‘Worsened Financial Results’ Cited : Texas Air Seeks Reduction in Price for Ailing People Express
Texas Air said Friday that it is trying to obtain a reduction in the price it will have to pay for People Express, the ailing discount airline.
In an announcement from its headquarters in Houston, Texas Air said that a lower price is necessary “as a result of worsened financial results of People Express” since the plan for the merger was announced on Sept. 15.
At that time, the acquisition of People Express and its bankrupt Frontier Airlines subsidiary was understood to be worth a total of about $301 million. Texas Air did not say Friday how much less it now wants to pay for People Express, which gained renown after its creation five years ago for its low-fare, no-frills policy.
Texas Air said People Express’ five-member board of directors is involved in the new negotiations on a proposed lower price. However, it was not known who is representing Texas Air in the talks.
One reason for the deterioration of People Express’ financial situation since the merger agreement was announced is that potential passengers are uncertain about the airline’s future and are afraid to make reservations. For example, in September, People Express’ planes flew only 44.9% full, compared to the 67% load factor the previous month. A People Express spokesman declined Friday to say what the October load factor had been. According to airline analyst Louis A. Marckesano of the Philadelphia brokerage firm of Janney Montgomery Scott, People Express, because of its low fares, needs a 73% load factor in order to break even. He added that People Express has recently been losing $500,000 to $1 million daily. “Once a company starts to flounder,” Marckesano said, “it is the opposite of the sharks going to feeding. Everybody pulls away.”
Despite Texas Air’s new demands, industry observers maintained Friday that the deal is still likely to go through. “I have a hunch that they will come to terms,” said analyst Scott Drysdale of the Seattle office of Birr, Wilson & Co, a San Francisco stockbrokerage. Texas Air, a holding company, owns Continental Airlines and New York Air. It is completing the acquisition of Eastern Airlines and said Friday that it had completed its acquisition of the assets and stock of Frontier Airlines, which halted operations in August after it went into bankruptcy proceedings. Texas Air said Frontier will be absorbed into Continental and will resume service out of its Denver hub today.
Under terms of the original purchase agreement, People Express shareholders would receive 0.07563 of a share of Texas Air common stock (a percentage now worth $2.88, based on Friday’s closing price of $38.125 on the American Stock Exchange), plus $2.50 face value of a Texas Air 10.75% non-convertible redeemable preferred stock issue.
The Department of Transportation gave final approval Oct. 24 to the Texas Air-People Express merger. Besides the newest obstacle, only one other stumbling block remains in the way of the deal. People Express public debt holders must agree by Nov. 6 to reduce interest rates and lengthen maturities on six issues. This would save $12.6 million in interest annually.
Marckesano said Texas Air’s attempt to reduce the consideration to People Express shareholders might be a tactic aimed at putting pressure on the debt holders to agree to the interest rate request.
Meantime, in an effort to stem People Express’ financial bleeding, Texas Air said its Continental subsidiary had agreed to an interline agreement with People Express that will allow travel agents to write Continental tickets for travel on People Express without concern for People Express’ financial condition.
