America West Holdings Corporation

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America West Holdings Corporation

4000 East Sky Harbor Boulevard
Phoenix, Arizona 85034
U.S.A.
Telephone: (480) 693-0800
Fax: (480) 693-5546
Web site: http://www.americawest.com

Public Company
Incorporated: 1981
Employees: 12,200
Sales: $2.2 billion (1999)
Stock Exchanges: New York
Ticker Symbol: AWA
NAIC: 481111 Scheduled Passenger Air Transportation; 56152 Tour Operators; 561599 All Other Travel Arrangement and Reservation Services

Of the more than 150 U.S. airlines launched during the post-deregulation start-up boom, only one survived to become a major carrier: America West Airlines (AWA), owned by America West Holdings Corporation. Propelled by strong economies in Phoenix and Las Vegas, AWA has added another hub in Ohio. America West Holdings Corporation also owns The Leisure Company (TLC), built out of the airline’s travel businesses.

Origins

America West was incorporated in 1981 by ten investors, including Edward R. Beauvais, an accountant and airline consultant; the investors took out second mortgages on their homes and borrowed against their credit cards to raise funds for the endeavor. With the company still short millions of dollars, Beauvais made dozens of trips to New York over a two-year period before he was able to convince an investment banking firm to underwrite a stock issue for the new airline, raising $18.7 million from the sale of 3.5 million shares at $7.50 a piece. With this capital, America West took to the skies on August 1, 1983. Operating three leased Boeing 737 aircraft, the fledgling airline offered flights from its hub in Phoenix to four cities: Colorado Springs, Colorado; Los Angeles, California; Kansas City, Missouri; and Wichita, Kansas.

The company’s strategy was to make Phoenix an east-west transfer point by routing travelers from its network of Midwestern cities through Sky Harbor Airport to California. With business travelers as its targeted market, America West aimed to increase passenger traffic on the routes it served through a combination of full-quality service, frequent flights, and low fares. To set itself apart from competitors, the company adopted perks such as onboard ticketing and free 12-ounce drinks.

In entering a crowded and highly competitive industry, Beauvais, who became America West’s chairman and CEO, and President Michael J. Conway, brought a different approach to the traditional problems of running an airline. To avoid head-to-head competition with the better established major airlines, the company decided to restrict its activities to the area west of the Mississippi. To circumvent high labor costs, Conway and Beauvais devised a mandatory employee stock ownership program, in which its employees, none of whom belonged to a union, were required to purchase shares in the company equal to one-fifth of their starting salary. The airline touted this angle in its advertising, which featured a picture of a company employee under the slogan, “There’s something unusual about Laurie: she owns an airline.”

In an effort to build team spirit and keep workers interested in their jobs, America West structured its workforce in a deliberately non-hierarchical fashion. All employees earned a low base salary, supplemented by earnings from a profit-sharing program that allotted 15 percent of all pre-tax earnings to be distributed among employees. Pilots were expected to fill in as dispatchers or in other ground jobs when they were not in the cockpit. Customer service personnel rotated between various tasks, acting as baggage handlers, flight attendants, gate and ticket counter agents, and reservations agents. A Wall Street Journal reporter who flew the airline in its second month wrote that customer service representatives servicing a newly landed plane on the tarmac looked like “college students preparing a homecoming float” and described one worker backing a catering truck into a conveyor belt.

America West expanded rapidly in its first months of operation, adding two more planes and service to Omaha, Nebraska, and Ontario, California, outside of Los Angeles, on October 1, 1983. At the end of that month, an additional plane to Las Vegas was brought on line. On December 1 of that year, the airline inaugurated service to four more cities east of Phoenix—Des Moines, Iowa; Tulsa, Oklahoma; Oklahoma City, Oklahoma; and Albuquerque, New Mexico—and also began flying to San Diego, California, to bring its total of destinations served to 12 and its number of planes leased to ten. Although the airline lost money in its first two months as a result of start-up costs, its passenger traffic was picking up, and the company had nearly tripled its 280-person workforce by the end of the year.

By the end of 1984 America West had 21 aircraft serving 22 cities. Although the carrier had attained a dominant position in its home market, Phoenix, it had done so by racking up $19 million in losses in its first 15 months in operation. In November 1984 the airline announced its first profitable month of operations, and the following month it rejected an offer by rival Southwest Airlines to purchase the company.

