update - AFA USAirways

Together We Fly
May 24, 2004
UPDATE
A plan to reshape US Airways
Creating a new airline to compete for the future
US Airways’ strategy to successfully compete in today’s difficult industry environment involves nothing less than a radical
transformation of the airline.
The changes will involve the route structure, our schedule,
the way we set and distribute
fares, and the products we offer
our customers. Its success,
however, depends on our
ability to lower costs to the
levels of successful airlines
like AirTran, America West,
Southwest and JetBlue. These
carriers have demonstrated
their ability to be consistently
profitable in the new industry
environment.
Special Edition
Because the content of this issue
is important to the
understanding of the
Transformation Plan,
US Airways is mailing it to
homes for employees and their
families.
While the company’s
Transformation Plan was
outlined to labor leaders
earlier this month, it involves
much more than labor costs.
This special edition is
devoted to a summarized
version of the plan as it
relates to the company’s
business model. What it
does not include are details
of how employees are being
asked to contribute to the
cost savings. Those are
issues to be addressed in
negotiations between the
company and its labor
groups.
The New US Airways Will Offer
Significant Rewards
Ability to Grow Again
Resources to Invest in the Company
Play Offense
Add International Destinations
Be the First Legacy Carrier to Truly
Adapt to the New Reality
Share in the Upside with Both Equity
and Profit Sharing
Re-establish the Leadership,
Confidence, and Pace-Setter
Position in the East
Transformation
Plan
Status
Quo

2
UPDATE
Transforming … where we fly
Focus to shift to larger local markets
Local Markets’ Revenue
New York
Local Market Yields Are Higher Than Connect
With Small Local Markets, CLT & PIT Rely More on Connecting Traffic
3,788
Wash, DC
* *
Chicago
LAX
1,683
Dallas
ATL
Domestic Annual O&D Revenue ($mil)
SFO
BOS
*
DEN
Houston
MSP
1,019
PHL
DTW
MIA
SLC
478 473
Like the rest of the so-called legacy carriers, US Airways
primarily operates a hub-and-spoke network. Hundreds of
flights from spoke cities converge in waves many times a day on
our three hubs at Charlotte, Philadelphia and Pittsburgh, where
passengers connect and fly out to their final destination.
While the hub system is a marvelous collector of revenue, it is
also more expensive to operate than point-to-point flights.
Large numbers of gates, equipment and employees are needed
to handle the peaks when aircraft are in the hubs. But during the
down times, these resources sit idle. The hub system also limits
the number of hours per day each aircraft can fly.
Legacy carrier hubs also used to be a “safe haven” to hide in as
the low-cost carriers (LCCs) expanded elsewhere, said Andrew
Nocella, vice president of network and revenue management.
Over the years, US Airways retreated from or downgraded most
of its point-to-point routes to its hubs as low-cost carriers
expanded. “With our hubs now under direct attack from the
LCCs, we no longer have any place to retreat to,” he said.
In the past, the revenue premiums generated by the hub system
more than offset its incremental costs versus a point-to-point
network. This was possible with higher fare levels offered in the
hub local markets in exchange for nonstop service. Further, the
LCCs had not tapped into the revenue stream in many smaller
regional markets in the Northeast. However, this equation has
changed, which requires a transformation of the way we do
business and how we schedule the airline, Nocella explained.
Local market yields (calculated by dividing passenger revenue
by passenger miles and expressed in cents) are higher than in
CLT
PIT
CLE
IND
385
CVG
MEM
* US Airways’ asset strengths
connecting markets. In a hub, the major
carrier can command a premium for
frequent non-stop flights. However,
passengers in spoke cities, who will
likely have to connect at some airline’s
hub to get to their destination, have an
array of choices. Their fares — and the
yield to an airline – are lower, reflecting
this competition.
With their relatively small local market
size, Pittsburgh and Charlotte rely far
more on connecting traffic than
originating passengers. Philadelphia,
meanwhile, is the fifth largest
metropolitan area in the U.S., and
US Airways currently captures 48
percent of the local traffic there.
Under the Transformation Plan,
US Airways’ schedule will be more
focused on larger local markets because
that’s where yields are highest - - and
that is where people want to go. Our
goal is to recapture the number one market share position in
the East through more point-to-point flying and a stronger
focus on LaGuardia, Boston and Washington National with the
US Airways Shuttle as the centerpiece of the operation.
