From “Worst” to First

For a start date in the role he was taking, Doug Parker probably couldn’t have picked a worse one. The airline known as “America Worst” was getting a new CEO and the date was September 1, 2001 – 10 days before the airlines’ worst nightmare.

America West Airlines had a rocky history. Large expansion of the regional carrier headquartered in Phoenix drove it the edge of bankruptcy more than once, and into bankruptcy in 1991, where it remained for three years. The company had record FAA fines for maintenance violations, poor employee morale, and even poorer customer relations. It was truly the “worst.” However, after emergence from bankruptcy, the company hired Northwest finance executive Doug Parker as its CFO. Parker with the help of a reorganized balance sheet took hold of America West’s low cost roots, and turned it into profits. Between 1995 and 1999, AWA grew revenues 42% and profits 120%. The Company’s operating cost per available seat mile (”CASM”) for 1999 was 7.52c, which was approximately 23% less than the average CASM of the other major domestic airlines. Between 1995 and the LTCM credit crisis, AWA stock lifted from $8 to over $30 per share.

The next few years were not kind to the airline business. After years of constant profitability, America West Airlines had lost approximately $100 million over three quarters ending June 2001. Parker was moved into the head executive office. And then four planes were hijacked.

Without the help of government loan guarantees, America West would likely have been liquidated a short time thereafter. Parker was instrumental in the process, and was one of the only airlines that actually received the loan guarantees from the Airline Transportation Board.

“The fact that we got that close makes you rethink the entire business model,” Parker later told CFO magazine. “Let’s just change everything we’ve ever thought about ourselves,” he said. He changed plane types, changed fares, cut cost and closed unprofitable hubs. By 2004, America West had the third lowest costs behind only Southwest (LUV) and JetBlue (JBLU), but more importantly, Parker understood that for airlines, cash had become king. By 2004, he had more than tripled the company’s cash balance.

But Parker wasn’t just a cost cutter, he was a bit of a visionary (or at least a realist). He understood in the months following 9/11 that the airlines needed to consolidate. He set his sights on U.S. Airlines, a dog with fleas. Like it’s AWA before it, US Airlines was worst in customer service and profits. US Air had major problems – a poor route structure, poor hub locations and an extremely competitive market and was trying to emerge from Chapter 22 (colloquial for its second chapter 11 bankruptcy) – but Parker saw that he could take the lessons they learned at AWA and apply them to a larger carrier. His goal – turn US Airlines from a legacy carrier into a low cost carrier. AWA bought US Air, assumed their name, and took toward a Herculean restructuring. Industry watchers thought he was crazy, but he flaunted it in their face taking the stock symbol LCC, for Low-cost-carrier.

Parker tackled issues head on remaking US Air into that low cost model and more competitive with Southwest, JetBlue and Delta. The company optimized its fleet, consolidated operations, restructured aircraft purchase agreements, refinanced debt and built cash. US Air went from 10th in on-time arrival to first, and turned around customer complaints. They turned a $335 million core operating loss in 2005 into a $400 million profit in 2007. Between its emergence from bankruptcy in 2005 and its peak in 2007, U.S. Airlines tripled its stock price.

The great recession wasn’t good for the airlines in general (in fact, it started in 2007 for the airlines given the cost of fuel), or the company in particular. For the third time in a decade, US Airlines ooked again to be heading to bankruptcy (along with almost every other airline not named Southwest) but they were able to make enough financial manuevers to pull out of the financial nose-dive. The company was one of the first airlines to raise post-2008 cash with a cheap convertible offering. The stock bottomed around $2, and has rebounded over seven-fold since. Meanwhile, Parker kept his eye on the consolidating ball. Although he made failed runs for both Delta and United Airlines, he remained undetered.

Although the US Airlines merger got him in the game, the recent announcement that little ol’ America West will buy the once-mighty American Airlines is the culmination of Parker catching his Moby Dick. It has left him atop the industry that has likely seen its last major merger. The music has stopped, and he is sitting in the biggest chair.

The alignment of US Air and AMR will create the world’s largest commercial airline. With now three national carriers – American, United (UAL) and Delta (DAL) – it is unlikely that the DOJ will allow another merger. At best, one could see a merger of low cost carriers such as Southwest and JetBlue.

For all his changes at US Air, Parker could never turn it into a gaint due to company-specific structural hurdles. There is only so much you do with hubs in Philadelpha, Charlotte and Phoenix. American has the route structure, a hub structure, and the cost structure that Parker can do a lot with. They are a complementary combination. Although they have a broad set of routes, US Air’s bread and butter was North/South, East Coast flying. American is known for transcontinental and international routes. With the potential for $1 billion in savings, the combination of these two could prove to be very profitable.

It’s truly amazing that the little American West of the 1990s is now the nations largest airline (assuming the merger occurs). Gordon Buthune, the man known for saving and turning around Continental (CAL) told CNNMoney.com in 2007, two years after the AWA closed its purchase of US Airlines, “We’ve all known consolidation was the answer to a lot of the industry’s problems. It’s just that Doug’s the only one with the balls to go and do it.”

Leave a Reply

You must be logged in to post a comment.