USAir offers flight plan to failed industry

USAir offers flight plan to industry

Buffed: The refashioned US Airways that's expected to emerge from bankruptcy tomorrow after only eight months could serve as a model for the shaky industry.

March 30, 2003|By Paul Adams | Paul Adams,SUN STAFF

US Airways Group Inc. is scheduled to emerge from bankruptcy tomorrow after having shed almost 17,000 employees, 128 airplanes and $2.1 billion in debt in what is being hailed as a textbook restructuring that could serve as a model for the teetering aviation industry.

The airline will emerge under the control of the Retirement Systems of Alabama, which provided a critical $500 million in financing during the company's restructuring and will invest $240 million in the company once it leaves bankruptcy.

Legal experts say the carrier's reorganization is notable for its duration of just eight months, during which it came perilously close to liquidation as a sluggish economy and the prospect of war in Iraq decimated its original revenue projections.

The speedy conclusion puts US Airways, which dominated the market at Baltimore-Washington International Airport until the late 1990s, a step ahead of many of its larger rivals, which are still battling their unions and vendors for cost reductions in hopes of avoiding bankruptcy.

"The opportunity is US Airways' to win or squander," said Henry Harteveldt, a senior analyst with Forrester Research.

The highly leveraged airline, which lost $1.6 billion last year, entered a two-year industry slump with the highest operating costs of any major airline.

Battered by low-fare competitors infiltrating the East Coast market, the Arlington, Va., airline became the first to enter bankruptcy after the Sept. 11, 2001, terrorist attacks. Since then, analysts say, the carrier has been a leader in making the kinds of cuts the industry needs to return to profitability.

"They've done everything right," said Adam Pilarski, senior vice president of Avitas, an aviation consulting firm in Washington. "They tried to have decent relations with creditors and unions, they have a goal, they know where they are going."

US Airways still must contend with high fuel costs and a travel downturn that has worsened with the outbreak of war. With demand down by double-digit percentages since hostilities began in Iraq, the company said Thursday that it will reduce capacity by an additional 5 percent and cut some trans-Atlantic flights. Employee salaries also will be cut by 5 percent effective tomorrow.

Despite the latest obstacles, airline analysts are giving US Airways a better-than-even shot at surviving as a smaller carrier.

"They have a future as a different type of airline," Pilarski said. "They will be more like a regional carrier."

Ultimately, the company's reorganization hinged on the negotiating expertise of Chief Executive Officer David N. Siegel and the resolve of the remaining US Airways employees, analysts and company officials said.

Faced with liquidation, workers decided they wanted to keep flying despite the price they were being asked to pay.

"It was painful and it was extraordinary," said William Pollock, a pilot and chairman of the US Airways unit of the Air Line Pilots Association. Pollock will serve on the restructured airline's board of directors.

"I think the pilots were really forced to make a decision as to whether the company would survive or not," he said.

After two rounds of negotiations, the final tab for unionized labor and managers came to about $1.2 billion in annual pay and benefit reductions, combined with a roughly 50 percent cut in most pilot pensions.

The airline won approval Friday from the Pension Benefit Guarantee Corp., a government agency set up to pay retirement benefits if a company fails, to end its pilot pension plan and replace it with a new defined contribution plan.

Winning government approval for the plan was among the last obstacles the airline had to clear in order to complete its bankruptcy reorganization. The previous pension plan was facing a $2 billion shortfall.

The rest of the savings achieved in bankruptcy - totaling $1.9 billion annually - will come from vendors and lease holders.

"The pilots, mechanics and flight staff blended together almost as a family to say we want to survive and we'll do whatever it takes to see it survive," said David G. Bronner, chief executive of the Retirement Systems of Alabama, which will own almost 37 percent of the restructured company.

Pension fund in control

The Alabama pension fund will get eight seats on the 15-member board of directors, along with 72 percent voting control. Labor unions will get four seats and management three seats.

Existing shares of the company's stock will become worthless. New shares will be distributed among Bronner's group, employees, management and certain creditors. The shares will be publicly traded under the company's existing ticker symbol, U.

Dependent to a large extent on drastic cost reductions, the airline's recovery also hinges on the introduction of up to 300 additional small regional jets, which will gradually replace the airline's larger jets in some low-volume markets.

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