US Airways

June 19, 2008

Transcript:

Ted Simons:
Tonight on Horizon, the president of the U.S. Airways is here to tell us how his company is dealing with high fuel prices and a slow economy and the operator of the Maricopa medical center is being sued for refusing to comply with a state law. That's all coming up next on horizon.

Ted Simons:
Horizon is made possible by contributions from the friends of eight, members of your Arizona PBS station. Thank you.

Ted Simons:
Hello, welcome to Horizon. I'm Ted Simons. Rising fuel prices eating into your wallet are also taking a huge bite out of the airline industry. Tempe based U.S. Airways expects to spend $2 billion more on fuel this year than it did in 2007. Industry wide fuel prices may jump more than $21 billion according to the air transport association. As a result airlines are looking for new ways to generate revenue. They're grounding airplanes and charging fees for everything from checked bags to in-flight beverages. Here to talk about how his company is dealing with the high price of fuel is Scott Kirby, president of U.S. Airways. Scott, good to have you here, thanks for joining us.

Scott Kirby:
thanks, glad to be here.

Ted Simons:
want to talk about fuel prices in a second. Overall what is the state of U.S. Airways?

Scott Kirby:
fuel is the story for U.S. Airways and the entire industry. We feel like we've operated fairly well. We've had a dramatic turnaround in our operation last year at this time, we were running the worst on time airline in the country, this year running the best. But that's been overshadowed by what's happened with fuel. The stratosphere increase in fuel price is the story.

Ted Simons:
as far as the company is concerned, cash balance and debt, those sorts of things?

Scott Kirby:
We're in good shape in terms of cash relative to the rest of the industry. We have the second highest cash balance of the big six carriers relative to our size. Our debt amortization is a long time away, no big payments in 2014. But for us and the rest of the industry the increase in fuel price is swamping even that. Without some substantive change in the industry, the whole industry is in trouble with oil at $135 a barrel. The good news is that things are changing. There's less capacity. The a la carte pricing has an ability to restructure the industry.

Ted Simons:
the C.E.O. was quoted as saying this is a severe industry crisis, you agree?

Scott Kirby:
I agree, worse from a financial perspective than 9/11 on the industry in terms of our financial performance.

Ted Simons:
The economy in general as opposed to just fuel prices, but economy in general, how is that impacting the airline?

Scott Kirby:
The economy's held up surprisingly well since last summer even as the housing downturn started. The economy's held up surprisingly well. There are been some signs of weakness recently, but they're small, particularly in the context of fuel price.

Ted Simons:
talk about let's get to fuel prices then and talk more about this. How is it directly impacting the airline?

Scott Kirby:
well, it's all in the cost side. Our second best year in history was last year, financially where we earned 400 million as you said in opening remarks, fuel is going to be $2 billion more expensive this year than last year. Easy to do that math. And that really we have to find a way to generate $2 billion more in revenue to get the company back to profitability.

Ted Simons:
right now how much do you this I can be recouped?

Scott Kirby:
well, with industry capacity where it is today, very little of that can be recouped. But the industry is making dramatic change. The industry's going to reduce capacity by nine to 10% in the fourth quarter and another nine to 10% in 2009. That has the potential to actually recoup all or a substantial portion of that $2 billion. The other significant change in the industry is a la carte price, charges for things like first bag. While I know that is frustrating to our customers, it's the kind of thing that is necessary to deal with fuel at these levels.

Ted Simons:
is it so frustrating though to some customers that it defeats the purpose, that you lose perhaps what you might be making?

Scott Kirby:
yeah, do we lose enough market share to counteract what we gain in revenue from another streams? I'm not sure. We'll see what the answer is, but it is logical. Today we has pass along the cost of the baggage infrastructure to all customers, allows us to keep fares as low as possible for everyone and if you don't check a bag you don't pay for the infrastructure associated with carrying bags. Those who do pay. So it's paying for what you use. It happens in most businesses across the country. It's hard 0 for me to think of anywhere else where you get a free coke, free drink, when you are doing anything, and where just going the way most other businesses have.

Ted Simons:
Couple numbers here, $300 in fuel for every round trip flight on average.