First Profit in 1985

In 1985 America West shed its initial difficulties and came into its own, doubling its revenues to $241 million to post its first profit, $11.4 million. The company had earned a one-third market share in its hub in Phoenix, offering 66 flights to California every day and 122 flights total. Overall, it flew 32 planes to 26 different cities. As a complement to its passenger service, the company inaugurated an air cargo service as well as a small package service. Offering passengers free sandwiches and copies of the Wall Street Journal on its flights, America West wooed business travelers and maintained a higher percentage of seats filled on its flights than the industry average. “We gave Midwesterners California at half the price and twice the frequency,” said Conway, explaining the company’s startling growth to the New York Times.

By 1986 the airline was set to undergo a period of transition, building on the success of its early years of limited operations to expand the scope of its activities. Now serving 30 cities, including its first international destinations, Calgary and Edmonton in western Canada, America West announced its intention to include an additional 10 to 20 points on its route map within the next two years.

The company also planned to inaugurate service using smaller planes to ferry customers from the start-up cities of Yuma and Flagstaff, Arizona, to connecting flights at its hub in Phoenix. In addition, America West broke ground on a new maintenance complex in Phoenix. The cost of this expansion, coupled with an expensive fare war the airline was waging with Southwest Airlines, cut back profits in 1986 to $3 million, less than a third of the previous year’s total.

By 1987 America West had opened a second hub of operations in Las Vegas, with 102 daily departures, as the airline looked to double its size by the end of the year. In part, this rapid pace of expansion was designed to ward off unwanted consolidation with a larger airline, the fate of many other small carriers during the late 1980s. America West ventured outside the safe harbor of its Western base for the first time in May 1987, inaugurating service to Chicago’s O’Hare International Airport. Six weeks later it extended its reach even further east, scheduling flights from Phoenix and Las Vegas to Baltimore and New York. In order to do this, the company added seven Boeing 757s to its fleet. These moves resulted in an unprofitable first half of 1987, as the airline racked up losses of nearly $15 million, and left America West vulnerable to competition from the powerful major airlines who dominated service from these areas. The company’s leaders insisted, however, that their targeted markets were underserved or overcharged, leaving a window of opportunity open for their airline with its low operating costs.

Despite the fact that the U.S. airline industry was undergoing a frenzy of mergers and takeovers during this time, America West was able to remain largely removed from this activity. The company’s stock option plan for employees had put 18 percent of the airline’s outstanding shares in workers’ hands, and members of the company’s management controlled an additional 12 percent. Nevertheless, a one-fifth stake in America West was purchased by Ansett Airlines, an Australian company half-owned by media mogul Rupert Murdoch. America West had previously leased planes from the company in August of 1987, providing the airline with a much needed infusion of additional cash. Regardless of this measure of financial health, the company’s stock price remained static, as Wall Street analysts expressed doubts about the company’s ambitious plans for expansion.

By the end of 1987 America West had added 3,200 employees, 23 aircraft, and ten new destinations in just one year, becoming the nation’s tenth largest airline. However, passenger traffic failed to grow as fast as the airline’s capacity, and persistent fare wars in some markets cut margins of profitability. These factors led to a $45.7 million loss on revenues of $575 million for the year.

Company Perspectives:

As America West grows, certain principles will continue to guide us. Safety will remain our top priority. Maintaining a strategic unit cost advantage is a constant imperative. We will invest in a productive workforce by hiring, training and rewarding highly skilled employees, and we will build on the positive relations with labor that have resulted from our new contracts. Our company-wide focus on customer service and operational reliability will be sharper than ever. We will continue to strengthen the Company’s financial foundation and enhance shareholder value. We believe the Company is well prepared for all challenges, including growth, intensified competition, increases in industry capacity and downturns in the economic cycle.

Faced with this bad news, America West announced plans for a cutback in operations in early 1988 in an attempt to regain profitability. The airline set out to trim flight operations by 10 percent, removing 15 planes from service, shutting down service to Chicago’s Midway airport and to Springfield, Missouri, and shrinking its staff by 500 employees. America West was teetering on the brink of disaster. “They’re flying into oblivion. It’s only a matter of time,” opined one pessimistic airline analyst in Business Week. The company’s planes were flying half-full, below the break-even point, and the airline’s success in Phoenix had attracted the interest of powerful competitors, who were increasing their service to this market.

