December 15, 2004
Dear Soaring Eagles Member:
The following is a report Sherwin prepared today for the § 1114 Retiree Committee:
As the hearing proceeds, we have all been working full time (seven days a week) preparing cross-examination of the company's witnesses and our own witnesses. The attached articles from the Daily Bankruptcy Review give a third part summary of what occurred. This is my summary:
The company has finished putting on its basic case. In my judgment, it has successfully proven what we all know--it is in deep financial trouble and no matter what the Court does, its chances for survival are not good. With that background, the Company's position is that every penny it saves--no matter where it comes from--is vital.
This we pretty much expected. What I did not expect, was the total lack of opposition from anyone but us (and, possibly, the IAM). The PBGC, after some initial saber rattling, has backed down completely. The company presented testimony that most people in the plans to be terminated will not only be fully protected by PBGC, but will actually be better off because of the Health Care Tax Credit. No one challenged this testimony. The Judge has scheduled the rest of the hearing (more about that later), and no one has made a request for time to put on contrary evidence. Based on the lack of any defense and the company's proven destitution, I think the three pension plans will be terminated when the Judge rules.
On the 1113 motion (the wage cuts for actives), ALPA, TWU and CWA have reached agreements, and those three entities have not put on any defense (the CWA agreement is still out for ratification and CWA has reserved the right to try to put on a defense later--assuming the motion is still pending--if the membership rejects the contract). The flight attendants have been rumored to be near an agreement for days, but, as of yesterday, had not made a deal. Because of the nearness of an agreement, AFA has not put on any defense (although its attorney has gone a great job in cross-examining the company's witnesses), but will put on one witness Thursday or Friday if no deal has been reached.
The IAM has put on witnesses who said the company's offer to its membership is so bad that ratification is impossible. In public, at least (I have no idea if anything is going on behind the scenes) the company has said it is willing to juggle its demands between layoffs and wage cuts, but will not change its bottom line. If both sides are saying the same things in private that they said in Court publicly, no deal will be reached with the IAM and the Court will rule. I suspect the IAM, while not happy in either case, would prefer the Court to impose the cuts rather than have the leadership voluntarily accept them and recommend ratification. The IAM may present one additional witness on Thursday or Friday, but will not seriously challenge the Company's case.
That leaves us as the last person standing--and I think that is very good, both as a litigation strategy and as a negotiating strategy. Yesterday, we put on three witnesses. The first was Gerry Carusi. He testified (and had receipts to prove it) that his medical payments had increased dramatically in the last two years, that his co-pays and deductibles had also gone up, that his insurance payments had increased and that he now stood to lose his pension plan. Since the law requires that all parties be treated "equitably", the law requires that we prove that what we are asking for will not provide us with more favorable treatment than anyone else. Gerry's testimony goes to the issue that retirees have already made their sacrifices (and will not share in any upside potential, such as profit sharing, 401(k) plans, etc). Our second witness was our actuary. Her testimony was difficult for a very simple reason. The company is in such bad shape that it doesn't have to doctor its numbers the way it did in the past. Retiree health costs money and that is a simple fact. What our actuary did do, however, is question some of Tower-Perrin's assumptions regarding its trend lines. Basically, the company assumed inflation at the high end of the acceptable range whereas 80% of the rest of the world assumed it would be lower. Using lower assumptions gives a lower cost. On the other hand, our actuary could not say that the Company's assumptions were unreasonable. Our actuary also testified that T-P used old data although more recent data was available. Using more recent data showed a lower cost for future retiree health coverage.
The main benefit of our actuary's testimony is not to show that retiree health care is free (it isn't) but that the numbers being thrown around by the company are not etched in stone. Everything is just an estimate and the numbers can fluctuate tremendously in either direction. This testimony will set up our lead witness, who will testify on Thursday.
Our third witness was Mani Saluja of Alvarez and Marsal. He testified regarding the production of data by the company to the 1114 committee and the negotiating sessions between the committee and the debtor. On data production, he said there were numerous problems with wrong data, outdated data and late receipt of data. In the end, though, we got what we needed. On the negotiations, he said they were still active and ongoing and that the committee had and would continue to negotiate in good faith. He said he also believed the company was negotiating in good faith, but that no agreement had been reached yet. His testimony satisfies two other elements of the statutory test--timely receipt of data and good faith negotiating--and, more importantly, again serves to set up Nick's testimony on Thursday.
