When USAir's Ed Colodny retired in Summer 1992 - three year after Buffett had bought preferred shares for Berkshire Hathaway - his chosen successor, Seth Schofield, became Chairman as well as CEO. Schofield had come through the ranks, starting at 18 as a ramp agent: loading bags, selling tickets and boarding aircraft. He was a popular “blue-collar guy” with a reputation for caring about his employees and had a strong rapport with union bosses.
Buffett really liked him and his actions, “Seth Schofield is making major adjustments in the airline's operations in order to improve its chances of being one of the few industry survivors. There is no tougher job in corporate America than running an airline: Airline managers need brains, guts, and experience - and Seth possesses all three of these attributes.” (Buffett's 1992 letter to BH shareholders)
But Summer 1992 was a bad time to take on the leadership of a firm which only weeks before had reported a massive $305m loss. It was still reeling from two fatal crashes which sapped the spirit of employees and damaged the company’s image with passengers. Even worse was the perennial problem of carrying much higher wage costs than competitors, and the unions’ imposition of crippling work rules.
Schofield faced down unions through the Fall 1991 strike, but this was not enough to save USAir from continuing to report losses exacerbated by yet more strikes and by yet more competition. The biggest blow was the entry of low-cost Southwest to Baltimore routes in 1993.
They hammered air fares. USAir, not to be outdone in its home market, pitched its fares below Southwest, which prompted another round of fare reductions. The ratcheting-down didn’t stop until it was only $19 to fly Baltimore to Cleveland. Of course, the result was a lot of red-ink. To make matters worse Continental started offering low-fares out of North Carolina. And American, Delta and United kept adding capacity and discounting fares too.
A helping hand from the Brits
Fully aware of growing losses and balance sheet debt ballooning to $2.2bn the board found a way of gaining some cash and customers. It agreed in 1993 to sell a 44% ownership stake to British Airways in return for $750m (BA’s votes were limited to 21% due to Federal rules on foreign investment).
This Alliance bought together the largely domestically focused USAir, carrying 55m passengers annually, with the internationally focused BA serving 24m flyers. Each airline could feed customers into the other’s network, expanding the range of destinations to 77 countries, and they could integrate marketing and some other functions. Schofield said the deal will “ensure our survival”. Buffett agreed it would help it dodge bankruptcy and hoped the path was now “eventual prosperity”.
BA took four seats on USAir’s board and the…To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Prof. Glen Arnold
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