Because of its large population size, Philadelphia will remain at
the core of our network. US Airways has the single largest
number of gates there, including new international and
US Airways Express facilities, and Philadelphia’s geography
also makes it a good gateway city to Europe and the Caribbean.
New York and Washington, D.C., are the nation’s two largest
O&D (origination and destination) markets and Boston is
eighth. US Airways already has a large presence and superb
facilities in all three locations, and these will be leveraged by
providing more point-to-point service. Connecting traffic is
important even in these markets but less so than local
passengers.
Non-stop service will be scheduled to key business and leisure
markets from these three cities. Aircraft utilization will be high
and turn times will be speedy — much like the operations of the
low-cost carriers. The plan includes US Airways returning to
many markets that were abandoned when our costs were higher
than the competition, including New York La Guardia to
Florida, Nocella said.
Under the plan, Charlotte’s strategic position as an effective
hub will permit more Caribbean service and will allow for
more growth of both domestic and international service. It will
operate closer to a traditional hub with more banks, but with
some flattening, or de-peaking of flights, to add efficiency.
Continued on page 3

UPDATE
Transforming . . . where we fly (continued)
Conversion to a point-to-point operation in Charlotte would
have required a significant reduction in the number of flights
and destinations as the local market is not large enough.
Instead, US Airways will grow Charlotte and make it our
primary connecting operation.
The strategy also envisions that Pittsburgh will not operate as a
traditional hub, but instead become a focus city, with
US Airways remaining the leading carrier there, but with fewer
flights and nonstop destinations. As the leading airline in
Pittsburgh US Airways will continue to serve cities where
people in Pittsburgh travel frequently and offer them lower
fares in the process. Smaller markets that have little demand to
and from Pittsburgh likely will lose service. In some situations,
service to these smaller cities will be maintained to
Philadelphia or Charlotte. The final mix of regional jet
departures versus mainline jets will be determined upon how
much local demand there is to and from Pittsburgh.
Transforming … how we sell
Reducing distribution costs will be key
Simplifying our pricing structure will be another vital piece of
US Airways’ successful transformation. Since pricing and
distribution go hand in hand, the effort to simplify pricing and
lower our distribution costs is paramount. These efforts are
already under way and continue to be refined.
The first example of US Airways’ simplified pricing structure is
GoFares, which were introduced in the Philadelphia market on
April 29 as a response to the competitive challenge there.
GoFares is a new, permanent and simplified program of low
prices featuring one-way fares starting as low as $29 and a cap
of no more than $499.
“We have heard our customers loudly and clearly,” said Senior
Vice President of Marketing and Planning Ben Baldanza. “Low
fares are a reality of the marketplace and US Airways is
adapting to these changing realities.”
As we continue to simplify our complex fare system, we will
further reduce our distribution costs. Reductions in
Reservations call times and in customer hold times will
naturally result as change fees and other rules are eliminated.
Airport processing delays also will diminish, along with
customer wait times and complaints.
Ongoing enhancements to usairways.com are helping to simplify
how tickets are sold and distributed. US Airways’ Web site is
the most efficient, low-cost distribution channel to maintain,
and the goal is to double the percentage of online sales we
receive at our Web site – from 10 percent to 20 percent – by
year-end.
To boost use of usairways.com and avoid expensive global
distribution system charges, we are investing to make the site
Operations at Philadelphia under the new plan will be “depeaked,”
meaning domestic flights will not be bunched up in
waves to accommodate connections, but scheduled more on a
“rolling” basis targeted at local customers. Feed for
transatlantic and Caribbean flights, however, will continue. Depeaking
the schedule will allow US Airway to expand the
number of flights it offers in Philadelphia while maintaining or
improving reliability.
As the schedule is de-peaked in various locations, operational
cost reductions result. For instance, fewer gates and less ground
equipment are required. With less congestion, there are
reduced taxi-out and enroute delays. In this scenario fewer
passengers and bags misconnect and there are more efficient
crew pairings. Also, there are more and better maintenance
opportunities to enhance schedule integrity.
However, simply de-peaking the schedule without simplifying
and lowering fares and other operating costs would put the
company further in the red.
more reliable and simpler to use, and will continue to promote
usairways.com with special marketing campaigns to entice
customers to use the Web site.
