Doug Parker

CEO, US Airways

Aero Club Luncheon

May 18, 2010

Thanks to the AeroClub for inviting me to speak today. I’d like to talk about what we’re doing as an industry to restructure our business in response to a changed global marketplace and what we need to do in order to ensure that commercial aviation remains a profitable, viable business.

For an enormous crisis, we’re coming out of it nicely, but we’re clearly not out of the woods yet. We are making huge strides. We have analysts now projecting a profitable U.S. airline business in the year 2010, a year I will note that saw oil at about $70 a barrel. It is certain – or most likely – that revenues are improving, but are still well below 2008.

I think that is an amazing statement to think about our industry; with oil as high as it is and revenues as low as they are, still making a profit shows that all the things we have done to restructure this business are indeed working. Those things, by the way, include capacity cuts, ancillary revenue additions, cost consolidation – all of those things are working really well.

Second, I’m not going to ask for any help. We don’t need any bailouts. We don’t need any relief from current taxes or legislation. We aren’t going to ask for any stimulus packages. That does not mean I’m not going to whine, though, because I am. But it’s not about things we need, but rather about a desire to be left alone. We’re all out there working very hard to create a truly sustainable, profitable model and we’re making a lot of progress. There are some in our Administration and Congress that seem hell-bent on changing the rules. So, just as we are starting to make progress, they are doing things that are making it a lot harder to do so. I come here with one simple request; let’s support our continued effort to fix ourselves.

I want to start with an industry overview and then get into some more details about what I just talked about. First off, you are all part of the aviation community, and I know you understand how important commercial aviation is to our economy. I would point to some numbers from the FAA, which estimates that commercial aviation provides 11 million jobs and 1.2 trillion dollars in annual economic activity. We’re important, we know that, but right now we are very fragile. We have lost $60 billion since 2001, nearly $30 billion of that since 2008. The problem is we have always lost money, but we still fly, we still have service.

What I will tell you is that it’s different this time. We have never lost this much money for this long. There have been major impacts, if you haven’t noticed. There have been 14 airline bankruptcies in the last two and half years, with most of those by the way, not Chapter 11’s that turn into restructuring, but liquidations. Not all of them are start-ups, but airlines that have been around for 50 years like ATA and Aloha, which made it through everything in the last 50 years and couldn’t make it through this and are now gone. Those of us still standing have extremely fragile balance sheets. At this point, you‘re probably wondering where’s the bullish part of this. The reality is I am bullish because despite those numbers, there are five issues, at least in our view, that have led to consistent inadequate airline returns. I’m happy to report that we’re making progress on at least four of the five. I’ll go through those five.

First, we’ve talked about this for quite some time, and that is that there is too much fragmentation. And I talk about this a lot, but I still have a hard time getting people to understand how badly fragmentation hurts our business. I have some examples for you that hopefully will drive this home. If you wanted to fly from San Diego to Norfolk tomorrow, non-stop service of course, it’s a long flight; there are only 150 people per day that want to fly between San Diego and Norfolk – a reasonable amount. Our industry provides a great deal of service, 29 options on that route, six different airlines and over 15 different airports for those 150 people. That isn’t efficient. Choice is great, but that is too much choice. That creates inefficiencies, which means we are providing way too much service and the result is very, very inefficient service. We can do better if there were fewer of us. We don’t need six airlines providing that service. On Albany to Savannah, Georgia – a shorter route – 11 people fly that route every day and they have 19 different options. Four airlines, eight connections – and these are real connections, by the way. Again, we all want choice, but I’m here to tell you, that creates tremendous inefficiencies. Because of these inefficiencies that are driven by too much fragmentation, we don’t provide as cost-efficient a service as we could. On the point of too much fragmentation, we are making great progress. We have seen of course since 2005, America West – US Airways; Delta – Northwest; and we now have the announcement of United and Continental. We certainly hope it gets approved because it’s good for the industry.

The second point that has been a problem is poor management-labor relations. I’m always careful to point out this isn’t a labor problem, it is a management problem. We created this. We created an issue where it is incredibly difficult on our employees to make a career in our business. To be able to plan their futures based on what we think we can pay them and then later find out we can’t. And that results in very poor management-labor relations. We certainly haven’t done a good job of explaining to our labor unions of how important it is to be working together to get to adequate returns over time. Now this one, I’m not about to declare victory on yet. This one, I put in the category of still to be determined as to where we’re going, but it’s very encouraging. With leadership and people like Captain Lee Moak, who is here today, Captain John Prater, Captain Mike Cleary and USAPA from US Airways, we have people who are trying very hard to work with management to get the company where it needs to be because they know what’s best for their constituents. Again, we have a long way to go here, but we’re encouraged to see all of this consolidation happening. We’re very encouraged by the fact that the labor groups are working together and understand what’s in their best interest.