Scott Kirby:
It's a remarkable number, surprised even me when we went and figured it out. The average to carry one customer on average we spend $299. Almost $300, a lot of customers buy a lot of tickets for less than $299 today. And every one of those customers, we're not only losing money, we're not even covering the cost of fuel, much less the cost of airplanes, labor, and everything else.

Ted Simons:
and as far as industry standards are concerned, per seat, what is it, $30? You try to at least get $30 per seat, somewhere around there?

Scott Kirby:
for fuel?

Ted Simons:
Every ticket sold per seat, how much do you try to make? In that general area.

Scott Kirby:
we're back to trying to break even in terms of per seat. And for us we need $680 round trip from an average customer just to break even.

Ted Simons
yeah. So in other words, industry-wide crisis

Scott Kirby:
it is industry-wide crisis. But the good news is the industry is taking dramatic action to deal with fuel at these levels.

Ted Simons:
now, the idea to cut capacity, how is that going? I know you were quoted as saying something along the lines that labor contracts are getting in the way of cutting that capacity even more so. Explain.

Scott Kirby:
a lot of it is at an industry level. It's basic supply and demand. The industry has too much supply to deal with for the level of demand which means we have to cut supply to get prices up. So the industry's cutting supply. We can only cut supply at the moment down to contractual limits. We have contractual constraints with pilots and flight attendants and going further is hard for us. The truth is even without the constraints we probably wouldn't go much beyond. Maybe two, 3% beyond where we are today, probably wouldn't go much beyond, though if oil keeps going up that's going to be more and more problematic for us.

Ted Simons:
as far as labor talks with pilots and flight attendants, how are they going?

Scott Kirby:
progressing slowly for a long time. We've glad we've got six of our eight contracts done but still pilots and flight attendants outstanding. As you probably know our pilots have had an internal issue between the unions, between the two sides, former America west and U.S. Airways b seniority, which hasn't been fully resolved. And that's created a lot of internal disruption within their union. Which has prevented negotiations from happening. They do have a union representation established back now. We started negotiations this week for the first time in over a year. We're back at the table. So we're encourage with the that. And flight attendants continue to progress. They're be going quickly, but we do continue to make progress on flight attendants as well.

Ted Simons:
Are there other speed bumps From America west merger still out there?

Scott Kirby:
No, that's all that's left. The basic interest grace and merger is done. We certainly hit speed bumps including our operation last year. Thank god we're over neat and running now frankly the best on time airline in the country. But finishing the labor contracts is the last two outstanding items.

Ted Simons:
You talk of merger and we heard much talk of merger here. Now we haven't heard much of it in a while. Is that going to go away for a while?

Scott Kirby:
I think it's done for this cycle. Delta northwest will get a merger done. We're big proponents of mergers. The truth is it saved U.S. Airways and America west by merging with U.S. Airways so we know the value that can be created by going through a merger. We're still big proponents, because of the change in administration, it's unlikely anything is going to happen until next year. And that's not about democrat versus republican. That is simply that when the administration changes, you have a new department of justice, new head all political appointees and new people to be appointed and approved by congress and it slows the process down.

Ted Simons:
logistically what are the benefits of a merger?

Scott Kirby:
benefits are you can reduce costs, reduce significant amount of overhead, you can also reduce routes that are redundant. So, you know, our example with united, we could have carried customers today that connect on united from Albuquerque to the west coast through Denver, we could have connected them through phoenix, and we could have saved costs by having fewer flights between Albuquerque and Denver. Significant cost savings you can generate through a merger.

Ted Simons:
With that in mind can U.S. Airways survive as a stand alone?

Scott Kirby:
I feel good about our prospects as a stand alone carrier. We have low debt amortization and we have a history of being pro active in dealing with crisis, history of the America West and U.S. Airways is a long history of being an undercapitalized smaller startup carrier but responding quickly and decisively in times of crisis.

Ted Simons:
the talks and rumors of mergers, how do they impact the airline and personnel on one side and communities like the community here, which hears about U.S. Airways could be leaving, I mean, talk about the ramifications of just the rumors of a merger?