Our main witness on Thursday (tomorrow) will be Nick Alvarez, Managing director of Alverez and Marsal. Nick will testify on two main points. First, he will discuss some of the assumptions used by the Debtors, especially their fuel cost projections, and conclude that, because of the volatility, projecting a given number (which happened to be near the high end of the fuel price spike) out for several years, was shaky at best. In fact, just the drop in fuel prices between Oct. and now, if projected out, would result in an annual "savings" of $24 million a year. The point is not to show that the company is not in trouble, but to show how rough all the numbers being thrown around really are (the same was true with the actuary's projections). He will next testify that, in the overall financial scheme of things the company's "ask" from the 1114 committee is so small as to be insignificant in the overall picture. He will demonstrate this in many ways and with several charts. His conclusion will be that, in the overall scheme of things, the cost of retiree health is so small that the success or failure of the company will not depend on it. It is therefore not necessary for the company's emergence from bankruptcy.
This will set up the legal issue for the Court to decide if the case goes to decision. The company will argue that things are so bad that every penny is necessary. We will argue that section 1114 requires a specific finding that the cost of retiree health, by itself, is such a small component that it cannot possibly have an effect on the company's survival. An open minded judge, in my view, could legally find in our favor based on the evidence before it. What this Court will do is anyone's guess, but, in the past, the Debtors have won on every major issue.
Even though the judge said the chances of him ruling before the end of the year are between slim and none, I expect the company to argue for a ruling this week. We will, of course oppose it. If we are successful (as I think we will be) in having a decision put off until January, the door is open for serious negotiations. I think we will have created the possibility that we will win, thus making it in the company's interest to seriously try to settle with us. Assuming the AFA has settled by then and the parties are resigned to the IAM not settling, one major impediment to settlement is removed. The company will no longer have to worry about flexibility to us being an invitation for the unions to demand similar flexibility. In addition to removing an impediment, the company will have an additional incentive to settle in that it would then isolate the IAM as the only non-settling party. This would provide better PR for both the company and the Judge in that it would allow the company to say its reasonableness was proven by the fact that it settled with everyone but the IAM.
Sherwin S. Kaplan
As I reported last night, we will have much better visibility when court recesses Friday night and I will issue another update at that time.
Dear Soaring Eagles Member:
The following is a report Sherwin prepared today for the § 1114 Retiree Committee:
As the hearing proceeds, we have all been working full time (seven days a week) preparing cross-examination of the company's witnesses and our own witnesses. The attached articles from the Daily Bankruptcy Review give a third part summary of what occurred. This is my summary:
The company has finished putting on its basic case. In my judgment, it has successfully proven what we all know--it is in deep financial trouble and no matter what the Court does, its chances for survival are not good. With that background, the Company's position is that every penny it saves--no matter where it comes from--is vital.
This we pretty much expected. What I did not expect, was the total lack of opposition from anyone but us (and, possibly, the IAM). The PBGC, after some initial saber rattling, has backed down completely. The company presented testimony that most people in the plans to be terminated will not only be fully protected by PBGC, but will actually be better off because of the Health Care Tax Credit. No one challenged this testimony. The Judge has scheduled the rest of the hearing (more about that later), and no one has made a request for time to put on contrary evidence. Based on the lack of any defense and the company's proven destitution, I think the three pension plans will be terminated when the Judge rules.
On the 1113 motion (the wage cuts for actives), ALPA, TWU and CWA have reached agreements, and those three entities have not put on any defense (the CWA agreement is still out for ratification and CWA has reserved the right to try to put on a defense later--assuming the motion is still pending--if the membership rejects the contract). The flight attendants have been rumored to be near an agreement for days, but, as of yesterday, had not made a deal. Because of the nearness of an agreement, AFA has not put on any defense (although its attorney has gone a great job in cross-examining the company's witnesses), but will put on one witness Thursday or Friday if no deal has been reached.
The IAM has put on witnesses who said the company's offer to its membership is so bad that ratification is impossible. In public, at least (I have no idea if anything is going on behind the scenes) the company has said it is willing to juggle its demands between layoffs and wage cuts, but will not change its bottom line. If both sides are saying the same things in private that they said in Court publicly, no deal will be reached with the IAM and the Court will rule. I suspect the IAM, while not happy in either case, would prefer the Court to impose the cuts rather than have the leadership voluntarily accept them and recommend ratification. The IAM may present one additional witness on Thursday or Friday, but will not seriously challenge the Company's case.
