Newly financed USAir emerges from Chapter 11

$1.24 billion in loans tied to major expense cuts

Costs were highest in industry

Unionized labor gave up $1 billion in pay, benefits

April 01, 2003|By Paul Adams | Paul Adams,SUN STAFF

A smaller US Airways emerged yesterday from bankruptcy with $1.24 billion in new financing and its chief executive pledging to continue looking for ways to cut costs and boost revenue.

"This legal process is done, but we're going to lose money this year and this war brings out a lot of uncertainty, and so we're going to have to continue to adapt and refine our business model," said David N. Siegel, the carrier's chief executive.

The Arlington, Va.-based airline, which cut expenses by $1.9 billion annually while in bankruptcy protection, hopes to further cut costs in light of reduced business. It also plans to purchase 100 small regional jets, which are a key component of its revamped business plan.

Completion of the company's nearly eight-month bankruptcy involved more than 700 transactions, including a $1 billion loan and a $240 million investment by the Retirement Systems of Alabama.

The Alabama pension fund will get eight seats on the reorganized company's 15-member board of directors, along with a nearly 37 percent stake in the company.

The $1 billion loan was backed with a $900 million federal loan guarantee. The federal government set aside up to $10 billion in loan guarantees to help ailing airlines after the Sept. 11, 2001, terrorist attacks. The remaining $100 million of the 6 1/2 -year loan was provided by the Retirement Systems of Alabama, which put up $75 million, and Bank of America, which provided $25 million.

The company used the financing to repay the $372 million it borrowed from the Alabama pension fund during its bankruptcy reorganization. The fund was also paid $9.4 million for administrative rent and assorted professional fees, and another $48 million for other expenses.

The airline also said yesterday that it has closed a 5 1/2 -year deal with the Bank of America to process the company's credit-card transactions, effective May 15.

US Airways had the highest costs in the industry when it entered Chapter 11 as the sixth-largest carrier. It emerged yesterday as the seventh largest, with expenses closer to that of its low-cost rivals.

The airline said its cost of flying one airline seat one mile is 10.5 cents, down from 12.2 cents prior to filing Chapter 11. Through bankruptcy proceedings, the airline eliminated more than $2.8 billion of its $8.4 billion in aircraft debt and lease obligations.

The airline's unionized labor gave up $1 billion in annual pay and benefits. Renegotiated debt and leases shaved $500 million from annual expenses, and vendors, management concessions and other cuts are expected to save $400 million.

While analysts lauded US Airways for making steep cuts in record time, many say the airline still faces a challenging future as war in Iraq and an anemic economy continue to batter the industry.

To help mitigate the effects of war, US Airways said last week that it will implement an additional 5 percent pay cut across the board and reduce the number of domestic and international flights.

"While cost structure is vastly improved, it has not improved to a point where success is guaranteed," said Gary Chase, an airline analyst with Lehman Brothers. "In order to ensure success, the company has to also execute on its revenue opportunities."

The airline's unions expressed optimism about the airline's chances for survival, despite the high price many paid.

"All US Airways employees should be commended for making the difficult decisions necessary for the company to successfully restructure and emerge from bankruptcy," said Robert Roach Jr., general vice president of transportation for the International Association of Machinists and Aerospace Workers.

Siegel pledged to work toward rebuilding morale among the workers. "Painful as it has been, the jobs they still have are better than a lot of the alternatives out there in this economy," he said.

The airline's common stock became worthless after bankruptcy. New shares will be issued to the Alabama pension fund, employees, management and others. The pilots union will get 19.3 percent of the shares; other employees 10.8 percent; unsecured creditors 10.5 percent; the government 10 percent; management 7.8 percent; and General Electric 5 percent.

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