"Creditors bear down hard on stressed U.S. airlines"

Tuesday, December 7, 2004

Creditors bear down hard on stressed U.S. airlines  
By Micheline Maynard
The New York (NY) Times


In the airline industry's dark months after the Sept. 11, 2001, attacks on
the United States, the U.S. government, banks, aircraft lenders and others
came forward to help, giving wounded airline companies leeway to cope with
extraordinary circumstances.

But three years later, the benevolence is gone.

In a form of tough love that has caught the industry by surprise, these same
backers are putting the clamps on airlines operating under bankruptcy
protection. The backers are giving chief executives at United Airlines, US
Airways and ATA Airlines their marching orders: enforce strict timetables,
conserve cash, reduce spending and eliminate jobs, or else.

The executives, meanwhile, already have their hands full with stiff
competition and high fuel prices. Collectively, U.S. airlines are expected
to lose $5.5 billion this year alone, on top of the $30 billion lost since
2000.

"The whole world is starting to cave in on them now," said Kevin Mitchell,
chairman of the Business Travel Coalition, which represents corporate travel
groups and business travelers.

What has changed, experts say, is the growth of markets outside the United
States, like Europe and Asia, where new airlines are forming, attracting
passengers and expanding, making them far more attractive to lenders and
airplane leaseholders.

"The market for aircraft is dramatically better around the world than it was
18 months ago and certainly two years ago," said Henry Hubschman, president
of GE Capital Aviation Services, the industry's most powerful aircraft
financing company.

About 48.5 percent of planes used by the domestic airlines are leased rather
than owned, according to Back Aviation Solutions, a consulting firm. That
gives leaseholders a voice to which the airlines must pay heed.

United Airlines found that out on Nov. 26, the day after the U.S.
Thanksgiving holiday, when it had to go to court to stop a group of
leaseholders from confiscating 14 big jets. Had they been successful, United
could have been forced to cancel flights during the busiest travel season of
the year.

Lawyers for the group did not comment. United, which won its bid to block
the move, said the leaseholders wanted to force the company to pay higher
rates than what other companies pay.

But Hubschman of GE Capital Aviation said, "We can flex our muscles by
moving our assets." His company did just that last month at US Airways, when
it struck a deal to take back 25 planes it had financed.

That freed up $140 million that US Airways will use for a fleet of regional
jets. But GE Capital Aviation also demanded that US Airways put all of its
restructuring in place by mid-January and be out of bankruptcy by the end of
June, the first time any such timetable had been mapped out.

US Airways is in its second round of bankruptcy protection in two years, and
is warning that it could liquidate next year unless it can make deep cuts in
both operations and union contracts, the third such round of concessions for
employees.

GE Capital Aviation is not the airline's only overseer. It is operating
under strict cash limits set by the U.S. Air Transportation Stabilization
board, created to oversee $10 billion in loan guarantees that were part of a
post-Sept. 11 bailout plan.

By filing for bankruptcy, US Airways defaulted on its $717 billion loan
balance, which is secured by its cash, airplanes, routes and airport gates.

The board agreed the airline could use its cash. But in the coming week,
representatives of the board, along with other lenders, must decide whether
to extend the arrangement beyond mid-January.

The loan board has a similar cash operating deal with ATA Airlines which
filed for Chapter 11 protection in October. ATA, a low-fare carrier, owes
$140 million on its federal loan package.

But as with US Airways, ATA has more to worry about than just the loan
board. As it went into bankruptcy, ATA cut a deal to sell its gates in
Chicago, New York and Washington to another low-fare company, Airtran.

Under bankruptcy law, however, the court must entertain competing bids. So
ATA now faces the prospect that it might be acquired by America West
Airways, which wants all of the airline, or that its gates in Chicago could
go to Southwest Airlines, its biggest competitor there. The bids are due by
Friday and will be unsealed on Dec. 15.

Until then, the company is in limbo, an uncomfortable position for its chief
executive, George Mikelsons, who founded ATA as a travel company in
Indianapolis more than 30 years ago. In an interview in his office there
last week, Mikelsons, 71, said that he thought airlines would have bounced
back long before now.

"What has happened to this industry is unprecedented. Nobody thought it
would be this bad for this long," Mikelsons said. If he loses control of the
airline, he said, "I will feel like I sold my child into slavery."

Indeed, Mitchell of the Business Travel Coalition said the government,
lenders and leaseholders were "backing management farther and father into a
corner."

"They're not really running the business, they're playing defense," Mitchell
said.


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