- Nov 9, 2003
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US Airways: Bronner's monumental challenge
02/01/04
By GEORGE TALBOT
Business Reporter
After three decades with one of the country's largest and most powerful unions, Robert Roach has earned a reputation as a tough-as-nails negotiator. As general vice president of the International Association of Machinists and Aerospace Workers, he's faced down some of the airline industry's most intimidating executives, from billionaire financier Carl Icahn to the infamous corporate raider Frank Lorenzen.
But never, he said Friday, has he met anyone quite like Alabama's David Bronner.
"He's a different breed of cat," said Roach, in a gravely growl straight out of the Bronx in New York. "You get used to these guys trying to dictate all the terms, trying to tell you just exactly what it is you need to be doing for them. That's not his approach. He listens. That's unusual in this business."
Patient listener is not a description often applied to Bronner, who is better known as the outspoken, deal-making chief executive officer of the Retirement Systems of Alabama. But it is a quality he's had to cultivate since RSA shocked observers 10 months ago by purchasing a $240 million stake in US Airways Group Inc., the nation's seventh-largest airline.
If he is to make good on his investment and keep the troubled airline in business, then Bronner, 58, faces perhaps the most monumental challenge of his mercurial 30-year career at RSA. The stakes are enormous: There's the financial well-being of the $24 billion state pension fund and its 280,000 participants. There are US Air's 28,700 employees and the 130,000 passengers who board its planes on an average day.
And there is the airline industry itself, which has seen losses approaching $20 billion since the Sept. 11 terrorist attacks. The nation's biggest airline carriers are urgently seeking the answers that will lead them out of a profound economic slump.
Airline workers, regulators and investors from coast to coast are watching Bronner's moves. Succeed, and US Air would become an instant model for other struggling carriers. Fail, and the airline's collapse could send shivers across the entire industry.
"Am I spending a lot of time on this investment? Yes, probably more than I should. It may be the most mentally challenging thing I've ever been involved in," Bronner said in an interview Thursday. "But I'm fascinated by it. I'm energized. I feel like I'm back in college again. More than anything, I want to make this airline work."
The RSA purchase agreement, coupled with a $900 million federal loan, lifted US Air out of seven months in Chapter 11 bankruptcy and installed Bronner as the chairman of its board of directors. RSA owns 36 percent of the airline -- including about 20,000 shares of the company's Class A stock -- but controls 72 percent of its voting interest.
The deal, approved by a bankruptcy court judge on March 31, 2003, stunned airline analysts who had taken to describing the troubled carrier as "Useless Air." They saw an airline saddled with aging planes, bullied by its unions and stuck with an ill-designed hub-and-spoke network.
Bronner was undaunted. He had dispatched a small army of investment bankers to scrutinize the airline's financial records and then negotiated personally with US Airways chief executive David Siegel. "This company, after bankruptcy, will become a real jewel," he said after closing the deal.
Less than a year later, the gem has yet to gain its luster. US Air's stock is at an all-time low -- shares were trading Friday for as little as $4.20 each, down from $15.25 in late October. The company lost $1 million a day during the third quarter of 2003, the most recent period for which earnings were available.
More of the same is expected on Tuesday, when a fourth quarter 2003 earnings report is scheduled to be released. Estimates from outside the company have ranged as high as $125 million in losses for the quarter. The airline has lost $4.5 billion since 2001.
Last month, the Air Line Pilots Association called for the removal of Siegel and other top executives, saying that the union's members had lost confidence in management's ability to run the airline. Standard and Poor's recently downgraded US Air's credit rating to B-, saying a return to bankruptcy "appears to be all too possible, given their current rate of loss."
Educated observers are once again pronouncing US Air's last rites.
"It's a pretty dismal situation," said Bob Mann, a principal in the Long Island, N.Y.-based R.W. Mann & Co., an airline consulting firm. "Everything that could go wrong has gone wrong."
Mann said US Air made draconian cuts to its operating costs -- more than $1 billion a year in wages and other union concessions -- but still lags behind its rivals. In terms of cost per available seat mile, a common measuring stick, US Air spent 9.52 cents in the third quarter, compared to about 7.51 cents for Southwest Airlines Inc.