Another key goal for usairways.com is to migrate a significant
amount of service transactions to the Web site by adding new
self-service features and making the site more intuitive and
reliable for customers to use. This will enable customers to
complete more of their travel transactions online.
“Customers’ willingness to manage their travel experience online,
coupled with the changes we are making to usairways.com,
is fueling a lot of growth for our Web channel,” said Managing
Director E-Commerce Mark Kuhns. “Customers are turning
to the Web site to complete a number of transactions, from
shopping and booking tickets, to printing boarding passes,
applying upgrades and selecting seat assignments, to managing
their Dividend Miles accounts on-line.”
In addition, E-Commerce has been working to integrate
functionality with airport kiosks to further enhance customer
convenience. For example, if customers print their boarding
pass at usairways.com and arrive at the airport without it, they
can now proceed directly to the kiosk and re-print their
boarding pass.
“All of these changes are moving us toward our common goal,
which is to provide our customers with a highly reliable, cost
effective, preferred channel to manage their US Airways travel.
When customers choose this channel, they will be rewarded
with benefits, such as lower fares, or Dividend Miles, which
may not be available through other more costly distribution
channels.” said Kuhns.
3

UPDATE
Transforming … our cost structure
Entire business plan hinges on lower expenses
US Airways’ Transformation Plan hinges on successfully
lowering our cost structure.
Consumers are demanding lower, simpler fares and carriers
like Southwest, America West, AirTran and JetBlue have been
successful because they are able to provide what customers
want. Budget airlines now account for nearly a third of
domestic capacity, up nine percentage points just since 2000
and are expected to top 40 percent by the end of the decade.
To maintain current market share and to even entertain notions of
growth will require US Airways to be competitive in this low-fare
environment. But without lower costs, the initiative to provide
10.02
CASM excluding fuel, Q1 2004
9.04 8.61 8.46 8.39 7.85 7.73
6.57 6.42 6.08 5.86
4.88
US DL AS UA NW CO AA WN FL HP TZ B6
simpler, lower fares cannot be sustained. And without changing the
fare structure, de-peaking our schedule and remaking the network
would only result in larger financial losses.
Cost savings will come primarily from two important sources
— more efficient operations and labor savings.
US Airways Web site are designed to attract more online
bookings and use of e-tickets, thereby lowering distribution
costs.
· Advertising low fares. With advertising driving more
consumers to usairways.com, the amount of fees the company
pays to CRS systems will drop.
These are radical changes to the US Airways business model,
but without them, the company will not be able to compete on
price. Regrettably, as productivity increases are realized, some
of these changes will result in furloughs. But once US Airways is
cost-competitive, growth and recalls can become a reality — a
situation that simply cannot occur
under the status quo.
Employee costs will need to be
compared along five dimensions: rates
of pay; seniority; benefits; productivity
and scope. President and CEO Bruce
Lakefield said the approach to lower
labor costs must be fair. No single work
group will subsidize another’s lack of
marketplace competitiveness, nor can
employees subsidize waste or mistakes
made by management, he said.
The new US Airways labor cost
structure must be based on that of our
profitable competitors, such as
America West, which operates a
network system, and JetBlue, which
operates point-to-point.
Every employee group will need to compare itself to the
industry’s “best practices” for their respective group.
Management has acknowledged that profit sharing with all
employees must be a part of the plan so that employees can
share in the upside of success.
Management actions will provide the structure required to
compete. These include:
· Increased aircraft utilization. This will improve productivity
of employees both in the air and on the ground.
· De-peaking hub schedules. This also will improve
employee productivity and lead to fewer misconnected
passengers, lost bags and flight delays.
· Lower, simpler fares. With a less complex fare structure,
Reservations talk time goes down and productivity rises. The
sales department will have fewer complex contracts to
manage, resulting in lower selling costs. And customers will
have fewer complaints.
· Automation. In airports, increasing use of kiosks results in
lower costs and higher productivity, as will gate readers when
they begin to be installed this year. Improvements to the
4
UPDATE
US Airways Corporate Communications
2345 Crystal Dr. Arlington, VA 22227
Tel: 703-872-5100 Fax: 703-872-5104
Comat code: DCA H/850
Lotus Notes/PROFS: usnews
Email: usnews@usairways.com
Editor: John Bronson, director of Corporate
Communications
Publisher: Office Services - Pittsburgh
Contributors: Amy Phoenik, manager of Employee
Communications