USAir stops preferred dividends

September 30, 1994|By Suzanne Wooton | Suzanne Wooton,Sun Staff Writer

In one of the strongest signals yet of its precarious financial position, USAir Group Inc. said yesterday that it will defer dividend payments on nearly $1 billion worth of preferred stock, including that held by its international partner British Airways.

The unanimous decision by the airline's 16-member board came as the beleaguered carrier faced an $8 million quarterly dividend payment today on the Class A preferred shares held by Berkshire Hathaway Inc., the insurance and investment holding company controlled by Omaha investor Warren E. Buffett.

By deferring payment on Berkshire's preferred stock, which is among the most senior class of USAir preferred, the company is restricted from paying dividends on its other preferred stock. Dividend payments on USAir's common stock were suspended more than two years ago.

The board's decision, which included the approval of two representatives from Berkshire Hathaway and three directors from British Airways, will save the Arlington, Va.-based airline $77 million a year.

"The board just decided it didn't make any sense to pay dividends while we're losing money," company spokesman Dave Shipley said yesterday.

vTC The financial market reacted strongly yesterday to the USAir announcement. The airline's stock fell to a record low, closing at $4 a share, down $1. And yesterday, Standard and Poor's Corp. lowered its rating on USAir's publicly held Class B preferred stock to single-C from triple-C, its next-to-lowest rating.

USAir has lost more than $2.3 billion since 1989. And even as other domestic carriers have been recovering during the past year, the company's losses this year are expected to exceed last year's $350 million.

Mr. Shipley said the move to suspend the preferred stock payments was not a sign that USAir was nearing bankruptcy. "It wasn't an issue of not having the money," he said. The airline expects to maintain its current cash position of $400 million by the end of the year, he said.

This week's move was partly seen as a message to labor that its big stockholders were willing to sacrifice also at a time the company seeks sweeping concessions from its unions.

"This is the big boys saying 'We're going to share in this pain, too,' " said Alex C. Hart, airline analyst with Ferris, Baker Watts Inc. in Baltimore.

"It may wind up giving [USAir] some added leverage at the negotiating table with the unions," he said. The airline is seeking $500 million a year in cuts from its employees.

So far, however, little progress appears to have been made. The pilots' union has been seeking a 25 percent stake for workers in USAir, as well as $670 million in newly issued preferred stock, in exchange for concessions. But USAir's offer to give workers a 10 percent stake instead was dismissed by union leaders.

In all, the directors decision, reached Monday but not announced until yesterday, affects four issues of preferred stock worth $971.7 million. Of that, $358 million is owned by Berkshire Hathaway, $400.7 million by British Airways and $213 million is publicly held.

Under the terms of its stock, Berkshire Hathaway could appoint two more directors to USAir's board if the dividend has not been paid for 30 days. USAir said yesterday, however, that Berkshire has no plans to exercise that right. Holders of the company's Class B shares have the right to elect two directors if six quarterly dividends are not paid. Berkshire Hathaway would not comment.

For British Airways, USAir's decision to defer its payments on the Class F and Class T preferred shares owned by the British carrier comes as it appears increasingly impatient about its partner's inability to resolve its financial crisis.

British Airways investors reacted to USAir's decision by pushing the British carrier's shares to a 52-week low in London trading, falling 15 pence to 345 pence a share.

For months now, investors have been pushing British Airways' stock lower because of concerns about the carrier's struggling U.S. partner. In January, the stock traded as high as 497 pence a share, an all-time high.

But British Airways officials downplayed the dividend suspension yesterday, focusing instead on the airline's attempts to reduce its cost structure, the highest in the U.S. airline industry, through negotiations with its labor unions.

"The passing over in dividends for now would not in itself cause a change in judgment," said Marge Volopia, a spokeswoman at British Airways' New York headquarters. "More important must be the results of the negotiations between management and union to reduce the cost structure."

With its $400 million investment, British Airways owns 24.9 percent of USAir. It had intended to buy an additional $750 million in stock over the next five years. But, in March, it vowed not to make that investment unless USAir reaches some agreement with its labor unions to reduce costs.

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