Continental to File Plan to End Its Bankruptcy
Like the legendary phoenix, Continental Airlines today will take the final step to emerge from the ashes of its bankruptcy, filing a final reorganization plan to pay off all of its nearly $1 billion in debts.
The carrier, which just two years ago ran out of cash and was forced to seek protection from its creditors, now plans to pay them in full, airline officials said.
Sources close to the company, who asked not to be identified, said that between 85% and 90% of the parties owed money by the airline--they range from ticket holders and small cleaning and fueling companies to giant Swissair, which is owed about $24 million on financing for five jets--have agreed to accept the provisions of the reorganization plan.
Now Among Most Profitable
Details of the plan--which will eventually allow Continental, now one of the most profitable airlines in the industry, to emerge from Chapter 11 bankruptcy--will be announced at a news conference here today.
“We want to get the scarlet letter off us,” Philip J. Bakes Jr., president and chief operating officer, said in an interview. “Every time we want to buy an aircraft, we have to go into court to get permission. We want to be successful or we want to fail in this business on the same rules under which others compete, which is not under the protection of Chapter 11.”
Chapter 11 of the U.S. Bankruptcy Code protects a company from its creditors but allows it to continue operations while it formulates a way to pay its debts.
“We don’t see it as a protection now; we see it as a hindrance,” Bakes said of the bankruptcy laws.
He conceded, however, that without protection of the bankruptcy court, with which the airline will file its reorganization plan today, “this company would have liquidated. It was a life preserver.”
Continental, which had lost about $500 million from 1979 to 1983, was losing $10 million a week when it filed for protection Sept. 24, 1983, breaking its labor contracts to save millions on wages and work rules.
Within months, Continental experienced a pronounced turnaround. It quickly dropped 25 of its money-losing routes and added highly traveled, profitable routes as a discount airline. Its labor costs have dipped to just 22% of operating costs, down from 36% before the filing. Other cost cutting saved $200 million a year.
The per-seat cost of flying a mile dipped from 8.5 cents to 6.5 cents, one of the lowest seat-mile costs in the industry. The airline has a positive cash flow and $100 million in reserves.
Record Load Factor
It earned $50 million in 1984 and equaled that in just the first six months of this year. Its fares for peak travel are between 30% and 50% below those of regular-fare airlines, and off-peak fares are 50% to 70% lower. Yet it has continued as a full-service airline, and its planes are flying with a healthy average of 65% of their seats filled.
Continental reported Wednesday that it set a record of 73.6% of its seats filled in August.
In its filing today, sources say, the airline says it will be profitable for the next five years despite a recession that it foresees next year. It will have a fleet of about 195 planes by 1989, compared to 125 today and 107 at the time of its bankruptcy filing.
“Continental has become one of the most successful airlines in the industry--and, at the same time, one of the most innovative,” said airline analyst Timothy Pettee of L. F. Rothschild, Unterberg, Tobin.
But Louis Marckesano, an analyst with Janney Montgomery Scott in Philadelphia, said Continental’s low fares and low wages “are undermining the health of the whole industry.”
The creditors who will not be assenting to the reorganization plan will be the airline’s major labor unions, especially the Air Line Pilots Assn., which represents Continental’s pilots and is still technically on strike against the airline.
The unions, which have filed claims against Continental totaling between $3.5 billion and $4 billion for such items as wrongful termination, pension claims, retirement insurance claims and violation of labor protection provisions, have charged that the airline went into bankruptcy only in order to cancel its union contracts.
Representatives of labor predict that the reorganization is doomed.
“I find it highly unlikely that the plan of reorganization they propose, which presumes no consent from union creditors, is a plan which will be confirmed,” said Claude Montgomery, the attorney for the Union Labor and Pension Creditors’ Committee, which represents between 4,000 and 6,000 flight attendants, pilots, dispatchers and machinists.
Airline officials, who say the unions have only about $30 million in legitimate claims against Continental, hope that the bankruptcy judge will allow the union claims to be separated and decided in later court cases so that the company can emerge from bankruptcy without union consent.
Both Bakes and Francisco Lorenzo, chairman of Continental, vehemently deny that they took the bankruptcy route as an anti-union ploy.
In the interview, Bakes recalled that, the day before the airline filed and shut down domestic service for three days, he received a call from a Continental employee in Detroit who said one of the airline’s planes could not be refueled on credit. On the same day, he said, Los Angeles airport authorities said they would refuse landing rights to Continental planes if some of the $300,000 that the airline owed was not paid. A rapid partial payment was made.
“People who say that Continental did not have to go into reorganization are blind,” Lorenzo said angrily in an interview. “Anybody with the most basic, superficial knowledge of finance, in looking at the losses (that) Continental had sustained, would realize that in 1983 it was a company that was headed for a cliff.
“To me, bankruptcy was not an alternative, it was the last resort.”
In all, Continental has about 25,000 creditors. Of these, about 15,000 are current or former employees, although not all of them are members of the unions that will not assent to the reorganization plan.
Among the secured major creditors are 30 banks who were part of several lending consortiums. They are owed a total of about $300 million. The lead bank of one consortium is Manufacturers Hanover Trust and, of two others, Chase Manhattan Bank. In addition, a participation group of 23 institutions, most of them life insurance companies such as Aetna, Connecticut General, Travelers and State Farm Insurance, are owned $37 million.
Sources said they will be offered payment over eight years at an interest rate of 1 percentage point over the prime rate. There will be no immediate payment of principal, although some of the accrued interest will be paid up front.
Unsecured creditors, including such vendors as Marriott Corp., which is owed about $6 million for food that it supplied to Continental’s planes, are owed about $150 million in all. Such creditors will be offered payment over five years, with 30% in cash immediately, and at an interest rate 2 percentage points above the prime rate, the sources said.
William M. Schultz, the attorney for the unsecured creditors, confirmed Wednesday that there had been agreement in principle between his committee and the airline.