That leaves us as the last person standing--and I think that is very good, both as a litigation strategy and as a negotiating strategy. Yesterday, we put on three witnesses. The first was Gerry Carusi. He testified (and had receipts to prove it) that his medical payments had increased dramatically in the last two years, that his co-pays and deductibles had also gone up, that his insurance payments had increased and that he now stood to lose his pension plan. Since the law requires that all parties be treated "equitably", the law requires that we prove that what we are asking for will not provide us with more favorable treatment than anyone else. Gerry's testimony goes to the issue that retirees have already made their sacrifices (and will not share in any upside potential, such as profit sharing, 401(k) plans, etc). Our second witness was our actuary. Her testimony was difficult for a very simple reason. The company is in such bad shape that it doesn't have to doctor its numbers the way it did in the past. Retiree health costs money and that is a simple fact. What our actuary did do, however, is question some of Tower-Perrin's assumptions regarding its trend lines. Basically, the company assumed inflation at the high end of the acceptable range whereas 80% of the rest of the world assumed it would be lower. Using lower assumptions gives a lower cost. On the other hand, our actuary could not say that the Company's assumptions were unreasonable. Our actuary also testified that T-P used old data although more recent data was available. Using more recent data showed a lower cost for future retiree health coverage.
The main benefit of our actuary's testimony is not to show that retiree health care is free (it isn't) but that the numbers being thrown around by the company are not etched in stone. Everything is just an estimate and the numbers can fluctuate tremendously in either direction. This testimony will set up our lead witness, who will testify on Thursday.
Our third witness was Mani Saluja of Alvarez and Marsal. He testified regarding the production of data by the company to the 1114 committee and the negotiating sessions between the committee and the debtor. On data production, he said there were numerous problems with wrong data, outdated data and late receipt of data. In the end, though, we got what we needed. On the negotiations, he said they were still active and ongoing and that the committee had and would continue to negotiate in good faith. He said he also believed the company was negotiating in good faith, but that no agreement had been reached yet. His testimony satisfies two other elements of the statutory test--timely receipt of data and good faith negotiating--and, more importantly, again serves to set up Nick's testimony on Thursday.
Our main witness on Thursday (tomorrow) will be Nick Alvarez, Managing director of Alverez and Marsal. Nick will testify on two main points. First, he will discuss some of the assumptions used by the Debtors, especially their fuel cost projections, and conclude that, because of the volatility, projecting a given number (which happened to be near the high end of the fuel price spike) out for several years, was shaky at best. In fact, just the drop in fuel prices between Oct. and now, if projected out, would result in an annual "savings" of $24 million a year. The point is not to show that the company is not in trouble, but to show how rough all the numbers being thrown around really are (the same was true with the actuary's projections). He will next testify that, in the overall financial scheme of things the company's "ask" from the 1114 committee is so small as to be insignificant in the overall picture. He will demonstrate this in many ways and with several charts. His conclusion will be that, in the overall scheme of things, the cost of retiree health is so small that the success or failure of the company will not depend on it. It is therefore not necessary for the company's emergence from bankruptcy.
This will set up the legal issue for the Court to decide if the case goes to decision. The company will argue that things are so bad that every penny is necessary. We will argue that section 1114 requires a specific finding that the cost of retiree health, by itself, is such a small component that it cannot possibly have an effect on the company's survival. An open minded judge, in my view, could legally find in our favor based on the evidence before it. What this Court will do is anyone's guess, but, in the past, the Debtors have won on every major issue.
Even though the judge said the chances of him ruling before the end of the year are between slim and none, I expect the company to argue for a ruling this week. We will, of course oppose it. If we are successful (as I think we will be) in having a decision put off until January, the door is open for serious negotiations. I think we will have created the possibility that we will win, thus making it in the company's interest to seriously try to settle with us. Assuming the AFA has settled by then and the parties are resigned to the IAM not settling, one major impediment to settlement is removed. The company will no longer have to worry about flexibility to us being an invitation for the unions to demand similar flexibility. In addition to removing an impediment, the company will have an additional incentive to settle in that it would then isolate the IAM as the only non-settling party. This would provide better PR for both the company and the Judge in that it would allow the company to say its reasonableness was proven by the fact that it settled with everyone but the IAM.
Sherwin S. Kaplan
As I reported last night, we will have much better visibility when court recesses Friday night and I will issue another update at that time.
