"Even for Sickest of Airlines, Financial Skies Can Be Friendly"

Saturday, February 26, 2005

Even for Sickest of Airlines, Financial Skies Can Be Friendly
By MICHELINE MAYNARD 
The New York (NY) Times


When Glenn F. Tilton, the chief executive of United Airlines, finished
outlining the steps the airline was taking to eventually emerge from
bankruptcy protection at a crowded investment conference last week, a voice
piped up from the back of the room.

Why shouldn't United just remain in bankruptcy? Mr. Tilton was asked.

The question reflected the skewed reality of the airline industry. Instead
of disappearing, the sickest airlines are being kept alive with significant
help from lenders, the federal government, patient judges, aircraft
companies and even rivals.

"It seems that almost anybody doing business with an airline would like to
see them keep flying," said Philip A. Baggaley, an analyst with Standard &
Poor's.

Behind the latest leniency, analysts say, lies a mix of politics and
financial opportunity. No one, least of all the government, analysts said,
wants to be responsible for shutting down struggling airlines, which employ
thousands of workers. And, the market is awash in investors undaunted by the
troubles of the airlines.

"As long as we're in this bubble and all this money is floating around,
people are going to take a risk with it," said Harvey R. Miller, the
longtime bankruptcy lawyer and vice chairman of Greenhill & Company, an
investment bank.

The wide variety of available help, however, frustrates some executives at
airlines that have managed to avoid a Chapter 11 bankruptcy filing, often
through the dint of deep cuts in their operations.

Even Southwest Airlines, the only profitable airline among the top seven,
and a participant in one bailout, sees the situation as troublesome.

As long as the sick companies cling to life, said Southwest's chief
financial officer, Laura Wright, the industry remains awash in too much
unprofitable capacity.

"Where we're being penalized is that there's such a glut of seats" being
sold at fares that do not cover the airlines' costs, Ms. Wright said.

For their part, the sick airlines are unapologetic about accepting
assistance and refuse to simply shut down without a fight. Many executives
at ailing airlines are hoping to follow in the footsteps of Continental,
which transformed itself into the leanest of the large carriers after two
bankruptcy filings, the most recent in the early 1990's.

One of the industry's four airlines in bankruptcy, ATA, refuses to become a
sacrificial lamb for its larger rivals. "If they think we're the weakest
link, they're truly underestimating this little airline," said John Denison,
the new chief executive at ATA Airlines, which sought bankruptcy protection
on Oct. 26.

ATA has a dual lifeline from the federal government and Southwest, which
invested $117 million in December, gaining six of ATA's valuable gates at
Chicago Midway Airport.

Mr. Denison, a retired Southwest executive who was named to his job on
Tuesday, vows to disprove those who contend there is little chance for ATA
to survive. "Do I think we have something we can work with? Yes," Mr.
Denison said.

The same resolve exists at United and US Airways, both of which obtained
financial help last week.

United, which sought bankruptcy protection in December 2002, disclosed it
had negotiated more-favorable terms for financing with lenders J. P. Morgan
Chase, Citibank, CIT Group and GE Capital. The new terms come after United
failed to comply with the previously tighter terms and recorded a net loss
of $326 million for January. That is on top of a $1.6 billion loss in 2004.

Nonetheless, United said it had received four proposals from lenders,
including some of its bankruptcy financiers, to provide the $2 billion to
$2.5 billion the airline needs to exit bankruptcy once it has a workable
business plan.

Meanwhile, US Airways, which filed on Sept. 12 for its second bankruptcy in
two years, obtained a $125 million investment from Air Wisconsin, including
$75 million that it can immediately draw upon.

In addition, US Airways, ATA and Aloha Airlines, another bankrupt carrier,
are all being allowed to draw from cash they pledged to secure loan packages
awarded by the federal Air Transportation Stabilization Board, which was
created after the September 2001 attacks. A spokeswoman for the board
declined to comment.

Yet another struggling company, Flyi Inc., the parent of Independence Air,
restructured its aircraft deals earlier this week, allowing it to forestall
a bankruptcy filing. East Capital Texas Partners, which owns 1 percent of
the airline, yesterday urged management to sell the company.

The glut of assistance is a sore subject at rivals unable to obtain such
treatment outside of court protection.

"It's frustrating to us," said a senior executive at a major airline, who
spoke on condition of anonymity. "The weakest need to go away for the
industry to be healthy for the survivors. The United States is not going to
lose its airline industry if one or two companies go away."

But the executive said the reasons for the help were obvious. "There's a lot
of money to be made from the airline industry, not running an airline mind
you, but making money off these airlines" in terms of legal and financial
fees, the executive said.

Just how much money can be made is clear in the case of United. In January,
United paid $13 million to its bankruptcy lawyers, consultants and financial
advisers, according bankruptcy court filings.

And though its revised agreement cut the rate it pays for bankruptcy
financing by half a percentage point, United is paying 4.5 percentage points
above the rate banks pay for loans, court documents showed.

By contrast, Southwest, which has the best debt rating among major airlines,
pays half a percentage point above the rate banks pay for loans, Ms. Wright
said.

Mr. Miller, who advised Continental Airlines during its 1983 bankruptcy
filing, said lenders foresaw a benefit: "The theory exists that after
rehabilitation, you'll get your rates, you'll get your fees, and your
collateral is worth something," he said.

But workers at the airlines share no such elation. "They're watching this
and they're shaking their heads," Richard Turk, a spokesman for the Aircraft
Mechanics Fraternal Association, said of United's mechanics.

Last month, the mechanics rejected the airline's demand for $96 million in
wage and benefit cuts, the only union group to refuse more concessions. A
bankruptcy judge later imposed temporary cuts on the union and could make
them permanent if the workers do not approve a new agreement.

Mr. Turk said, "It doesn't seem fair" that United can attract support at the
expense of its workers.

For his part, United's Mr. Tilton maintained there were compelling reasons
for the airline to leave bankruptcy protection, where it has been for 26
months.

Once the airline completes its streamlining, and deals with its pension
issues, "it will be time for all of us to move ahead," he said in a recorded
message to employees.

The bankruptcy process was necessary, he said, "but also draining of our
resources and our energy."

And it could still prove a gamble for investors. Mr. Baggaley said this week
that the airline industry could be awash in "widespread simultaneous
bankruptcies" if the companies that thus far have stayed afloat decide they
need to match the savings of their sickest rivals.

In that case, bankruptcy would lose its advantage to airlines and lenders
alike.

Mr. Miller said, "The last person standing when the music stops, look out."


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