The third problem we have as a business is an unprofitable focus on customer service. What I mean by that is that for the longest time we have seemed to have lost focus on operating reliability and tended to focus on a lot of other things the customer cared less about. I’m happy to report we’re doing a much better job in that regard, and are actually making great progress. It helps somewhat with capacity reductions because so much of this was airlines chasing market share. And now because of the financial crisis, capacity is down and there is less concern about market share and we’re doing a much better job of flying places profitably. On-time performance in 2009 was the highest it’s been since 2003, and it looks like 2010 is going to be even better. This last April, when the DOT announced its April results, you’d be amazed at how well the industry flew in the month of April and how well it’s flying now in the month of May. So we’re doing a great job there. While it’s unpopular, the baggage fees the industry has put in place are making a huge difference in our ability to be profitable and our ability to actually provide better service for our customers because there are fewer bags being checked.

The fourth one is management focus. I’ve been in this business for the last 24 years. I came to this conclusion awhile back, that we have people in our business who are running companies – or they were running companies, anyway – that cared more about how they did versus other airlines than they did about their profitability. Given the choice of “Look, we can all make five percent margins, but you’ll make four percent,” airlines would choose to say “Let’s all make negative five and I’ll make negative three because that means I’ll be better than you are.” And we run the business that way – or we ran our business that way – but that’s not happening anymore. The best thing I could point to show you progress there is to point out, assuming United-Continental gets done, of what will be the five largest airlines, of the CEOs of those airlines, three of us will be ex-CFOs and two of us will be ex-lawyers. These are people who care about returns and care about returns on investment and are working in that regard. And I think that’s a positive.

There’s a fifth one on my list that I want to get to and that is government policy. One of the biggest reasons that our industry hasn’t been able to become profitable and that we’re not making progress on is government policy. This is an industry that has been treated like a public utility and not a business. We’re over-taxed and we’re over-managed by our government. That one we need to do a lot of work on. The question is, what do you do? And we say, “Leave us alone, let us compete, let us finish what we’re doing,” and as Jim May and ATA are fond of saying, “Do no harm.” What that means is two things: One, no new taxes and fees or unfunded mandates. Already 20 percent of the average consumer ticket now goes to taxes and fees – well above other businesses. Yet, in light of that, we have proposals that are floating around this town somewhere for PFC increases (two billion dollars a year), security fees (two billion dollars a year), fire-fighting services (one billon), cap and trade (five billion), U.S. visit and exit (three and half billion dollars increased cost), NextGen (10 billion dollars). You get the point. As an industry that has lost 30 billion dollars in the last two years, let’s round off 20 billion dollars in incremental costs at least that people are trying to impose upon this business. That’s a huge problem.

NextGen I do want to talk about; I made some comments awhile ago that I think were misinterpreted by someone at the FAA, which made it sound like we were opposed to NextGen, that couldn’t be further from the truth. We are huge proponents of NextGen. It’s a fantastic project that has enormous benefits to airlines and to the general public. Our point is that we just can’t pay for it; we can’t afford it with all we have been through, nor should we. We would love to have it done; we just don’t want it done in a way that we would have to pay for it. So our only concern with NextGen is the cost and not the cost itself. It’s an investment well worth making, just not one that should be borne by the airlines because there are a lot of other benefits – reduced carbon, increased jobs, other things – at should be funded by people other than airline customers.

At any rate, no to taxes and fees. The other thing in “do no harm” is to allow us to fix ourselves through rational business decisions and self-help mechanisms. Those include things that other businesses use so long as you comply with anti-trust laws. Things like joint ventures, mergers, trading and selling of assets. Those are the types of things we would think that government would like to support. Those are the things that will help us do a better job of getting this business profitable again and make a long-term profit. Our friends from Delta are here and I need to say a little bit about the La Guardia – D.C. slot swap: DOT’s decision to not allow us to go forward with that transaction was stunning to us. It’s good for commercial aviation, it’s good for consumers, it’s good for the communities that we serve and it’s good for competition. Yet, due to the DOT’s order, it’s not going to happen. We’re working on an appeal. It’s going to be a lengthy process but the order as written is not going to happen. So, we’ve got a transaction that we would love to do that has all sorts of benefits but unfortunately, we cannot do it because we are not being allowed to do it. That’s not good and it doesn’t bode well for what’s going to happen as we move forward. It’s a disturbing state of affairs, when we’re out working as hard as we are trying to improve this business to not be allowed to do it, particularly when it’s pro-competition and doesn’t violate any law. But we can’t get the order done to actually trade slots.

So look, it’s an industry that’s been severely impaired by the economic crisis of the past two years. We’re making great progress, but we’re still quite fragile. What I’ve described today is consolidation, which is creating efficiencies, labor-management relations that appear to be improving, a shared understanding of the need to be profitable. Customer service has improved greatly. Customer relations are now properly focused on reliability, which is what our customers want. We have management now focused on transforming the industry to a longer-term profitable business model. The result is that we anticipate profits in a very tough environment here in 2010, but the biggest threat to our viability is government intervention. We ask simply that we be left alone.

I will close just by noting that we are cautiously optimistic about Secretary LaHood’s advisory committee because it’s a great group of people with an important cause at hand. I say “cautiously” because I think we all know when you get committees and commissions together they want to do stuff and that’s the last thing we need. I am very hopeful that what the committee and commission will do is get together and impress upon the Secretary that we don’t need any more regulations. That we don’t need any more taxes, what we need to do is be left alone. Let the airlines compete, they’re well on their way to getting this industry fixed.

Thank you.