Scott Kirby:
Yeah, it does impact the community and certainly impacts communities if it happens, we would never do anything we didn't think in the net was positive for all of our constituents, including the communities we serve but does create angst. That's over now because we're done talking about mergers. And the last merger America West and U.S. Airways was obviously good for the community, brought several thousand jobs to the community. Now have, you know, one of the largest airlines in the world headquartered here. I think a source of pride for the community. But it does create that angst. I certainly know when I was going around town it got hard to even go out because everyone would ask me what's going to happen, are you moving to Chicago are what's happening with the company.

Ted Simons:
So 1700 jobs though overall at the airlines, looks like they're gone.

Scott Kirby:
Correct.

Ted Simons:
How many are here?

Scott Kirby:
We haven't broken it out by community. The largest impact is in Las Vegas where we'll lose about 600 jobs. The rest will kind of be spread proportionately around our system. My guess, a couple of hundred. But we haven't broken it out specifically.

Ted Simons:
Everything again seems contingent on the fuel prices. Explain first of all what the airline, your airline in particular and the airline industry in general has learned from this crisis, a, and b, hate to bring up the word southwest, but what are they doing right? How did they figure this out?

Scott Kirby:
what southwest is doing right, start with that, is fuel hedging. They do a lot of other things right too. But fuel hedging is the difference. They've got a fuel hedge worth $5 billion today. While we're paying an average of about $120 a barrel of oil for oil, they're paying less than $60 a barrel. That really is the difference. That explains all the financial difference and it would be a different world if we were paying $60. Credit to Southwest and Gary Kelly for having the prescience to hedge fuel at $60 a barrel of oil years ago, but their big fuel hedge gives them a huge advantage.

Ted Simons:
Is that something -- is that a gamble that other airlines are now more willing to look at considering what's happen the?

Scott Kirby:
It's a gamble they made and made smartly, a gamble we could take today but we'd be hedging at 135. So we could choose $135 a barrel and if oil goes down we're still paying $135 a barrel.

Ted Simons:
last question, looks like stocks you were just on CNBC the other night, stocks not doing well, 80% loss recently. How do you convince people that you're optimistic?

Scott Kirby:
well, I actually am optimistic. As I said on CNBC, maybe naively optimistic. It's because of what's going to change in the industry fourth quarter, reducing capacity in the industry by 9%, starting the a la carte revenues, very much like 2005, which if you follow the industry in 2005 everyone thought all the airlines were going bankrupt and stocks traded down to one or $2 a share and what happened was we took 2% of capacity out of the industry. Revenues went up 12% as a result of that because we got pricing power and stocks roared up to $60 a share all because we got supply and demand back in balance. I'm not sure if we've done enough this time as an industry but there's reason to be optimistic. We're not going to know until the fourth quarter but there's reason for optimism.

Ted Simons:
reason to think you'll be sticking around Tempe for a while. Thanks for joining us.

Scott Kirby:
enjoyed being here.

Ted Simons:
facing a $2 billion budget shortfall state lawmakers need every available dollar, but a decision by the organization that runs the Maricopa medical center could cost the state millions of dollars. David Majure explains.

David Majure:
the Maricopa medical center is a public hospital operated by the Maricopa integrated health system, using a new state law to stop millions of federal dollars from flowing to the state's general fund. At issue is federal disproportionate share or dish fund. It's money available to public and private hospitals that provide a disproportionably high amount of uncompensated care. They're dollars intended to help defray the cost of caring for people who are poor and uninsured. That has to happen before the state's Medicaid program access can draw down the federal money Arizona's entitled to. But the health system is refusing to file a certification until it gets a larger share of the federal dish money that's currently deposited in the state's general fund. It says it's entitled to $60 million but it only gets about 4 million. Meanwhile access has filed a lawsuit seeking to force the Maricopa integrated health system to abide by the law and certify its uncompensated care expenditures. Various private hospitals have joined the lawsuit, concerned they won't get the federal dish dollars they're entitled to.

Ted Simons:
Joining me to talk about the issue says Bil Bruno, a member of the board of directors for the Maricopa integrated health system. We invited the governor's office and access to appear but both declined because of the current litigation. Bil, thanks for joining us.

Bil Bruno:
thank you.