While US Air was busy climbing out of bankruptcy, Mann said, cost-conscious travelers started trying out low-fare carriers, including Southwest, JetBlue Airways Corp. and Airtran Airlines Inc.
"Business travelers who wouldn't normally have even tried Southwest discovered that it wasn't half-bad, and they saved money for their company to boot," Mann said. "That shift in business was extremely damaging to a high-cost, slow-to-change carrier like US Air."
The airline came out of bankruptcy with a plan designed to make it competitive against traditional rivals, chief among them Continental Airlines Inc. But by the fall of 2003, the competition had changed. As Bronner put it, "the world tanked on us."
Regional jet service grew by 140 percent over the past two years, and low-cost airlines are now carrying almost half of all passengers, according to a recent report from the U.S. Department of Transportation.
"The big hub-and-spoke carriers continue to lose money, while the discount airlines are increasing profits and aggressively grabbing market share," Siegel said in a message to US Air employees last week. "I don't like it, I don't expect you to like it, but we cannot ignore these realities."
US Air was forced to scrap its reorganization plan and start building a new one on the fly. To compete with its low-cost rivals, Bronner said, US Air must find a way to establish a low-cost component of its own.
"It's a low-cost world right now," said Glenn Engel, an airline analyst for Goldman Sachs in New York. "US Air is not in a good place."
Bronner said his challenge at US Air is similar in scope to the job he faced when he took control of RSA in 1973. At that time, the $500 million pension fund had $1 in assets for every $4 it owed. Today, the $24 billion RSA is fully funded. Nearly 80 percent of its $3.8 billion in revenue last year came from investments; taxpayers contributed just $400 million or about 10 percent.
The difference with US Air, he said, is the added pressure of time.
A series of financial covenants tied to the $900 million federal loan will become active on June 30, including provisions that the airline have a minimum cash level of $1 billion and be breaking even on operations.
In anticipation of that deadline, Bronner hired the New York investment bank Morgan Stanley to "develop alternatives" for the airline, including the sale of some or all of its assets. The bank is expected to return its recommendations next week.
"I'm only trying to get everything on the table and then let management and the unions look at (the options)," Bronner said.
Still, many industry observers anticipate that Bronner will cut his losses and liquidate the airline. Published reports have said at least five rival operators already have expressed interest in US Air assets.
"The report is that everything is up for sale, and that's certainly the indication I get," said Jim Bromley, a partner in the New York law firm Cleary Gottlieb Steen & Hamilton. Bromley has worked on a number of airline bankruptcy cases, including the 1991 liquidation of Pan American Airways.
"The problem is that it doesn't look like anybody's buying. The low-fares are the only ones with any money, and the fact is, they're doing just fine. Why should they buy the restaurant when they're already eating your lunch?"
While selling off assets may be a fast way to generate cash, such sales likely would hamper US Air's long-term prospects, according to analysts.
Bronner, however, insists he can make the company fly.
"There's no question in my mind we can be successful. It just depends on whether the people on the other side of the table -- the unions -- want to be successful," he said. "My strategy is to stabilize it. Get it from the red into the black. We can't go out there and fight if we're already beat up and bleeding."
He said he is acutely aware of the fact that US Air's competitors are circling. Southwest, for example, recently announced plans to start serving Philadelphia -- where US Air has one of its three hubs -- this May.
"I've got to chase Southwest out of Philadelphia. If they sell a ticket for $99, I've got to sell one for $98," Bronner said. "But I need to have cash reserves if I'm going to get into that kind of fight. We've got to get some money in the bank."
Bronner said the US Air investment poses minimal risk to RSA's participants, since RSA's exposure represents only about 1 percent of the entire fund. Even in a worst-case scenario -- a total collapse of the airline -- RSA could reasonably expect to get at least some return on its investment, he said.
He said the investment "doesn't even come close" to RSA's holdings in Montgomery-based Raycom Media Inc., a network of about 35 television stations, and the Birmingham-based Community Newspaper Holdings Inc., a chain of about 200 newspapers. The two companies represent a combined $5 billion investment for RSA.
"You've got to put it in perspective. For $240 million, we got control of an airline with $7 billion to $8 billion in assets," he said. The investment has given him a unique opportunity to promote the state, Bronner said. Video footage of RSA's Robert Trent Jones Golf Trail has aired on international flights, and state attractions have been featured in US Air's in-flight magazines.
