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US Airways Group Inc. faces an uphill battle to win additional labor concessions, industry analysts say, raising the prospect that the troubled airline could be forced to dismantle or go out of business. Company CEO David Siegel called for cost cuts last month during an Internet broadcast with employees, contending that discounter Southwest Airlines Co. is “trying to kill us and take our franchise away.” Siegel said US Airways must slash expenses by 25 percent to compete with Dallas-based Southwest, which begins service to Philadelphia, US Air’s most profitable hub, in May. US Air is expected to start talks with pilots later this month. The airline hopes to have new contracts in place with all workers by this summer, but to date only the pilots have agreed to negotiations. J.P. Morgan Chase & Co. analyst Jamie Baker estimates that during the fourth quarter US Air paid workers 3.8 cents per seat per mile, a standard measure of airline expenditures, in line with the industry average of 3.7 cents. But its cost is still well above that of low-fare rivals such as JetBlue Airways Inc., at 1.9 cents; AirTran Airways Inc., 2.2 cents, and Southwest, 3.1 cents. US Airways wants to bring its labor costs down to JetBlue’s level, a daunting goal given the average age and experience of US Airways pilots. “Many of JetBlue’s pilots presumably studied the history of Vietnam; some of US Airways’ employees actually flew fighters there,” Baker wrote in a research note Monday. “We simply do not see how a work force populated by this level of experience can take on the cost characteristics of one in just its fourth year of operation, even when survival may be at stake.” The airline also hopes to take about 2 cents per available seat mile out of its nonlabor costs, a goal that Baker said is “at least notionally achievable.” A spokesman for Arlington, Va.-based US Airways said it was too early to predict the outcome of the upcoming labor negotiations, but said the company was committed to lowering its costs. “Dave Siegel has said he will not allow this company to fail and that he will continue to work with all employee groups to reduce costs to be competitive,” the spokesman said. “We have a plan to do that, and that plan is going to require more sacrifice by all employees.” US Air filed for bankruptcy protection in summer 2002 amid a steep drop-off in travel following Sept. 11, 2001. Excluding extraordinary items, the company lost $129 million in the fourth quarter of 2003, up from a loss of $352 million in the year-ago period. Late Monday its stock traded at $3.90. Although US Airways is pressing to reduce costs before Southwest ramps up in Philadelphia, the airline has staved off its immediate need for concessions. US Air in March reached an agreement with the Air Transportation Stabilization Board to revise terms of a $1 billion loan backed by the ATSB, prepaying a portion of that loan and securing a reduction in the amount of cash it must keep on hand. The airline earlier this year hired Morgan Stanley to help it explore options for raising cash, including selling some of its most lucrative assets. Sources said US Air would prefer returning to profitability by cutting costs rather than divesting parts of its operations. But one industry source said US Airways would likely have to commence an asset sale should its labor talks fail. “History has shown that is the beginning of the end for an airline,” the source said, citing divestitures by now-defunct TWA and Pan Am. Should US Airways be dismantled or fail, Baker said the legacy network carriers, and not low-fare carriers, would be the immediate beneficiaries. Delta Air Lines Inc., based on its network overlap with US Airways, would inherit roughly 20 cents of every US Airways dollar, or about $1 billion per year in passenger revenue, the analyst said. American Airlines Inc. and United Air Lines Inc. would pick up about $500 million in passenger revenue apiece. The discounters, however, would be the longer-term winners. US Airways’ fleet is relatively modern, and its aircraft would fit nicely into an existing low-cost airline’s fleet or into the plans of a future startup. A US Airways-related windfall could also further dissuade Delta pilots from agreeing to concessions that the company says it needs to compete with discounters. Delta hopes to reduce its total pilot costs by roughly 40 percent, while the union, which has a contract in place through May 2005, has offered cutting wages 9 percent and skipping a scheduled 4.5 percent raise later this year. The two sides have no new talks scheduled. “In the event any members of Delta’s pilot leadership are purposely dragging their feet in hope that US Airways fails, we believe this is the wrong direction to take,” Baker wrote. Copyright �2004 TDD, LLC. All rights reserved.

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