US Airways may benefit from Chapter 11

Ailing airline will emerge leaner, more competitive as a result, analysts say

August 13, 2002|By Paul Adams | Paul Adams,SUN STAFF

Before the Sept. 11 terrorist attacks, many airline analysts did not give US Airways much of a chance of surviving on its own.

Its costs were too high and its network was too small to compete against budget carriers such as Southwest Airlines. With its sale to UAL's United Airlines blocked by federal regulators last year, many predicted the nation's seventh-largest airline was a goner.

Eleven months later, the industry is crippled by billion-dollar losses and the Arlington, Va.-based carrier is in bankruptcy court negotiating for its life. But instead of the airline's inevitable demise, industry experts are talking about a possible reversal of fortunes that could alter the competitive landscape east of the Mississippi River.

"I held the view before Sept. 11 that they were not going to survive," said Adam Pilarski, senior vice president of Avitas, an aviation consulting firm in Washington. "They didn't have a plan, and it wasn't certain where they were going. Right now, actually, they may know where they are going and they may need this Chapter 11 to get there."

Nobody is saying it's a done deal or that it will be easy. US Airways, the second-largest carrier at Baltimore-Washington International Airport, faces months of uncertainty as it deals with lessors and financiers after its bankruptcy filing Sunday. But analysts and investors in the plan say the airline will emerge smaller and more competitive than it has been in years as a result of new deals with labor unions, among other cost-cutting moves.

After shedding certain debt in bankruptcy court, the carrier may actually put pressure on other struggling airlines to cut costs and trim unprofitable routes, some believe. A stronger US Airways would force competitors such as United, itself a bankruptcy candidate, and Delta Air Lines to become leaner, possibly leading to lower fares for air travelers.

"The opportunity we saw in US Airways is that the company starts off with a strong franchise with an enviable position in major East Coast markets," said Richard Schifter, a partner in Texas Pacific Group, which is helping to finance US Airways' restructuring.

If the deal is approved in bankruptcy court and no other investors step forward to outbid it, Texas Pacific will take a 38 percent stake in the airline in exchange for a $200 million investment. The group will also get five of the 13 seats on the airline's reconstituted board.

Bankruptcy experts say Schifter's group is getting a bargain. Based on the size of its stake, the airline's equity is being valued at about $500 million, said William Rochelle, a lawyer who has represented aircraft lessors in numerous airline bankruptcies.

"My guess is that that's a lowball number," he said.

Schifter said the price is fair given the risk the investment group is taking and the price of the airline's shares, which fell to under $3 before the filing.

"It's more than twice as much as the equity value of US Airways today," he said.

Industry analysts and airline consultants say Texas Pacific's involvement is one indication that the airline's new business model has a fighting chance in the competitive East Coast market, which is slowly being taken over by budget carriers such as JetBlue, AirTran and Southwest, which is BWI's biggest carrier by a wide margin.

Texas Pacific co-founder David Bonderman and other partners have a proven track record with airlines, having helped rescue Continental and America West airlines from bankruptcy. Continental emerged from bankruptcy twice before evolving into the strong competitor it is today.

"When you see Texas Pacific putting money into an airline, you know it's a good basic franchise," said Ray Neidl, an airline analyst with Blaylock & Partners. "It's strong, but it just needed the right cost structure."

Yesterday, US Airways won preliminary approval from U.S. Bankruptcy Judge Robert G. Mayer in Alexandria, Va., for a $500 million loan to continue operations while it reorganizes. The airline can immediately tap $75 million of the loan as it implements its new business plan.

US Airways' reorganization calls for replacing older full-sized planes with hundreds of small regional jets, which are cheaper to operate in small markets and can be used to feed passengers to the airline's hubs in Pittsburgh, Philadelphia and Charlotte, N.C.

The plan includes securing $950 million in annual pay concessions from labor groups. Deals already have been struck with pilots and flight attendants.

Finally, the airline is likely to shrink its fleet, eliminate some routes and further reduce staff, which has already been trimmed by more than 11,000 employees.

"The management team and the employees collectively have made the kind of tough decisions that are essential for viability in a very different climate," said Jon Ash, managing director of Global Aviation Associates, a Washington consulting firm.

Rochelle, the bankruptcy expert, agreed that the airline has made unexpected strides in cutting its costs, which have historically been the highest in the industry. But it remains to be seen whether that will be enough to make the airline competitive against Southwest and others.

"My concern for the airline is not about the reorganization, because my guess is they will emerge successfully from Chapter 11," he said. "The bigger problem is, will they be able in the long run to operate an airline successfully flying in the East. The East Coast market has been a burying ground for airlines."

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