The airline also made an unsuccessful attempt to shift $10 million in maintenance work on some of its Airbus aircraft to ST Mobile Aerospace Engineering Inc. at Mobile's Brookley Field, a move that was blocked by the machinists' union.
"This experience has allowed me to connect Alabama to a whole new spectrum of people," Bronner said. "It's opening all sorts of doors for us."
The airline's struggles have raised few concerns in Alabama, even at a time when the state is facing a funding crisis in preparing its 2005 budget.
"I have the utmost confidence in David Bronner's ability to manage the pension fund," said State Finance Director Drayton Nabers. "The airline business is a tough business, but he's a tough businessman."
Others familiar with RSA's portfolio said the fund is balanced enough to absorb any US Air losses without affecting contribution levels for its participants.
"Looking at their asset allocation, the fund is well-diversified. It's financially secure and sound," said John Jahera, a finance professor and interim dean of Auburn University's College of Business. "Just like an individual investor, not every investment you make is going to work out like you'd expect. But my view, and I think it's shared by most of our faculty here, is that he's done a good job. He's earned the benefit of the doubt."
Danny Goodwin, director of the Mobile County Education Association, a union that represents about 5,400 public school employees, said he's heard no complaints about the US Air investment.
"We've not seen him make too many mistakes," Goodwin said. "Nobody's infallible, but he's pretty darn close."
The center of the airline universe, at least for the next couple of months, could well exist in the fifth-floor corner office at RSA's headquarters in Montgomery. In a telephone interview late Thursday, Bronner said he'd just finished a conversation with Roach, the union negotiator.
"He's right -- I'm not at all like the guys he's used to dealing with," Bronner said. "My objective is not to make a billion dollars and leave a bunch of wreckage behind. I have no desire to put 30,000 people out of work. If I make a pile of money, I get no big bonus check. That's not my motivation.
"If we can maintain our investment and somehow get this airline back into the black and have some fun along the way, I'll be satisfied. I told (Roach) I'm always willing to listen, but I'm about ready to get some things done."
02/01/04
By GEORGE TALBOT
Business Reporter
After three decades with one of the country's largest and most powerful unions, Robert Roach has earned a reputation as a tough-as-nails negotiator. As general vice president of the International Association of Machinists and Aerospace Workers, he's faced down some of the airline industry's most intimidating executives, from billionaire financier Carl Icahn to the infamous corporate raider Frank Lorenzen.
But never, he said Friday, has he met anyone quite like Alabama's David Bronner.
"He's a different breed of cat," said Roach, in a gravely growl straight out of the Bronx in New York. "You get used to these guys trying to dictate all the terms, trying to tell you just exactly what it is you need to be doing for them. That's not his approach. He listens. That's unusual in this business."
Patient listener is not a description often applied to Bronner, who is better known as the outspoken, deal-making chief executive officer of the Retirement Systems of Alabama. But it is a quality he's had to cultivate since RSA shocked observers 10 months ago by purchasing a $240 million stake in US Airways Group Inc., the nation's seventh-largest airline.
If he is to make good on his investment and keep the troubled airline in business, then Bronner, 58, faces perhaps the most monumental challenge of his mercurial 30-year career at RSA. The stakes are enormous: There's the financial well-being of the $24 billion state pension fund and its 280,000 participants. There are US Air's 28,700 employees and the 130,000 passengers who board its planes on an average day.
And there is the airline industry itself, which has seen losses approaching $20 billion since the Sept. 11 terrorist attacks. The nation's biggest airline carriers are urgently seeking the answers that will lead them out of a profound economic slump.
Airline workers, regulators and investors from coast to coast are watching Bronner's moves. Succeed, and US Air would become an instant model for other struggling carriers. Fail, and the airline's collapse could send shivers across the entire industry.
"Am I spending a lot of time on this investment? Yes, probably more than I should. It may be the most mentally challenging thing I've ever been involved in," Bronner said in an interview Thursday. "But I'm fascinated by it. I'm energized. I feel like I'm back in college again. More than anything, I want to make this airline work."
