update - AFA USAirways

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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
Page 1: Together We Fly May 24, 2004 UPDATE

update - AFA USAirways

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