Could Iraq war hurt US Airways?

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Sep 11, 2002
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Could Iraq war hurt US Airways?
Principal backer says he's committed to airline's survival
TED REED
Staff Writer

The last time the United States waged war with Iraq, a major airline shut down the next day.

In January 1991, Eastern Airlines was operating under bankruptcy court protection, just as US Airways and United Airlines are today. The threat of a Mideast war had pushed oil prices to $31 a barrel. Faced with rising costs and plunging ridership, the carrier shut down Jan. 18, 1991.

If America again goes to war with Iraq, could more airlines face a similar fate?

Experts are divided, not just about the future of US Airways, Charlotte's dominant carrier, but also about the fates of United and others.

Analyst Ray Neidl of Blaylock & Partners LP in New York said US Airways is well-positioned to survive a war because it has dramatically lowered its cost structure during five months in bankruptcy court.

In fact, Neidl said, "I think everybody will survive (the war) because I don't think it will be a long war, if it happens."

Lehman Brothers airline analyst Gary Chase said the airline industry could even benefit from a war. In 1991, he noted, fuel prices spiked preceding Operation Desert Storm but fell when it ended. And removing uncertainty about a war could trigger economic expansion, he said.

Others see a dire future for the industry.

On Tuesday, the chief of Northwest Airlines predicted that at least one major carrier will disappear. "I believe there will be fewer major airlines three years from now," Northwest Chief Executive Richard Anderson told Wall Street analysts at a transportation conference.

Anderson didn't specify which carrier he thought would fail. But he said: "When you think about how much capacity is in the marketplace, and how many hubs there are, and how many airplanes there are flying, and the lack of profitability in the industry, it seems only logical that, on an economic basis, there need to be fewer."

Arlington, Va.-based aviation consultant Mort Beyer said US Airways and United "are in a fragile position (where) almost anything that happens is going to hurt them."

While analysts are divided, US Airways' principal financial backer says he's committed to the survival of the airline, which employs about 7,000 in Charlotte.

"We don't run from fights," said David Bronner, chief executive officer of Retirement Systems of Alabama, which is US Airways' principal partner in bankruptcy court and principal owner if it emerges.

"We knew six months ago that a war would be a high probability," Bronner said in an interview. "We knew this would be bumpy and rough. We knew this would take a total commitment from the family of US Airways ... to come up with a plan.

"Now we are at the closing end of it, and we aren't going to abandon anything like that. If there is anyone who deserves to survive, these guys do."

US Airways workers have given up $1 billion annually in concessions. They also committed to take additional 5 percent pay cuts in the event of a war or terrorist attack.

No other airline has such an arrangement.

Alabama's pension fund will provide $200 million more during bankruptcy and $240 million when the case concludes.

United's bankruptcy filing is more problematic, experts say. So far, the airline has met resistance from workers, lessors and vendors in getting concessions and implementing a new business plan.

Bronner speculated that United has a 50-50 chance of surviving a war. He said that if United were to sell assets, he would consider backing the purchase of some "if it would be beneficial to US Airways." Neidl suggested that United's Washington Dulles hub and some gates at Chicago O'Hare might have value for US Airways.

Consultant Beyer said the airline industry is worse off than it was in January 1991, when war broke out and Eastern folded.

The industry had lost a then-record $4 billion the previous year. Its main problem was too many airplane seats, which led weaker airlines such as Eastern to regularly offer deep discounts. Other airlines were forced to match the fares.

Eastern sought bankruptcy court protection in 1989 to keep operating after a bitter strike. Continental Airlines, a sister airline, filed for bankruptcy court protection in 1990, and Pan American World Airways filed in January 1991. The weak airlines accounted for the bulk of the industry losses.

Today there are fewer hub carriers. Travel has already fallen steeply because of an economic slowdown and the Sept. 11 terrorist attacks. The threat of war means fuel prices have risen to about $34 a barrel. And losses have set records: $7.7 billion in 2001, and $7.4 billion in 2002.