The RSA purchase agreement, coupled with a $900 million federal loan, lifted US Air out of seven months in Chapter 11 bankruptcy and installed Bronner as the chairman of its board of directors. RSA owns 36 percent of the airline -- including about 20,000 shares of the company's Class A stock -- but controls 72 percent of its voting interest.
The deal, approved by a bankruptcy court judge on March 31, 2003, stunned airline analysts who had taken to describing the troubled carrier as "Useless Air." They saw an airline saddled with aging planes, bullied by its unions and stuck with an ill-designed hub-and-spoke network.
Bronner was undaunted. He had dispatched a small army of investment bankers to scrutinize the airline's financial records and then negotiated personally with US Airways chief executive David Siegel. "This company, after bankruptcy, will become a real jewel," he said after closing the deal.
Less than a year later, the gem has yet to gain its luster. US Air's stock is at an all-time low -- shares were trading Friday for as little as $4.20 each, down from $15.25 in late October. The company lost $1 million a day during the third quarter of 2003, the most recent period for which earnings were available.
More of the same is expected on Tuesday, when a fourth quarter 2003 earnings report is scheduled to be released. Estimates from outside the company have ranged as high as $125 million in losses for the quarter. The airline has lost $4.5 billion since 2001.
Last month, the Air Line Pilots Association called for the removal of Siegel and other top executives, saying that the union's members had lost confidence in management's ability to run the airline. Standard and Poor's recently downgraded US Air's credit rating to B-, saying a return to bankruptcy "appears to be all too possible, given their current rate of loss."
Educated observers are once again pronouncing US Air's last rites.
"It's a pretty dismal situation," said Bob Mann, a principal in the Long Island, N.Y.-based R.W. Mann & Co., an airline consulting firm. "Everything that could go wrong has gone wrong."
Mann said US Air made draconian cuts to its operating costs -- more than $1 billion a year in wages and other union concessions -- but still lags behind its rivals. In terms of cost per available seat mile, a common measuring stick, US Air spent 9.52 cents in the third quarter, compared to about 7.51 cents for Southwest Airlines Inc.
While US Air was busy climbing out of bankruptcy, Mann said, cost-conscious travelers started trying out low-fare carriers, including Southwest, JetBlue Airways Corp. and Airtran Airlines Inc.
"Business travelers who wouldn't normally have even tried Southwest discovered that it wasn't half-bad, and they saved money for their company to boot," Mann said. "That shift in business was extremely damaging to a high-cost, slow-to-change carrier like US Air."
The airline came out of bankruptcy with a plan designed to make it competitive against traditional rivals, chief among them Continental Airlines Inc. But by the fall of 2003, the competition had changed. As Bronner put it, "the world tanked on us."
Regional jet service grew by 140 percent over the past two years, and low-cost airlines are now carrying almost half of all passengers, according to a recent report from the U.S. Department of Transportation.
"The big hub-and-spoke carriers continue to lose money, while the discount airlines are increasing profits and aggressively grabbing market share," Siegel said in a message to US Air employees last week. "I don't like it, I don't expect you to like it, but we cannot ignore these realities."
US Air was forced to scrap its reorganization plan and start building a new one on the fly. To compete with its low-cost rivals, Bronner said, US Air must find a way to establish a low-cost component of its own.
"It's a low-cost world right now," said Glenn Engel, an airline analyst for Goldman Sachs in New York. "US Air is not in a good place."
Bronner said his challenge at US Air is similar in scope to the job he faced when he took control of RSA in 1973. At that time, the $500 million pension fund had $1 in assets for every $4 it owed. Today, the $24 billion RSA is fully funded. Nearly 80 percent of its $3.8 billion in revenue last year came from investments; taxpayers contributed just $400 million or about 10 percent.
The difference with US Air, he said, is the added pressure of time.
A series of financial covenants tied to the $900 million federal loan will become active on June 30, including provisions that the airline have a minimum cash level of $1 billion and be breaking even on operations.
In anticipation of that deadline, Bronner hired the New York investment bank Morgan Stanley to "develop alternatives" for the airline, including the sale of some or all of its assets. The bank is expected to return its recommendations next week.
"I'm only trying to get everything on the table and then let management and the unions look at (the options)," Bronner said.