Nevertheless, the cost-cutting measures proved effective, and, benefiting from a strong economy, America West ended 1988 in the black, showing a profit of $9.4 million after a debt refinancing. Despite a disastrous first quarter, the company’s operating profits had grown steadily throughout the last nine months of the year, as the percentage of seats filled on each plane improved and some ticket prices were raised. Rivals pronounced the turnaround “extraordinary.”

Rebounding in 1989

Buoyed by the company’s resurrection, America West’s president announced plans to add flights to major markets on the East Coast, including New York-LaGuardia and Washington-National Airport, using boarding gates abandoned by ailing Eastern Airlines. Despite its heavy burden of debt, which had reached 85 percent of operating capital, the airline looked even farther afield to Hawaii and Australia, where it planned to hook up with part-owner Ansett Airlines and other points on the Pacific Rim. Undeterred by the company’s recent brush with disaster, CEO Beauvais explained the need for continued expansion to a Business Week reporter, asserting: “You cannot just sit still and survive.”

In keeping with this philosophy, America West made a bid in the spring of 1989 to acquire Eastern Airlines’ shuttle service between Washington, D.C., New York City, and Boston. Although this attempt was ultimately unsuccessful, the airline did inaugurate service from the west to New York City and Washington, D.C., in July 1989 as well as service to Hawaii in November 1989. Although the flights to Hawaii lost money due to stiff competition on the route, they helped to fill connecting flights to Phoenix and lent cachet to the airline’s frequent flier program, which could now reward customers with a vacation in the islands. In addition, the airline envisioned Hawaii as a potential hub for a network of flights radiating out to points across the Pacific.

In May 1989 America West lost a hard-fought bid to provide service to Tokyo, the first of its planned Pacific Rim destinations. It pressed on, however, with efforts to win permission to fly to Nagoya, a large Japanese industrial center, and also to Hong Kong and Taipei. The airline also took steps to increase the size of its fleet, ordering an additional 25 jets from Boeing as well as six more small commuter planes from another manufacturer. America West ended 1989 in the black, posting a profit of $20 million.

In the first half of 1990, America West was reclassified as a major airline by the United States Department of Transportation, and the company’s sales rose as the airline carried 40 percent more revenue passenger miles than it had in the previous year. Curtailed by high fuel costs and heavy interest payments on its large debt, however, earnings remained small. To counteract its higher costs, America West raised fares by 10 percent in August 1990.

As other airlines in poor financial shape, such as TWA, underwent radical reorganization, America West explored the possibility of taking over some of their operations. In the fall of 1990 the company made its second serious inquiry into an East Coast shuttle, entering into talks with Pan Am about taking over its Washington-New York-Boston route. Although those talks, too, fell through, the company did receive a much-coveted approval from the federal government to start service between Honolulu and Nagoya. This boon shortly followed a September 1990 announcement that America West intended to lease more than 100 planes from Airbus Industrie, the European aircraft consortium, for use on possible new routes. (AWA chose the Airbus jets over Boeings largely for the cockpit and maintenance commonality across various types in the Airbus family.) Despite these signs of aggressive expansion, the airline ended 1990 in poor financial shape, racking up losses of $74.7 million.

1991 Bankruptcy

Performance in 1991 continued to be weak. Although America West added coast-to-coast flights between New York City and Orange County, California, began service to Atlanta, and stepped up flights to Honolulu, it prepared to scale back its growth. The war in the Persian Gulf in early 1991 cut air traffic dramatically, as travelers wary of possible terrorist attacks stayed home. By the middle of the year it was clear that America West’s expansion had left it with too small a financial cushion to fall back on in lean times. Although the airline had grown to the point of serving 54 cities with a fleet of 109 planes, 87 of those aircraft were leased from their owners; the lack of cash to make payments on these planes forced the airline to file Chapter 11 bankruptcy on June 27, 1991. The airline petitioned for protection from its creditors while it attempted to reorganize its finances without being forced to suspend operations.

Key Dates:

1983:: America West Airlines (AWA) launches first flights after two years of fundraising.
1985:: First profit is posted.
1987:: Debt-laden AWA loses $45 million, opens second hub in Las Vegas.
1990:: AWA reaches major airline status with $1 billion in revenues.
1991:: Overextended AWA files bankruptcy.
1995:: Record profits allow AWA to expand again.
1998:: Growth in travel business prompts restructuring.

