US Airways Files for Bankruptcy Reorganization
US Airways Group Inc., becoming the first major airline casualty of the Sept. 11 terrorist attacks, filed for bankruptcy reorganization Sunday but said its 3,800 daily flights would continue without interruption.
The nation’s seventh-largest airline, already suffering from heavy debt, high operating costs and massive losses, was the carrier most severely damaged by the fallout from the attacks.
The carrier’s route system is concentrated in the East, where the post-Sept. 11 travel slump hit the hardest. The prolonged shutdown of Reagan National Airport in Washington after the attacks also exacerbated US Airways’ struggle. The airline, which boarded 62 million passengers last year, lost $2 billion in 2001 and has lost an additional $517 million in the first six months of this year.
US Airways’ filing marked the latest in a string of high-profile bankruptcy cases in the last several months, though most of the others were related to scandal as much as financial distress. They include energy trader Enron Corp., telecommunications firms WorldCom Inc. and Global Crossing Ltd., cable giant Adelphia Communications Corp. and discount retailer Kmart Corp.
One smaller airline, Vanguard Airlines, filed for bankruptcy and shut down operations in July.
But history shows that many airlines keep operating without incident while going through a bankruptcy reorganization. Over the last decade, Continental Airlines and America West both kept flying as they restructured, as did Trans World Airlines, which eventually was bought by American Airlines.
For months US Airways had warned it might have to file for bankruptcy if it couldn’t restructure quickly enough, but its filing Sunday still caught some observers by surprise. The Arlington, Va.-based airline already has received conditional support to get federal backing for $900 million of a $1-billion bank loan. The guarantee was part of the $15-billion federal bailout of the airlines after Sept. 11.
The agency in charge of the bailout, the Air Transportation Stabilization Board, issued a statement Sunday saying US Airways’ application “remains in effect,” though it still is subject to revisions mandated by the board and approval by the U.S. Bankruptcy Court.
To help secure the guarantee, US Airways has been racing to wring about $1 billion in wage cuts and other concessions from its 35,000 full-time employees, and it recently got approval for the cuts from the unions representing its pilots and flight attendants. The airline also is seeking at least $300 million in concessions from its suppliers and lenders.
Yet US Airways’ chief executive, David Siegel, said the airline needed to file under Chapter 11 of the Bankruptcy Code anyway because the airline “determined that it was unlikely” to reach agreements in time with certain of its vendors, aircraft lessors and financiers. US Airways already had defaulted on a number of public and private debt obligations.
“US Airways will continue to operate while we complete our financial restructuring,” Siegel said in a statement.
Under Chapter 11, a company’s debt is frozen--and it is protected from creditors seizing assets to satisfy their loans--while the company works out a plan to overhaul its financial situation. In its filing in U.S. Bankruptcy Court in Alexandria, Va., US Airways listed debt of about $7.83 billion and assets of $7.81 billion.
The airline’s more than 300 jetliners fly to 204 cities--including Los Angeles and San Diego--in the United States, Canada, Europe, Mexico and the Caribbean. US Airways’ hub airports are in Charlotte, N.C., Pittsburgh and Philadelphia. The airline also operates shuttle service connecting Boston, New York and Washington.
US Airways said it expected its stay in Bankruptcy Court to be relatively brief. The carrier said it already has secured $500 million in debtor-in-possession financing from Credit Suisse First Boston and Bank of America.
Also, Texas Pacific Group, a private investment firm, has agreed to pump $200 million into the airline in exchange for 38% ownership of the carrier after it emerges from Chapter 11, US Airways said. Texas Pacific, led by financier David Bonderman, also has invested in Continental Airlines and America West in the past.
Whether US Airways stockholders still have an investment will remain to be seen. When a company files for Chapter 11, its existing stock often becomes worthless because all its assets are claimed by its creditors.
US Airways’ stock closed Friday at $2.45 a share on the New York Stock Exchange.
US Airways, a troubled airline for many years, traces its roots to 1939 and the early days of the old Allegheny Airlines. After the airlines were deregulated in 1978, Allegheny changed its name to USAir and then, in 1987, acquired the California-based carrier Pacific Southwest Airlines and Piedmont Airlines, which served mainly the mid-Atlantic region. It adopted the US Airways name in 1997.
But since deregulation, US Airways hasn’t been able to find the right formula for generating sustained profits. Different union contracts for all the workers brought in from the merged airlines caused employee-integration problems and added to US Airways’ relatively high costs. Constant assaults from lower-cost, lower-price carriers such as Southwest Airlines also hurt its performance.
US Airways has been hurt by the combination of having a regional route system “with a cost structure that’s as high as the major airlines’ with far larger networks, overexpansion at its small hubs and rapidly expanding low-fare competition,” said Gary Chase, an analyst with Lehman Bros.
Siegel, though, seemed to be making quick progress in restructuring US Airways. After the carrier got its pilots and flight attendants to agree to cutbacks, the International Assn. of Machinists--which represents about 6,800 US Airways mechanics and other workers--said its members also would soon vote on the airline’s concessions proposal.
“Our members will not give up on US Airways, and neither should anyone else,” Robert Roach Jr., the union’s general vice president, told Associated Press on Sunday. “We believe US Airways can successfully restructure while it continues to serve the traveling public and provide employment for our members.”
Though the bankruptcy filing could complicate matters among US Airways, its unions and the federal government, it should give the airline more leverage in dealing with its aircraft lessors and other vendors, said Eric Schaffer, a bankruptcy lawyer with the firm Reed Smith in Pittsburgh. The airline, in effect, will get the help of a bankruptcy judge in trying to restructure loans on terms it can afford.
Regardless, “it’s hard to imagine that any constituency [of US Airways] wants to undermine the ATSB” and the agency’s conditional agreement to guarantee the $1-billion loan that the airline says it needs to survive, Schaffer said.
