America West Amends Loan Guarantee Application
America West Airlines, the first airline to apply for federal loan guarantees crafted from the Air Transportation Safety and System Stabilization Act, yesterday amended its original application. The changes to its request, which asked for $400 million in federal loan guarantees, included more conservative assumptions on industry recovery, increased compensation that could total $175 million to the U.S. Treasury, and perhaps most significantly, the inclusion of warrants to acquire approximately 3.4 million Class B shares of America West Holdings Corp. The equity proposal, not included in the original application submitted last month, worries many throughout the industry who fear government ownership could bias regulatory and competitive policies.
America West said approval would lead to $600 million in concessions from lessors, manufacturers, creditors, vendors and state and local governments, for a total recovery package exceeding $1 billion.
In its revised application, America West projected continued losses for 2002 and "very modest profitability" in 2003. The carrier had less than $145 million in cash on hand at the end of the third quarter and additional federal funds already entitled to the airline under the Stabilization Act may not be enough.
"The only airline we are worried about from a viability standpoint is America West," said Susan Donofrio, analyst at Deutsche Banc Alex. Brown in a research note late last month. "With a daily cash burn rate of roughly $2 million, the airline could potentially run out of cash in four months, unless the government grants them their requested $400 million loan guarantee."
"After a tremendous amount of work by, and helpful negotiations between, the board's staff, our lenders and our team, we believe our submission demonstrates America West's ability to comfortably repay the loan under very conservative assumptions about economic and industry recovery and provides meaningful compensation for the loan guarantees," said AWA CEO W. Douglas Parker.
Smaller carriers, more vulnerable to the economic slowdown and traffic drop-off compounded by Sept. 11, are more likely to apply. In fact, Kansas City-based Vanguard Airlines yesterday became the second carrier to file. Approval of its application for $60 million in federal loan guarantees would lead to a total of $80 million in fresh capital. "The federal loan guarantee is the key component in our ability to continue providing low fare competition in the airline industry," said CEO Scott Dickson.
Las Vegas-based National Airlines last month submitted its proposal for bankruptcy reorganization, including plans to apply for guarantees. Midwest Express Airlines said it will submit its application in the first quarter of 2002, but acknowledged that approval is not certain. Midway Airlines, which ceased operations just a day after the terrorist attacks, also is reportedly interested in loan guarantees and a return to the skies sometime this month.
Most other airlines--particularly larger network carriers--would like to secure financing on their own without relying on government guarantees, especially because much remains uncertain; the board has yet to fully staff, establish timeframes or set firm parameters. General guidelines, however, are in place and carriers have until June 28 to submit applications (BTN, Oct. 22).
Meanwhile, several airlines have taken recent steps to shore up their financial positions. United Airlines, for example, restructured its aircraft delivery programs with both Boeing and Airbus and now will take 43 fewer planes in the next two years than originally planned, including zero deliveries in 2003. The arrangements temporarily will save the company $2.5 billion. United also recently added $600 million in incremental liquidity last month but did not provide details, and indicated it may seek pay cuts from many of its employees. US Airways secured $404 million in financing involving previously unencumbered planes and engines. That, along with the excise tax payment deferral approved by the federal government, will boost US Airways' year-end liquidity to about $1 billion. Continental Airlines last week completed a stock offering of class B shares, netting $172.1 million to be used for "general corporate purposes."
Meanwhile, Minneapolis-based Sun Country Airlines last week indefinitely canceled scheduled service, eyeing a charter-only operation similar to the one it launched with in 1983. The move leaves Northwest Airlines in a more dominant position on many routes Sun Country abandoned.