"We're starting out so far behind the eight-ball," Beyer said. "There are more unfavorable potentials out there than there were in 1991. Most airlines weren't in real difficulty last time."

To be sure, today's bankruptcy filings differ from Eastern's, which resulted from a three-union strike against then-owner Frank Lorenzo, whose Texas Air Corp. had purchased the airline.

Lorenzo struggled for months to operate with strikebreakers, until the court took the airline from him and turned it over to trustee Martin Shugrue. By then Eastern was too troubled for Shugrue to save it.

In contrast, US Airways has systematically cut costs, pressuring employees to join in the effort, and expects to emerge from bankruptcy court protection March 31 with lower operating cost than any of the five larger hub carriers.

The 5 percent employee pay cuts, which could last for up to 18 months, provide an additional cushion. The reduction means the airline possibly "would be able to buffer against any shocks from war or acts of terrorism," Chief Executive David Siegel told transportation analysts Tuesday.

He said the airline could impose the reduction more than once. Reductions would cease after 18 months or when the company makes its first profit. Afterward, the airline would gradually return the money.

Additionally, in the event of a war or terrorist attack, the airline could further reduce the size of its fleet, Siegel said. He said "force majeure" laws would provide the airline with the right to reduce below the minimum of 279 jets mandated in its employee contracts.

A war would also mean US Airways would participate in the Civil Reserve Air Fleet program, which entitles the military to lease planes from commercial carriers to transport troops and goods.

The program, instituted by the Eisenhower administration in 1959, was first used in 1990. The Air Force has contracted to use US Airways' 10 wide-body Boeing 767 jets, and has practiced reconfiguring the cabins so that they can serve as medical transports
 

Retired1

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Dr. Bronner says he knew six months ago it would be rough and bumpy. Does anyone believe six months ago he thought there was money for the pilot pensions to continue? I dont blame the line pilots for this but i do blame ALPA at the top level for not seeing this coming. Two billion dollars is a lot of money and some of the ALPA smart people should have been asking some tough questions. Maybe they were but it sure didnt work out.
 

MrAeroMan

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Dec 29, 2002
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Biffeman
Some things really stick out in this article. Number one would be the comment from NW. I think the rest of the carriers are sitting back waiting for someone to go belly up to help improve the bottom line and take care of the glut of seats in the market without pulling their own fleet down. Problem is time is running out and they're going to have to deal with their losses and over capacity sooner rather than later.
The second thing is Bronners comments. As I suspected these guys thought this thing through long ago. The one interesting point he made though was where he said they aren't going to abandon the plan. I think there may be some wiggle room for the pilots and their pension problems if you read into that comment a bit. Bronner has been known to make comments that he really shouldn't make and this may be another example of that. I would venture to say there is something that will get worked out at the 11th. hour. The United asset comments go to prove that what Chip stated a few weeks ago is indeed factual.
Lastly is Dave's comments and they are the most troubling. If I read this correctly is Dave saying they can issue a 5% reduction for each event? Let's say there is a terrorist attack AND we go to war. Does that give him the ability to take 10% due to the two events? I sure hope he's not thinking that and if he is he's lost his mind. The force majeure comments are a bit scary also. If they're planning on using that clause to stick it to the employees then there is no hope for the company IMHO.

MrA
 

Bear96

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Aug 20, 2002
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[blockquote]
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On 2/7/2003 11:52:23 AM

...Bronner speculated that United has a 50-50 chance of surviving a war. He said that if United were to sell assets, he would consider backing the purchase of some "if it would be beneficial to US Airways."...
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[/blockquote]

Seems like Chip's (and apparently, now others here) plans for U buying parts of UAL are much further along than Bronner's.

Bronner says he "may consider" backing some purchases with conditions.

Is any other airline in the US NOT interested in at least that much?

Chip on the other hand already has a number as to how much (30-35% of the UA system) and where-- DEN, ORD, LAX, SFO. (Though it does strike me that the assets Chip mentioned don't match what Neidl said-- specifically, IAD. But no doubt Chip has the "inside scoop" from both U and UA management. Why would they waste their time laying out plans to the investment community when they have a U pilot to confide in?)