Ted Simons:
Why did your group not sign off on these federal funds?

Bil Bruno:
Well, Ted, I don't know if your viewers really understand who we are, the healthcare district, we are a public entity created by the citizens of Maricopa county in 2003 by a vote. So we're an independent board, we're responsible to our constituents, I'm elected out in the southeast valley. And we have to do what's right or wrong. And I'm not a lawyer. I'm not a doctor or anything, but my mom and dad taught me right from wrong, and we are not going to certify something that is wrong, and that's what the state is asking, trying to force us to do.

Ted Simons:
But are you not obligated by law to go ahead with this system as it is?

Bil Bruno:
we are obligated to continue to operate the system. We have our choice. We have a choice. The citizens have a choice. You operate the system in accordance with the services that were prescribed in the original legislation, or you close it up, give it back, and to the Maricopa county or whoever, we are not required to certify to the united states government something that is wrong and that's what they have passed, you know, they got together and passed a law saying you the board are going to do this, we say no, that's not right. It's a scheme and we are not going to participate in it.

Ted Simons:
You say not right, it's wrong, it's a scheme, but is the state breaking the law?

Bil Bruno:
we feel that they are. We feel that when this litigation is eventually resolved and by the way, it's stupid for governments to sue each other, but the state has decided to initiate this thing and we are going to counter it, you know, with our own lawyers and all of that. So we think in the end that the federal government it will be determined that what they are doing, what they have been doing, is wrong.

Ted Simons:
Are there ways to go about this though without putting this money, these shares, this funding pool, at risk for other hospitals?

Bil Bruno:
Well, it's never our intention to take any money any funds from other hospitals and the amount that was shown on the video that we're talking about, the roughly $60 million, that does not include any funds from the other hospitals. But, you know, I'm confused about these, and it's not all the hospitals, it's a minority actually of these five systems or whatever of the hospitals that are on the list, but I was born at St. Joe's. My kids were all born at good Samaritan, grand children born at chandler regional, so I appreciate these hospitals and the service they do, why they would join in this thing for the paltry, you know, bit that they get and try to order another board of directors to do something they feel is wrong, it surprises me. And disapoints me. We're not trying to take anything. We asked, in fact we went to the hospital association which we're all members of, like a year ago, and we said let's get together and talk about this. There's a storm come, there's going to be a d-day here, and we need to talk about this, and they would not come together and talk to us.

Ted Simons:
But again, doesn't state law explicitly say you must sign off on this?

Bil Bruno:
There is a state law that says that, but they cannot require us to do something that is illegal. We're not going to do it.

Ted Simons:
was there not a deal when the system was first put into place the legislature basically saying go ahead, we get this system into place, but was there not a deal as well to where access would get the money that we're talking about, the money that seems to be at play here, because of their needs as well? Do you understand what I'm saying? Seems as though there was a tacit agreement, maybe not so tacit, between the group and the state that here's what we're going to do for the counties, knowing that the state would get more money from the feds.

Bil Bruno:
I have tried to find this deal, you know, this contract, and I've not been able to and I've talked to the county some of the members of the county board of supervisors going back into the '90s, Betsy Bayless was on the board of directors, what's this about a deal? What deal? I've been affiliated with the system as a volunteer board member since 1999, I never participated in any such deal. Now what happened prior to this year is the state was able to manipulate this thing by laundering the funds, using the county treasurer, they put in the 60 million and take out, you know, 56 million, and this year though the federal government changed the rules, they said we don't like what's going on across the country, so now we're going to require that the institutions that are furnishing the actual services that justify this money we're sending out to the states, they're going to have to certify it, and that's when we say we're be going to do it.

Ted Simons:
Why not go to lawmakers, explain what's going on, say here it is, it's black and white, this needs to be changed, it's systemic, do something.

Bil Bruno:
We've been trying to do that. Believe me. We've been down the legislature, we asked for meetings, last year I mean that was a whole table full of lawyers that I sat across from, and we were ready to litigate this thing, because we knew it was going to be an explosion. We started talking, they were in the same budget crisis, days are running out, got to do something, got to do something, so the deal came back from these and, you know some prestigious lobbyists that, hey, you guys work with it, let it go this year, and then we will work it out. We will be your friend. We will work this thing out with you over the next -- well, the way they worked it out is they did not have any meetings with us at mutual request, then three hours before the deadline they call us down there and they go well we won't want to make a deal. So that's when the board met two hours later and said ok.

