"US Air's Chief Lender Threatens the Ultimate"

Saturday, December 7, 2002

US Air's Chief Lender Threatens the Ultimate
By MICHELINE MAYNARD
The New York (NY) Times


The chief executive of the primary lender to US Airways said yesterday that
he would liquidate the airline if unions refused to provide $200 million in
additional wage and benefit concessions.

In an interview, David G. Bronner, head of the Retirement Systems of
Alabama, said that he did not expect to have to follow through on his
ultimatum and predicted that the discussions between the airline and its
employees would result in an agreement by next week.

The concessions would be the second round in US Airways' efforts to draft a
reorganization plan under Chapter 11 protection from its creditors. US
Airways has said it hopes to submit its proposal to a federal bankruptcy
court by Dec. 20. Before that, it would like to receive final approval for
$900 million in loan guarantees from the government, which gave it
provisional approval last summer.

To do so, the airline has asked union members for further cuts in pay and
benefits. If they do not comply, Mr. Bronner said in the interview, the
airline would go out of business and be liquidated in bankruptcy court.
"What's their alternative?" he asked rhetorically. "If they don't want to do
this, we'll Chapter 7 it."

Referring to the debtor-in-possession financing that the Alabama pension
system is providing the airline during its time under bankruptcy protection,
Mr. Bronner said that without concessions, "we'll pull the D.I.P. financing
and they're gone."

His stance with the US Airways unions is an example of the tough approach
that analysts expect airlines to begin taking with employees now that a
United Airlines bankruptcy filing seems highly likely.

Indeed, Mr. Bronner's comments came as Donald J. Carty, the chairman and
chief executive of American Airlines, continued a series of meetings this
week with groups of employees. In the meetings, which began last week in
Chicago and are expected to continue through the end of the year, Mr. Carty
is emphasizing the financial crisis American is facing and its need for
concessions, an American spokesman, Tim Doke, said. The airline is telling
employees that if United emerges from bankruptcy with labor cost reductions,
American will have to become similarly lean, Mr. Doke said.

At US Airways, Mr. Bronner's words carry extraordinary weight. As the result
of negotiations completed this week, Mr. Bronner, who directs the $25
billion Alabama fund, will in effect take control of the airline's board at
the point US Airways emerges from bankruptcy.

Mr. Bronner and the airline agreed that he will have 7 of the 13 seats on
the board, up from the 5 that he and the Alabama pension fund originally
gained when he came forward in September to bid for the airline.

Mr. Bronner said the seven seats would be equivalent to 72 percent voting
control of the airline, for which he initially agreed to provide $240
million in immediate financing as well as $500 million more in
debtor-in-possession financing, outbidding the Texas Pacific Group. US
Airways has drawn $300 million of that $500 million but cannot draw the
remaining $200 million until it emerges from bankruptcy.

Mr. Bronner said that he would occupy one of the seven board seats, but had
not decided who would have the others. As part of the agreement with the
airline, Mr. Bronner is cutting his fund's stake, originally 37.5 percent,
to 36 percent, so that a larger share can be given to unsecured creditors.
Management is also reducing its stake, to 8 percent from 10 percent.
Whenever the company emerges from bankruptcy, which it hopes to do by March,
Mr. Bronner said he would give 2 percent of his stake to management to
restore its lost holdings.

The negotiations came as US Airways struggles to reduce its costs and
complete its Chapter 11 plan. Though workers cooperated in an initial round
of concessions, some are opposed now. Only the pilots' union has agreed to
consider further concessions. The machinists' union has rejected the idea,
while the flight attendants said they would participate only if other unions
did so.

Mr. Bronner asserted it was vital for the airline to obtain work rules from
the unions "that are in this century, and not in the last century."

Yesterday, Scotty Ford, the president of the union chapter that represents
mechanics, said he was willing to meet with US Airways on the matter. "We're
just going to see what they're going to say," Mr. Ford said.

Patricia Friend, international president of the Association of Flight
Attendants, was critical of Mr. Bronner. "He's acting as though he believes
an airline can be saved on the back of the workers," she said. "It shows his
lack of experience. Maybe he's looking for an easy way out because he made a
mistake. There's not going to be anything to govern if he liquidates."

Under the restructuring plan, unions will have three representatives on US
Airways' board, one each for pilots and machinists, and the third to be
shared by flight attendants and other employee groups. But unlike their
counterparts at United Airlines, the union representatives do not receive
veto power over company affairs, nor will the unions hold a stake in US
Airways.

A spokesman for the airline, Chris Chiames, declined to comment on Mr.
Bronner's remarks but said, "We plan to be working through the weekend,
talking with our unions, and have every confidence that we'll reach
agreements."

Mr. Bronner said he had no regrets about investing in the airline, despite
the difficulties in this stage of the reorganization plan. "It always gets
ugly right at the end," he said.

Officials at American, meanwhile, said their airline had no timetable for
achieving cost reductions. Nonetheless, the carrier hopes that employees
will rapidly agree to cuts that will help achieve savings of $3 billion to
$4 billion a year by 2004, compared with what it spent on operations in
2001. Management has already squeezed out spending cuts of about $2 billion
a year before approaching the union groups, said Mr. Doke, who is American's
vice president for corporate communications.

"One of the purposes of these meetings is to give the sense that this is a
period of immediate financial crisis," he said, "and we have to address it
with that sense of urgency. We have to acknowledge that this is a time where
we need to take a real hard look at our contracts, and look for as many
savings as we possibly can."

In the meetings, which involve senior executives of American, the airline is
providing employees with details of those spending cuts, then presenting
comparisons between its labor costs and those of its competitors. The
approach is intended to show employees that they are not the only source
from which American is extracting savings.

But, Mr. Doke continued, "Obviously labor is a major expense line in this
company, and we're going to have at some solutions to get us closer to the
$3 billion to $4 billion target that will make us competitive."

While some analysts have speculated that American, based in Fort Worth,
could follow US Airways, and potentially United, into bankruptcy court, the
airline is not raising that possibility with employees, he said, nor does it
expect that workers would put it in that position.

"None of our employees want to have anything close to a United situation,"
he said. "I don't think there's any way our employees will let us get to the
point where a creditors' committee and a bankruptcy judge are writing our
contracts."

But the airline is also not ignoring the economies that United could achieve
in bankruptcy. "If United emerges as more competitive in their operations,
we're going to have to be competitive with them on the cost side," Mr. Doke
said.

He described the meetings as cordial, not adversarial, adding, "It's kind of
a 180 from the kind of approach our friends in Alabama are taking."

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