BTW-- has the pilot pension issue suddenly been resolved this morning? Seems like that "minor detail" would have a place in a discussion about the future shape of U, like this one. But suddenly it isn't even being mentioned. Odd.
 
C

chipmunn

Guest
The assets US is interested in is a large portion of the DEN & ORD hub, LAX/SFO gates, and presumably the A320 fleet, although dependent upon UA lessor negotitations, the aircraft transfer could be different. I suspect we are looking at maybe 30 to 35 percent of the current UA system.

In fact, in today's CLT Observer article Ted Reed wrote, "United's bankruptcy filing is more problematic, experts say. So far, the airline has met resistance from workers, lessors and vendors in getting concessions and implementing a new business plan."

It's to early to tell what will happen, but an "interesting coroprate transaction" where the asset divestiture keeps the revenue within the domestic/Star alliance umbrella(s), may be the only way UA survives this crisis.

However, what's sad is that all of this could have been prevented if the UA unions had not demanded to bypass merger policy, demand that only US employees be furloughed, and the UA employees have a "no furlough" clause during the negotiations between Seth Schofield and Gerry Greenwald in November 1995.

As far as an employee transfer, if a deal occurs I believe UA employees should come to US with their assets and the current union merger integration policy used to determine the seniority list(s).

Chip
 

MrAeroMan

Veteran
Dec 29, 2002
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[blockquote]
----------------
On 2/7/2003 12:34:44 PM chipmunn wrote:

The assets US is interested in is a large portion of the DEN & ORD hub, LAX/SFO gates, and presumably the A320 fleet, although dependent upon UA lessor negotitations, the aircraft transfer could be different. I suspect we are looking at maybe 30 to 35 percent of the current UA system.

In fact, in today's CLT Observer article Ted Reed wrote, "United's bankruptcy filing is more problematic, experts say. So far, the airline has met resistance from workers, lessors and vendors in getting concessions and implementing a new business plan."

It's to early to tell what will happen, but an "interesting coroprate transaction" where the asset divestiture keeps the revenue within the domestic/Star alliance umbrella(s), may be the only way UA survives this crisis.

However, what's sad is that all of this could have been prevented if the UA unions had not demanded to bypass merger policy, demand that only US employees be furloughed, and the UA employees have a "no furlough" clause during the negotiations between Seth Schofield and Gerry Greenwald in November 1995.

As far as an employee transfer, if a deal occurs I believe UA employees should come to US with their assets and the current union merger integration policy used to determine the seniority list(s).

Chip
----------------
[/blockquote]
Chip

What routes would they be looking at, if any, to pick up from UA?

MrA
 
C

chipmunn

Guest
Bear 96:

You're right and the pilot pension issue could not only prevent a corporate transaction between US & UA, it could be the catalyst for both US & UA to liquidate.

Regardless, I am only discussing what I have been told by Wall Street and Company sources.

MrAeroMan, I'm not sure what routes US would be interested in, but the hub information was provided by two independent people who are intimately involved with airline issues on Wall Street. In fact, you routinely read their quotes in most airline articles.

In November 2001, a few months after the last merger attempt was officially terminated, former UA president Rono Dutta told a friend of mine he would "not sleep until he put US and UA together". Apparently, the parties began discussing what I have referred to as a "unique corporate transaction" shortly thereafter, which was initially designed to try and prevent a UA formal reorganization.

Dutta along with other airline officials believe there is a huge synergistic benefit to combining the two companies and Stephen Wolf told me and some other pilots the combined route network would generate $1.6 to $1.9 billion in additional incremental revenue.

Meanwhile, Dutta is now the RSA Airline Advisor where he is paid $100,000 per year for his consulting services and he has also been retained by UA as a consultant. I believe Dutta is one of the key figures behind a potential transaction, along with Wolf, and dependent upon how things work out, I suspect there could be a deal later this year.

