Report Paints Dire Picture of US Air
Pilots' Union Bankers See Failure
Or Bankruptcy Soon Without Cuts
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
August 13, 2004
Investment bankers working for the pilots union at US Airways Group warned that the carrier could fail in the near future and is highly likely to file for bankruptcy-court protection by mid-September without needed cost cuts.
The somber 26-page report, dated July 14 and released this week to 3,400 members of the Air Line Pilots Association, essentially validated management's dire assessment of the company's financial health and its poor prospects without quick cost cuts. The report -- prepared by Glanzer & Co., longtime banker for the union -- was distributed amid a logjam in negotiations between the company and the pilots over givebacks.
Various creditors of the nation's seventh-largest airline already have put claims on its cash to minimize their exposure when and if US Airways collapses, the report said. "Any one of these creditors or financing parties can cause the equivalent of a run on the bank. If any one of them begins executing these capital calls, they all will and the airline will fail." The banker also pointed out that US Airways "might be worth more dead than alive to groups other than the employees," because some of its assets could be used more profitably by other airlines.
Capt. Bill Pollock, chairman of the ALPA group at US Airways, in a cover letter introducing the report, said the union's leadership council "does not disagree in principal with the conclusions" reached by Glanzer. "The reality of our financial situation speaks for itself," he said. Copies sent by e-mail to the pilots were redacted to protect sensitive financial information.
US Airways, based in Arlington, Va., said it concurs with the report's conclusion that it is in the best interest of the company and its labor unions to quickly reach consensual agreements that will reduce expenses and help it implement its turnaround plan.
The company lowered its costs significantly when it was in Chapter 11 bankruptcy protection for eight months in 2002 and 2003. But it has been unable to thrive, because the domestic revenue environment now is controlled by discount airlines that have low costs and thus can afford to charge low fares. And recently, fuel prices have skyrocketed. In the first half of this year, US Airways posted a net loss of $143 million.
For the past several months, US Airways management has been trying to further reduce expenses and entice the unions to the bargaining table to discuss labor savings worth $800 million a year. ALPA, which is being asked to kick in $295 million of the total, has been the most receptive to negotiations, but the talks recently have bogged down.
The Glanzer report, which had intended to poke holes in US Airways' assumptions, turnaround plan and requests for labor concessions, didn't find many. US Airways' plan, which calls for it to model itself after discounters such as America West Holdings, JetBlue Airways and AirTran Holdings, "is a thoughtful effort to devise a viable business plan, considering the company's assets and financial condition," the report said.
The report said carriers such as UAL Corp.'s United Airlines, Delta Air Lines and Northwest Airlines "are expected to consider some version of the same in light of the revenue environment."
The bankers also concluded that the labor savings that US Airways is seeking aren't out of line, and "only on such basis would such a [turnaround] plan be potentially workable." They said the company seems to have taken full advantage of its first bankruptcy to reduce costs, and said they didn't see other significant opportunities for expense cutting, save for further employee givebacks, terminating other unions' pension plans or throttling back capital expenditures. The pilots plan was terminated in last year's Chapter 11.
The report said the pilots have two choices: negotiate a contract that gives US Airways a discount-carrier cost structure and get some returns for the sacrifice, or "be prepared to accept liquidation, or, less likely, the imposition of contractual terms that will be more severe" in bankruptcy proceedings.
The next few weeks are critical to US Airways. It has a $130 million pension-plan contribution due on Sept. 15 that will consume precious cash if the company pays it. Its regional-jet financing arrangements with two manufacturers and General Electric Co. run out on Sept. 30 in the absence of a turnaround. And it is in danger of defaulting on Sept. 30 on the terms of a big federally guaranteed loan that helped the company step out of Chapter 11 in March 2003.
In 4 p.m. Nasdaq Stock Market trading, US Airways fell nine cents to $2.54
Pilots' Union Bankers See Failure
Or Bankruptcy Soon Without Cuts
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
August 13, 2004
Investment bankers working for the pilots union at US Airways Group warned that the carrier could fail in the near future and is highly likely to file for bankruptcy-court protection by mid-September without needed cost cuts.
The somber 26-page report, dated July 14 and released this week to 3,400 members of the Air Line Pilots Association, essentially validated management's dire assessment of the company's financial health and its poor prospects without quick cost cuts. The report -- prepared by Glanzer & Co., longtime banker for the union -- was distributed amid a logjam in negotiations between the company and the pilots over givebacks.
Various creditors of the nation's seventh-largest airline already have put claims on its cash to minimize their exposure when and if US Airways collapses, the report said. "Any one of these creditors or financing parties can cause the equivalent of a run on the bank. If any one of them begins executing these capital calls, they all will and the airline will fail." The banker also pointed out that US Airways "might be worth more dead than alive to groups other than the employees," because some of its assets could be used more profitably by other airlines.
Capt. Bill Pollock, chairman of the ALPA group at US Airways, in a cover letter introducing the report, said the union's leadership council "does not disagree in principal with the conclusions" reached by Glanzer. "The reality of our financial situation speaks for itself," he said. Copies sent by e-mail to the pilots were redacted to protect sensitive financial information.
US Airways, based in Arlington, Va., said it concurs with the report's conclusion that it is in the best interest of the company and its labor unions to quickly reach consensual agreements that will reduce expenses and help it implement its turnaround plan.
The company lowered its costs significantly when it was in Chapter 11 bankruptcy protection for eight months in 2002 and 2003. But it has been unable to thrive, because the domestic revenue environment now is controlled by discount airlines that have low costs and thus can afford to charge low fares. And recently, fuel prices have skyrocketed. In the first half of this year, US Airways posted a net loss of $143 million.
For the past several months, US Airways management has been trying to further reduce expenses and entice the unions to the bargaining table to discuss labor savings worth $800 million a year. ALPA, which is being asked to kick in $295 million of the total, has been the most receptive to negotiations, but the talks recently have bogged down.
The Glanzer report, which had intended to poke holes in US Airways' assumptions, turnaround plan and requests for labor concessions, didn't find many. US Airways' plan, which calls for it to model itself after discounters such as America West Holdings, JetBlue Airways and AirTran Holdings, "is a thoughtful effort to devise a viable business plan, considering the company's assets and financial condition," the report said.
The report said carriers such as UAL Corp.'s United Airlines, Delta Air Lines and Northwest Airlines "are expected to consider some version of the same in light of the revenue environment."
The bankers also concluded that the labor savings that US Airways is seeking aren't out of line, and "only on such basis would such a [turnaround] plan be potentially workable." They said the company seems to have taken full advantage of its first bankruptcy to reduce costs, and said they didn't see other significant opportunities for expense cutting, save for further employee givebacks, terminating other unions' pension plans or throttling back capital expenditures. The pilots plan was terminated in last year's Chapter 11.
The report said the pilots have two choices: negotiate a contract that gives US Airways a discount-carrier cost structure and get some returns for the sacrifice, or "be prepared to accept liquidation, or, less likely, the imposition of contractual terms that will be more severe" in bankruptcy proceedings.
The next few weeks are critical to US Airways. It has a $130 million pension-plan contribution due on Sept. 15 that will consume precious cash if the company pays it. Its regional-jet financing arrangements with two manufacturers and General Electric Co. run out on Sept. 30 in the absence of a turnaround. And it is in danger of defaulting on Sept. 30 on the terms of a big federally guaranteed loan that helped the company step out of Chapter 11 in March 2003.
In 4 p.m. Nasdaq Stock Market trading, US Airways fell nine cents to $2.54