Still, many industry observers anticipate that Bronner will cut his losses and liquidate the airline. Published reports have said at least five rival operators already have expressed interest in US Air assets.
"The report is that everything is up for sale, and that's certainly the indication I get," said Jim Bromley, a partner in the New York law firm Cleary Gottlieb Steen & Hamilton. Bromley has worked on a number of airline bankruptcy cases, including the 1991 liquidation of Pan American Airways.
"The problem is that it doesn't look like anybody's buying. The low-fares are the only ones with any money, and the fact is, they're doing just fine. Why should they buy the restaurant when they're already eating your lunch?"
While selling off assets may be a fast way to generate cash, such sales likely would hamper US Air's long-term prospects, according to analysts.
Bronner, however, insists he can make the company fly.
"There's no question in my mind we can be successful. It just depends on whether the people on the other side of the table -- the unions -- want to be successful," he said. "My strategy is to stabilize it. Get it from the red into the black. We can't go out there and fight if we're already beat up and bleeding."
He said he is acutely aware of the fact that US Air's competitors are circling. Southwest, for example, recently announced plans to start serving Philadelphia -- where US Air has one of its three hubs -- this May.
"I've got to chase Southwest out of Philadelphia. If they sell a ticket for $99, I've got to sell one for $98," Bronner said. "But I need to have cash reserves if I'm going to get into that kind of fight. We've got to get some money in the bank."
Bronner said the US Air investment poses minimal risk to RSA's participants, since RSA's exposure represents only about 1 percent of the entire fund. Even in a worst-case scenario -- a total collapse of the airline -- RSA could reasonably expect to get at least some return on its investment, he said.
He said the investment "doesn't even come close" to RSA's holdings in Montgomery-based Raycom Media Inc., a network of about 35 television stations, and the Birmingham-based Community Newspaper Holdings Inc., a chain of about 200 newspapers. The two companies represent a combined $5 billion investment for RSA.
"You've got to put it in perspective. For $240 million, we got control of an airline with $7 billion to $8 billion in assets," he said. The investment has given him a unique opportunity to promote the state, Bronner said. Video footage of RSA's Robert Trent Jones Golf Trail has aired on international flights, and state attractions have been featured in US Air's in-flight magazines.
The airline also made an unsuccessful attempt to shift $10 million in maintenance work on some of its Airbus aircraft to ST Mobile Aerospace Engineering Inc. at Mobile's Brookley Field, a move that was blocked by the machinists' union.
"This experience has allowed me to connect Alabama to a whole new spectrum of people," Bronner said. "It's opening all sorts of doors for us."
The airline's struggles have raised few concerns in Alabama, even at a time when the state is facing a funding crisis in preparing its 2005 budget.
"I have the utmost confidence in David Bronner's ability to manage the pension fund," said State Finance Director Drayton Nabers. "The airline business is a tough business, but he's a tough businessman."
Others familiar with RSA's portfolio said the fund is balanced enough to absorb any US Air losses without affecting contribution levels for its participants.
"Looking at their asset allocation, the fund is well-diversified. It's financially secure and sound," said John Jahera, a finance professor and interim dean of Auburn University's College of Business. "Just like an individual investor, not every investment you make is going to work out like you'd expect. But my view, and I think it's shared by most of our faculty here, is that he's done a good job. He's earned the benefit of the doubt."
Danny Goodwin, director of the Mobile County Education Association, a union that represents about 5,400 public school employees, said he's heard no complaints about the US Air investment.
"We've not seen him make too many mistakes," Goodwin said. "Nobody's infallible, but he's pretty darn close."
The center of the airline universe, at least for the next couple of months, could well exist in the fifth-floor corner office at RSA's headquarters in Montgomery. In a telephone interview late Thursday, Bronner said he'd just finished a conversation with Roach, the union negotiator.
"He's right -- I'm not at all like the guys he's used to dealing with," Bronner said. "My objective is not to make a billion dollars and leave a bunch of wreckage behind. I have no desire to put 30,000 people out of work. If I make a pile of money, I get no big bonus check. That's not my motivation.
"If we can maintain our investment and somehow get this airline back into the black and have some fun along the way, I'll be satisfied. I told (Roach) I'm always willing to listen, but I'm about ready to get some things done."