Regardless, Brooner has now publicly confirmed his and US Airways' interest in an "interesting corporate transaction".

What's important to note is that if a bidding war erupts for UA assets, if UA is going to remain a viable business entity, US has a key advantage in that a transfer of assets would permit UA to keep some of the revenue because of the alliance. For example, if US obtains some of the SFO gates, this would permit US to take a person to SFO and then transfer the passenger to a UA flight to a Pacific destination. However, if CO gets the SFO gates, then CO would keep this traffic all the way to the Pacific and UA would not get the international portion of the revenue.

This is a key and important point that would easily be understood by the bankruptcy court, creditors committee, and other interested parties who would vote on the POR and disclosure statement.

Chip
 

Hula Girl

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Aug 20, 2002
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WAR CONTINGENCY: In the event that (a) the U.S. invades Iraq (meaning that the U.S. initiates a sustained aerial bombardment of those parts of Iraq that are not within the current no fly zone or introduces substantial numbers of ground troops into the territory of Iraq), or (B) there is an act of terrorism which in either event has a material adverse impact on commercial aviation, there will be an immediate 5% pay deferral for up to 18 months. The deferral will begin to be repaid starting in the first month following the end of the deferral and will continue to be repaid in as many monthly installments as were covered by the deferral. In the event that US Airways Group reports a pretax profit with respect to any quarter during which the pay deferral is in effect, the deferral will immediately stop and repayment will begin in the next month to continue for the same number of months as were included in the deferral.
Management employees will participate in this provision on the same terms as other employee groups.


You get your money back. (F/As)
 

diogenes

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Aug 22, 2002
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Could Iraq war hurt US Airways?
Principal backer says he's committed to airline's survival
TED REED
Staff Writer


Additionally, in the event of a war or terrorist attack, the airline could further reduce the size of its fleet, Siegel said. He said "force majeure" laws would provide the airline with the right to reduce below the minimum of 279 jets mandated in its employee contracts.




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[/blockquote]
------------------------------------------


toldjaso
 
C

chipmunn

Guest
Deathwatch

UAL's Chapter 11 reorganization may just turn into an outright liquidation. Lenders, lessors and competitors are ready to pick up the pieces.


CHICAGO (Forbes.com) - Even by the sickly standards of the American airline industry, UAL Corp. is a mess. After losing $3.2 billion last year, the nation's second-largest carrier is confronting the distinct possibility that it will not emerge from Chapter 11. It may instead be auctioned off in parts, the airplanes and landing slots carted off and the corporation liquidated in the manner of Braniff, Pan Am and Eastern.

Valiantly presiding over the Chicago-based parent of United Airlines is Glenn Tilton, a 54-year-old former oil executive who took the chief executive job in September. Perhaps radical thinking is just what is needed at this desperate juncture. But so far some of Tilton's moves have been--to put it politely--counterintuitive. To increase traffic he cut unrestricted walk-up fares by 40% in January out of United's two busiest hubs, Denver and Chicago O'Hare. That gained it some passengers but lowered the take from last-minute travel by an estimated $30 million a month.

Even without the discounts UAL (NYSE:UAL - News) was burning through money faster than jet fuel. In the fourth quarter it had an operating loss (earnings before depreciation, interest, taxes and airplane rent) of $478 million. Lenders, of course, have very limited patience with funding such operating losses, and if there is no prospect for reducing them, then the company would be worth more to creditors dead than alive. Starting in March, UAL's loan covenants require it to meet a schedule of reductions in operating losses and to break even by October.

If UAL can't meet the timetable, then debtor-in-possession lenders Bank One, J.P. Morgan Chase, Citigroup and CIT Group can begin confiscating planes, spare parts, routes and landing slots. "If things go badly, J.P. Morgan and Citigroup have a big incentive to seek liquidation and get their money back by calling in their collateral," says a lawyer following the bankruptcy. Publicly, United isn't conceding it's in any kind of death-spiral scenario. "The changes we're making should enable us to strengthen our operations and make us competitive," says United spokesman Jeffrey Green.

