Chapter 11: US Airways Emerges, AA Treading Water
As promised by CEO David Siegel, US Airways today emerged from Chapter 11 bankruptcy protection after less than eight months of reorganization. The carrier today secured $1.24 billion in liquidity, including a $1 billion financing package backed by a $900 million federal loan guarantee issued by the Air Transportation Stabilization Board and a $240 million equity investment from the Retirement Systems of Alabama Holdings LLC.
"Securing the $1.24 billion of added capital funds was critical to boosting our liquidity, executing our business plan and weathering the very difficult operating environment that airlines face due to the Iraqi war and general economic weakness," Siegel said. "We have taken very difficult--some would even say impossible-steps to restructure our company and lower our costs."
RSA holds a 36.6 percent stake in the reorganized company. The Air Line Pilots Association receives 19.3 percent of company stock, followed by other employee groups with 10.8 percent, unsecured creditors with 10.5 percent and ATSB with 10 percent.
US Airways cleared another major hurdle by announcing a long-term credit card processing agreement with Bank of America. Effective May 15, the new deal replaces the existing agreement with National Processing Corp. Without securing a credit card processor, the airline likely would have been forced to shut down.
"US Airways has relatively aggressively used the bankruptcy code as it is intended. They have substantially lowered labor and lease costs, lowered debt and gotten rid of the pilots' pension," said UBS Warburg analyst Sam Buttrick, speaking last week at Corporate Travel World, "but they still are losing money."
Industry observers, insiders and executives at other airlines wonder how US Airways will manage to stay competitive with a cost structure that is lower than before bankruptcy reorganization but still quite a bit higher than such direct competitors as AirTran, JetBlue and Southwest.
To return to profitability, US Airways will rely on an expanding partnership with United Airlines and inclusion in the Star Alliance. It also will focus on growing its regional jet fleet. A new US Airways unit, MidAtlantic Airways, is scheduled to begin operations before year-end.
"US Airways always has been one of our best partners and easier to deal with than anyone else. They went ahead and bit the bullet by being first to enter bankruptcy and it looks as if they will be the first to emerge," said a travel manager at a large US Airways corporate account. "We did not see our volume decrease when they went into Chapter 11. We told travelers, 'Don't let that stop you.' "
The travel manager added that US Airways' partnership with United could lead to savings opportunities, particularly across the Atlantic, as the two carriers continue integrating products and services.
Meanwhile, American Airlines' fate at press time remained uncertain. The carrier reportedly was prepared to file for bankruptcy as early as today unless it can secure tentative agreements with all labor unions representing $1.8 billion in annual savings. The carrier earlier today confirmed a new agreement with the mechanics union, while the Association of Professional Flight Attendants also said a tentative deal was in place. Though some published reports indicated that a new agreement with the Allied Pilots Association also had been reached, neither party provided confirmation at press time.
American is hoping to avoid following rival United Airlines into bankruptcy. United has until May 1 to reach consensual, long-term agreements with labor groups in order to meet lender requirements. The carrier took a huge step in the right direction last week when it reached a temporary pact with the pilots union. Meanwhile, United's parent, UAL Corp., by Thursday will be delisted from the New York Stock Exchange because its minimum share price closed below $1.00 for 30 consecutive trading days.
US Airways' emergence from bankruptcy and American's potential to avoid it are glimmers of hope for the beleaguered airline industry. With the ongoing war decimating demand and billions of dollars in losses expected again this year, however, the commercial aviation sector is nowhere near the light at the end of the tunnel. Indeed, US Airways' long-term survival is not guaranteed and American, burning through millions of dollars a day, still may go the Chapter 11 route if its financial position does not begin to improve.
"Government-imposed costs continue to strangle this industry, and the war's direct impact has been substantial," Siegel said. "I am very hopeful that Congress will respond with appropriate relief for the losses the airlines are suffering because of the war and more stringent security requirements."