US Airways expanded into the international market to take advantage of an increase in foreign travel to and from the United States. To provide for this expansion, US Airways purchased new wide-bodied aircrafts, upgraded the Philadelphia international terminal, and expanded international destinations (23). However, after September 11 international travel statistics changed. There was “a 23 percent decline in service” and “a 1.3 percent decline in the first half of 2001” (23). US Airways continued its growth of the international market despite these statistics. Furthermore, US Airways reported that its current strategy is “aimed at reducing operating expenses and increasing expansion of its international operation” (22).
International expansion is a challenging task for US Airways. The weak global and United States economies are the main challenge in successful expansion. The weak economy prevents individuals and businessmen from traveling because they do not have the disposable income to afford it. The reduced number of travelers leaves the new wide-bodied aircrafts with empty seats. These empty seats create financial strain for US Airways because it costs the same to fly a full plane as it does to fly one half empty.
Fuel prices also continue to increase (16). Flying the new bigger planes will become more expensive. Farther destinations require more fuel. To cover fuel expenses, passengers must purchase tickets. Demand, however, is on a decline due to the economy.
In addition to terrorist fears and the weak economy, a pending war with Iraq decreases demand. Consumers already hesitate to fly because of September 11. If a war is being fought, consumers will be less likely to travel abroad. The war will also influence fuel prices and the economy. Fuel prices will increase because the United States purchases fuel from the Middle East. Increased fuel prices will force airlines to raise ticket prices to cover the added expense. If consumers are not flying at current war-free prices, they will not purchase more expensive tickets during wartime.
War with Iraq will change the economy and, therefore, demand. During wartime, disposable income decreases because the prices for everyday items increase. There will be no extra money for business or vacation travel.
The support provided by US Airways to facilitate international expansion given current international travel statistics are ineffective. The purchase of new aircraft, an improved international hub, and more destinations in a time of declined travel are risky ventures. US Airways is unclear of the potential payoff from international expansion (23). The corporation is investing a great deal of money to expand internationally while not knowing if any possible benefits will result.
US Airways strategically analyzed the expansion before implementing the plan. The expansion, however, does not have clear benefits to US Airways and, in a time of financial struggle, uncertain ventures create uncertain outcomes. US Airways does not have the flexibility to get involved in a failing venture. International expansion involves many unknown variables. The company should have closely analyzed external factors, such as the economy and the supply and demand of travelers. US Airways should also have planned for possible surprises in the world, such as a war. International expansion with possible external threats should have been strategically examined more closely before investing in it.
The airline industry traditionally runs on a one percent to two percent margin (21). This low margin creates a challenge for airline companies because there is little room for error, and any small financial effect could be critical to an airline’s success.
The one to two percent margin impacts US Airways through its load factor. With each flight, US Airways should sell enough seats to achieve a breakeven point. The goal of the company is to fill the plane to an above breakeven point so that a profit will result (Profits, ACT 162). This is done through raising the number of paying passengers per flight, by lowering operating costs, or by lowering a portion of fixed costs (21). US Airways is trying to increase the number of paying passengers by increasing international flights and adjusting ticket prices to compete with other airlines. External factors, such as the economy, terrorism, and war, negatively impact the number of tickets purchased and make it difficult for the airline industry to attract passengers.
US Airways does not address the one to two percent industry margin effectively. When operating on a tight margin, airlines need to be prepared for any emergencies that could hurt or improve profits. US Airways did not have a clear plan on what to do if an emergency occurred. For example, when September 11 brought a decline in travelers, US Airways expanded flights. US Airways should have adjusted to the decline by concentrating on domestic flights instead of trying to expand. This assisted in the company’s current financial troubles.
Chapter 11 Bankruptcy
US Airways filed for Chapter 11 bankruptcy in August 2002 (26). The corporation was awarded $75 million to continue flying through September 2002 and submitted a reorganization plan on December 31, 2002 (26). In recent court hearings, US Airways submitted a reorganization plan and developed a timeline that included an emergence from bankruptcy target date for March 31, 2003 (See Appendix B, pp. 43-45).
Corporate reorganization under Chapter 11 bankruptcy code is a way for the debtor and creditors to create a plan. Under this reorganization plan, the debtor, US Airways, promises to pay a portion of their debts and is discharged from the balance of the debt (Bankruptcy, BUS 371). Important points of the reorganization plan include details of a $1 billion loan from the Air Transportation Stabilization Board, discussions with the pilots union, retirement plans, and reconstruction of the Board of Directors (See Appendix B, pp. 43-45).
US Airways filing for Chapter 11 bankruptcy is an effective way to reorganize. Chapter 11 bankruptcy allows US Airways to reduce the amount of money owed to creditors and allows them to continue to operate. US Airways should create a long-term financial plan to ensure emergence success.