 1995, p. 59.
• Del Valle, Christina, Wendy Zellner, and Susan Chandler, "USAir's European Squeeze Play," Business Week, September 2, 1996, pp. 62-63.
• Dwyer, Paula, et al., "Air Raid: British Air's Bold Global Push," Business Week, August 24, 1992.
• Feldman, Joan M., "Unfinished Business," Air Transport World, September 1999, pp. 24-34.
• Foust, Dean, Keith L. Alexander, and Aaron Bernstein, "USAir's Frightening Loss of Attitude," Business Week, June 6, 1994, p. 34.
• Fulman, Ricki, "Bronner Says US Air Deal Will Pay Off When Industry, Now 'In a Dither,' Turns Around," Pensions & Investments, September 30, 2002, pp. 1, 41.
• Jennings, Mead, "Snowed Under: Growth of the British Airways-USAir Alliance Has Been Put on Hold As USAir Attempts to Put Its Own House in Order," Airline Business, April 1994, pp. 26+.
• Kleinfeld, N.R., "The Ordinary Turned to Instant Horror for All Aboard USAir's Flight 405," New York Times, March 29, 1992.
• McDonald, Michele, "Flying Solo," Air Transport World, September 2001, pp. 44-47.
• Miller, James P., "US Air's Wolf Gives Gangwal the CEO's Job," Wall Street Journal, November 19, 1998, pp. A3, A14.
• Noonan, David, "Turbulence Ahead," Newsweek, June 5, 2000, p. 40.
• Odell, Mark, "US Airways Chief Is Latest Casualty of Crisis," Ft.Com (London), November 27, 2001.
• Ott, James, "Executive Pay Clouds US Airways Recovery," Aviation Week & Space Technology, September 3, 2001, p. 82.
• ------ "US Airways' Restructuring Has to Sway Skeptics," Aviation Week & Space Technology, May 20, 2002, p. 156.
• Reeves, Frank, and Jim McKay, "US Airways to Lay Off 471 Pilots, 915 Attendants; Daily Flights Also Facing Cutbacks," Pittsburgh Post-Gazette, October 26, 2002, p. A1.
• Salpukis, Agis, "USAir Discovers There Is Life After a Messy Merger," New York Times, January 19, 1992.
• Shives, Robert, and William Thompson, Airlines of North America, Sarasota, Fla.: Crestline, 1984, 240 p.
• Spiegel, Peter, "Can Heroes Work Miracles?" Forbes, April 6, 1998, pp. 53+.
• Thomas, Cathy Booth, "Is There a Doctor on Board?" Time, August 26, 2002, pp. 28-29.
• "US Airways Forms RJ Subsidiary," Air Transport World, July 2002, p. 22.
• "USAir's Seth Schofield Is Named Chairman," Wall Street Journal, May 14, 1992.
• Velocci, Anthony L., Jr., "MetroJet's Expansion Tests Rivals' Mettle," Aviation Week & Space Technology, April 12, 1998, p. 57.
• ------, "US Airways Accord Sets Stage for Growth," Aviation Week and Space Technology, October 6, 1997, pp. 35, 38-39.
• Walker, Karen, "US Airways Cry Wolf!," Airline Business, August 1997, pp. 24+.
• Whitaker, Richard, and Mead Jennings, "BA and USAir Forge a New Deal," Airlines Business, February 1993, pp. 20+.
• Woellert, Lorraine, "US Airways: Into the Next Cloud," Business Week, April 10, 2000, p. 44.
• Woellert, Lorraine, and David Leonhardt, "Pulling US Airways Out of a Dive," Business Week, September 14, 1998, pp. 131-32.
• Woellert, Lorraine, and Michael Arndt, "Somebody Still Likes US Airways," Business Week, September 2, 2002, p. 37.

Source: International Directory of Company Histories, Vol. 52. St. James Press, 2003.

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