Since the generally poor state of the American airline industry made the likelihood of a bail-out by a foreign airline or a domestic competitor small, AWA looked to pare its unprofitable operations and emphasize its strengths. To do this, it moved away from head-to-head competition with more efficient Southwest Airlines on short-haul flights and restructured its route map to stress longer flights to eastern destinations. As part of this process, the company announced plans to shed its commuter airline operation. Desperate to lure passengers back to the air, America West was forced to sell tickets at half-price, weakening its earnings. The company laid off 15 percent of its employees and slapped the others with a 10 percent pay cut. In addition, 15 planes were taken out of service. In August 1991 the airline received some essential financial help from Northwest Airlines and a British group, and a creditor pledged additional loans in December of that year. Even with these measures, America West ended 1991 $213.8 million in the red.

Still alive and kicking in 1992, despite the predictions of doomsayers, America West transferred the focus of its attention from Phoenix, its historical base of operations, to Columbus, Ohio. By building a hub in Ohio, the airline’s leaders predicted, the company could avoid damaging competition with Southwest Airlines and garner profitable business fliers from the area’s high concentration of corporate headquarters. By March 1, 1992, 26 flights left Columbus daily, and the company had made its entry into the Florida market.

As part of its new eastern focus, America West also sold off its recently acquired route to Nagoya, Japan, adding $15 million of cash to the airline’s coffers. Passenger bookings were up, as the airline aggressively courted travel agents to regain their lost confidence. In addition, the company’s costs had sunk to the lowest levels in the industry as America West prepared to submit a plan for reorganization to its bankruptcy court in 1992. While Conway told Business Week that “this airline is too tough to die,” industry observers predicted that America West’s fate hung with the rest of the economy: a robust economic upswing could save it, while continued recession would almost certainly doom it.

Beauvais left America West in 1992 as William A. Franke, leader of a group of Arizona angels who invested in the company, became chairman. A. Maurice Myers, president and CEO of Aloha Airlines, replaced Conway in January 1994 after the airline had become profitable again (earning $37 million in 1993) and pressure mounted to pick a reorganization plan.

The America West board chose that of AmWest Partners, which included Continental Airlines chairman David Bonderman, James Coulter, Continental Airlines itself, Mesa Airlines, and Fidelity Investments. It invested $215 million in America West, which continued to cut costs and post profits. The Bonderman group declared an alliance with Continental would produce enough value to repay creditors. The two airlines began conducting joint flights in October 1994.

Record profits in 1995 fueled further expansion around the Phoenix hub. The airline added six routes from Acapulco to Anchorage. Company officials stated there was enough room for America West and Southwest Airlines to coexist in Arizona, which had one of the fastest-growing economies in the United States. America West specialized in longer trips than Southwest, which typically operated point-to-point routes.

The company began to outsource its heavy maintenance to BF Goodrich’s Tramco unit in December 1995. However, the transition was awkward and costly in terms of canceled flights and lost revenues. Personnel shortages contributed to a loss of $50 million in the third quarter of 1996; the carrier posted an undersized $8.5 million profit on sales of $1.7 billion for the year.

Richard Goodmanson was named president in February 1996. By this time, America West was boasting the lowest operating costs among major U.S. airlines—lower even than Southwest’s. However, in spite of efforts to win big-spending business flyers, AWA remained dependent on low-rent leisure traffic. Its Nite Flight service to Las Vegas, the company’s nocturnal hub, accounted for 15 percent of revenues and helped keep its moonlighting planes profitable.

AWA’s travel package offerings grew handsomely, warranting the creation of a separate subsidiary, The Leisure Company (TLC), in January 1998. This unit specialized in bundling air travel with accommodations under the America West Vacations and Destination Leisure brands. TLC launched FareBust-ers, a ticket consolidator, in April 1998 and acquired The Vacation Store (TVS), a $30 million-a-year business, in October.

America West sought to distance itself from any budget carrier connotations with a $10 million advertising effort in 1999. It reassured business travelers in particular that “Every flight counts,” a message also aimed at its own fractious employees (flight attendants nearly walked off the job in March).