If, that is, the unionized workers accept the changes. In January Tilton proposed to split off a big chunk of the carrier later this year and turn it into a low-cost, no frills airline, rumored to be named Starfish, that could compete with JetBlue (NasdaqNM:JBLU - News) and Southwest (NYSE:LUV - News). Pilots now making $225,000 (down from $316,000 last year) could be forced to trade down to jobs paying a maximum of $153,000.

Continental (NYSE:CAL - News) and US Airways (OTC BB:UAWGQ.OB - News) have gone the low-cost route before, without success. "If this is what they want to do, it's a nonstarter," stated Paul Whiteford, chairman of the 8,500-member United chapter of the Airline Pilots Association. It would, he added, "lead to the death of United Airlines." In other words a strike would push the airline out of business via the same route Eastern traversed.

By mid-March United must get its unions to agree to permanently hack off $2.4 billion in annual pay, or about 34% of their total. (Labor consumed half of UAL's $14.3 billion in revenue last year.) Mechanics and flight attendants have been publicly assailing Tilton for not offering a concrete proposal for them to consider. If no agreement is reached, United must petition the bankruptcy court to impose concessions.

To line up $1.5 billion in debtor-in-possession financing, United had to pay an unusually large 5% commission for a $300 million portion, plus a percentage point more in interest than WorldCom, Kmart or Adelphia paid. The postbankruptcy lenders are first in line during a liquidation, but even so they are taking a significant risk. If the workers won't come to work for reduced pay, then no lender is going to come out whole.

So far United has yet to buzz-cut any of its aircraft leasing deals. In fact, it just agreed to hold on to 154 of its 463 leased planes under the same old terms. But if the carrier starts offering, say, 25 cents on the dollar, big aircraft lessors like GE Capital (which owns 20 United planes) may just repossess and try to redeploy the jets to overseas carriers. When that market is saturated, the only thing to do with a commercial jet plane may be to park it in the desert in the Southwest, along with the 1,800 other jets already there.

Ready to feast on any leftovers are rivals like American, which would benefit from O'Hare's slots and routes. Continental lusts after United's Denver hub and its London Heathrow routes. Other hubs up for grabs would include Washington Dulles, San Francisco and Los Angeles. Delta, US Airways and Northwest would likely jump into the fray. With 20% of traffic already, and a strong tailwind at their backs, the discounters like Southwest, JetBlue and AirTran may be the biggest winners of all.
 

PITbull

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Dec 29, 2002
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Article reads:
Anderson didn't specify which carrier he thought would fail. But he said: "When you think about how much capacity is in the marketplace, and how many hubs there are, and how many airplanes there are flying, and the lack of profitability in the industry, it seems only logical that, on an economic basis, there need to be fewer."

PITbull writes:

That is what the airline analysts were saying this past summer. Hate to say it, and I refused to admit it this summer, but that is the anwer to the Industries ailment.
None of us who work for this industry wants to be the ones that goes, but from the outside looking in, it's pretty obvious that's the fix.

After reading the article with regard to Dave S. comments on 5% pay reduction events (plural). The man would be purly insane. That was NOT agreed to with our MEC. That, I believe, has to be missed quoted.

Most of our reserves presently ARE NOT making it financially. They are in crisis,short of U throwing them out the door, no one can help them. I fear to say this, but if we were truly still that bad off, and it took all of these employees to sacrifice themselves in order for U to still be in "survival mode", I think it cruel to continue to keep inposing more stringent, wage sacrifices. If that is truly the case, then "shut the lights".

 

PITbull

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Dec 29, 2002
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[blockquote]
----------------
On 2/15/2003 12:18:12 AM DELLDUDE wrote:

not this stuff again?
survival of the fittest in nature and business...thats life...
----------------
[/blockquote]

DEll,

IMHO, there are TWO types of "hearts" in the world in relationship to humanity....Either,

a) You are of the "heart" of "Survival of the fittest",

or

b)You are the "heart" of "My brothers keeper"...

You can tell on these boards who is who.




 

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