Ted Simons:
but again, and I'm looking at this purely at a distance, a, and b, from a P.R. standpoint, holding up funds for other hospitals, phoenix children's hospital included, is that the best way to achieve what you're trying to achieve?

Bil Bruno:
Absolutely not. But we're not the ones who initiated the lawsuit. We're not the ones who passed instead of sitting down and trying to help us figure this out, how come maybe there's other funds we can help the state obtain that will take the place of these, because we serve a lot of people, we have a -- train a lot of doctors, maybe there's other things we can do, there's very bright people, but instead of sitting down they decide, hey, we'll just make them certify. You're right. It's stupid to be in this thing, but I don't know what we can do. We can't go against our what we believe is -- we can't do something that we believe is wrong and certifying some funds, saying telling the federal government we've received this money when we truly haven't, we can't do that.

Ted Simons:
so again, the idea of access being created to help with some of these disproportionate share, the funding for folks who simply can't pay, you don't see that as being in this equation?

Bil Bruno:
what I see is access has --

Ted Simons:
Because the state will tell you the general fund, they need this money to help fund access and the county knowing that access is there take something of the brunt of this should be able to survive with less funds, fewer funds.

Bil Bruno:
the people of Arizona established the poverty levels that would qualify for access. They did that. And there was no deal to my knowledge, I've asked for copies of it and to tell you the truth, we are healthcare district. We're not whatever, you know, whoever was running things 15, 20 years ago, there is no such thing, and I'm admit the state and access, they're addicted to our money. There's no doubt about it. And that's why we wanted to meet. We've even had proposals on the -- out there that help us, we will help you wean yourselves off of this, you know, we know you're addicted and we'll figure out some way, maybe there have some other funds we can draw down in the meantime to help you ease you off this. They have no interest in that.

Ted Simons:
Can you understand how some people see this as your group saying if we can't get the money, no one gets the money? Because that is in fact what's happening here, if you're not going to sign off on these funds.

Bil Bruno:
Why is it that we need to sign off? I mean, if you step back and if people are thinking this, then they need to think why is it that the federal government is insisting that we sign off? Well, they're insisting because they want to know that the money was properly received and spent. So if we're not going to do that because it's wrong, the people who have this position should understand, we can't bail out the state of Arizona and the bureaucrats down there at access or other hospitals, some insignificant amount of their total expenses. We're the ones caring for, you know, 400,000 patients here in Maricopa county. We're the ones operating the Arizona burn center. We're the one with the trauma services, we train hundreds of doctors every year. We have the H.I.V. aids clinics, we've got two psychiatric hospitals, we're in businesses nobody else wants to be in.

Ted Simons:
Is there room for compromise?

Bil Bruno:
Well, I think there is. Now, we can't compromise on doing right and wrong, but we can try to help the state figure out how to break this addiction they have, and try to ease them off of that. And that was our hope, still is our hope, as more and more money pours out to lawyers from here at Washington, D.C., who knows.

Ted Simons:
and you've got a response now to access, that was yesterday the group filed a response.

Bil Bruno:
right.

Ted Simons:
And now tonight we're going to hear about a response or maybe tomorrow sometime for the private hospitals?

Bil Bruno:
Yeah, there's a few private hospitals, hospitals many, many times larger, one system with 44 hospitals I think and another with over 20 hospitals, they've decided to weigh in on this thing and we'll be answering them tomorrow.

Ted Simons:
All right. Well, bill, we thank you for your time and help us try to figure out what the heck's going on here. Thank you so much.

Bil Bruno:
good luck, thanks.

Ted Simons:
coming up Friday on the Journalists Roundtable, the governor says vital services will continue even without a state budget. And Arizona lawmakers try to kick start the economy with a stimulus package of tax incentives. Find out more Friday on Horizon. That is it for now. I'm Ted Simons. Thanks for joining us.