Airlines : Eastern Offers Unsecured Creditors 10 Cents on Dollar
Since filing for bankruptcy last March, Eastern Airlines has consistently vowed to pay all creditors in full, but it made a significant reversal on Thursday in offering unsecured creditors just 10 cents on the dollar, in cash.
The troubled carrier said it would repay another 70% of its debt over the next decade, though without interest. In return, Eastern’s parent, Texas Air Corp., said it would give creditors up to 40% of its equity in the Miami-based airline.
“The plan proposes that certain creditors make contributions to assure Eastern’s post-reorganization successful operations and participate in the equity of the company,” Eastern said in a statement released as creditors met here Thursday. It predicted that its plan “would enable the company to emerge from bankruptcy as soon as midyear as a strong competitor with $500 million in cash, access to new aircraft and a revamped, more conservative balance sheet.”
The carrier said unsecured creditors would also get preferred stock with a liquidation value of $80 million and convertible into 40% of its common stock, though it did not explain when or under what conditions the issue could be converted. (Unsecured debts are obligations not backed by specific collateral and include payments for jet fuel, catering, landing fees and airplane leases.)
Eastern added that holders of secured debt would be paid in full, and that holders of $45 million in tickets purchased before bankruptcy would be fully reimbursed once the plan is approved.
The airline’s president, Phil Bakes, called the plan “fair for all the financial stake holders in the company.”
The new reorganization plan, the latest of several offered by the airline, must be approved by Eastern’s creditor committee and, ultimately, by Federal Bankruptcy Court. It is almost certain that creditors will insist on modifications, but no one representing them could be reached for comment Thursday.
The new plan, with its watered-down payment offer, resulted from the recent dismal performance of the airline industry and from greatly increased fuel prices, analysts said. Eastern’s planes flew only 53.7% full in December, down from 57.2% 12 months earlier.
“The deterioration has caused lower-than-anticipated revenues,” said analyst John W. Mattis of Shearson Lehman Hutton. “As a result Texas Air is willing to give up 40% of its ownership to keep the airline going.”
Analyst Paul Karos of First Boston Corp. said he interprets the plan as “Eastern saying in the long term that it cannot make money with the capital structure it now has. It needs breathing room, and is asking its creditors for significant concessions in return for stock.” If Eastern prospers, he said, these shareholders could also benefit.
Eastern said it will report a $280-million loss for the last quarter of 1989 and a loss of $850 million for the year. It also predicted that it will lose $125 million in the present quarter, cut the loss to about $30 million in the second quarter and break even in the second half of the year.
The airline has been operating under Chapter 11 of the Federal Bankruptcy Code since last March 9--five days after its machinists, pilots and flight attendants struck. Only the machinists remain on strike.
The airline said it will ask the court for an additional $100 million from the $600 million that it holds in escrow as proceeds from selling off assets. It previously sought $210 million.
