Pressure Mounts on US Airways to End Pilot Dispute

by Martin Rivers
-9.10%
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Market
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US Airways
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US Airways (NYSE:LCC) is redoubling efforts to end its dispute with pilots in the wake of the recent Chapter 11 filing by American Airlines (NYSE:AMR). The carrier, formed in 2005 through a merger with America West, has locked horns with the US Airline Pilots Association (USAPA) over perceived inequality in conditions for pilots. Though less worrisome than the pay row which felled American Airlines, the dispute has already undermined operations and risks derailing future merger bids. Our analysis below shows how ongoing wrangling could impact on the stock.

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Brand Damage Could Run to Hundreds of Millions

The dispute has its roots in US Airways’ bankruptcy filings in 2002 and 2004, which saw pilots accept deep salary and benefit cuts in a bid to restore competitiveness. When the carrier later took over America West, the two groups of pilots could not agree how to merge their contracts, prompting the US Airways pilots to break away and form USAPA.

Following five years of stalemate, US Airways recently accused USAPA of orchestrating an illegal slowdown of work which it says could cost more than $350,000 per day. [1] The airline claims pilots, who are ineligible to strike under federal law, have fabricated safety concerns in a bid to create delays and inconvenience passengers. According to the lawsuit, brand damage could total hundreds of millions if passengers start to desert the airline en masse.

USAPA rejects the charge and insists its members are among the lowest paid in the industry. But if union President Mike Cleary’s latest call for mediation [2] fails, the toxic staffing atmosphere is likely to further impede operations, potentially forcing US Airways to cut capacity. Move the trend-line below to see how fewer available seat miles undermines our otherwise bullish price estimate of $7.50.

Barclays Unfazed, Upgrades US Airways to Overweight

Though losing market share to rivals like Delta Air Lines (NYSE:DAL) now appears possible, there are several reasons for retaining optimism. Union disputes are commonplace place among legacy carriers, and a recent upgrade by Barclays analyst Gary Chase shows how many believe the sector was oversold during recent market volatility. [3] The AMEX Airline Index is down 40% from its November 2010 peak, with US Airways alone shedding 55% of its value.

Furthermore, if the union dispute can be resolved then US Airways will be well placed to launch a potential takeover bid of American Airlines, in turn securing large-scale synergies. The two carriers have broadly complementary route networks and US Airways is known to be on the hunt for a consolidation partner. But with American Airlines succumbing to its own pilot dispute, any tie-up is unlikely until US Airways can demonstrate that its pilots are on board with the deal.

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This article was submitted as part of our Trefis Contributors program. Email us at contributors@trefis.com if you’re interested in participating.

Notes:
  1. Labor showdown is latest obstacle for US Airways its Charlotte passengers, Charlotte Observer, Dec 1 2011 []
  2. US Airways pilot union’s mediation offer rejected, CBS News, Nov 25 2011 []
  3. US Airways Soars on Upgrade, Barron’s, Dec 1 2011 []
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