But (america west) Pilots, sounding warnings of slowdowns and overtime refusals, say Mr. Parker is going to have to come up with some creative ways to meet their demands. "We can make the contract either work for the company or work against the company," says Ted Phipps, secretary-treasurer of the Air Line Pilots Association at America West
By Melanie Trottman Staff Reporter of The Wall Street Journal
Updated April 4, 2002 12:01 a.m. ET
PHOENIX -- On Sept. 10, after just nine days on the job,
America West Airlines CEO W. Douglas Parker gathered for a celebration with colleagues at a bar across from headquarters. The No. 8 carrier, a perennial also-ran among the nation's major airlines, had just installed a new management team and signed preliminary documents for $200 million in badly needed financing.
The next day, terrorist attacks grounded America West's fleet and left the carrier bleeding $5 million a day. When it started flying again on Sept. 14, the losses continued, and the financing fell through.
Go to Aftermath of Terror
Mr. Parker, a 40-year-old fare analyst and financial whiz, would spend more than two months lobbying Washington for a bailout. He returned home as the first, and so far the only, CEO of a major carrier to take advantage of a new loan-guarantee program set up by Congress after Sept. 11.
Now, Mr. Parker's victory is viewed as a test case in the debate over whether the government should be in the business of propping up airlines who have fallen on hard times. Huge losses continue to mount across the industry as airlines suffer a big drop in high-dollar business travel. Losses at the major carriers are expected to top $2 billion in the first quarter of this year, on top of $7.3 billion in losses last year. Many believe losing an airline or two and taking some capacity out of the skies is the only way, in the long run, to improve lousy airline economics.
Yet instead of bankruptcy and consolidation, the most seriously ailing carriers, including
UAL Corp.'s
ual -0.46% United Airlines and
US Airways Group Inc., now have a safety net. In late September, Congress established the Air Transportation Stabilization Board, with the authority to dole out as much as $10 billion in loan guarantees. Carriers have until June 28 to apply for their own bailouts. "The loan board is having discussions with all the leading suspects," said one investment banker who specializes in aviation.
For America West, getting government help wasn't easy. Mr. Parker had to wring concessions from dozens of creditors, build a case that America West was worth saving and agree to give the government the right to buy a third of his company. But since America West made it through the process, many expect that bigger carriers will get the same, if not better, treatment.
Consumer advocates and travelers may welcome continued brutal fare competition and increased stability for struggling airlines. But the loan program could also end up hurting travelers by saddling the U.S. with shaky airlines.
"I think the loan-guarantee program has delayed consolidation and delayed carrier failure, but it's not going to prevent it," says Mo Garfinkle, president of GCW Consulting, a Washington-based aviation consulting firm.
Mr. Parker strongly disagrees with those who say America West is one of the airlines that should have gone under. He cites the carrier's ability to achieve industry-beating profit margins and the tough review process for the loan guarantees that required the airline to submit a business plan proving it could repay the loan.
"We're the nation's largest, low-cost hub-and-spoke airline," Mr. Parker says. "We keep prices down not just for our customers but for [those of] every other airline."
Loan Guarantees
With the government's $380 million in loan guarantees, the airline was able to secure a $429 million loan from a group led by Citibank. It also won more than $600 million in other financing and concessions from manufacturers, vendors, leasing firms and others. But the carrier still isn't out of danger.
Mr. Parker promised his government backers that he will hold down labor costs -- even though he knows his pilots, the lowest-paid among major carriers, are desperate for a new contract and big raises. He also must find ways to reverse the reputation for poor service America West earned in the late 1990s. After a two-year effort to improve its on-time record and maintenance procedures, as well as curb the number of flight cancellations, the carrier has only recently shown signs of a consistent operational turnaround.
In February, the airline ranked first in on-time performance among major carriers for the third consecutive month, according to Department of Transportation rankings. It also had the second-lowest rate of canceled flights.
To survive, America West must win back business travelers. In February, 40% of the airline's traffic came from sales through discounted channels, such as
Priceline.com.
pcln +0.43% So last month, America West embarked on a risky new fare structure, discounting unrestricted tickets and eliminating the requirement that passengers stay over a Saturday night to qualify for a lower fare.
"Doug is a capable young manager who is really being put to a baptism of fire right now," says Kevin Murphy, an airline analyst with Morgan Stanley.
If America West should stumble further this summer, the loan-guarantee program's critics would have new ammunition, says Rep. Jeff Flake, a Republican from the carrier's home state of Arizona. Opponents of the bailout would be quick to say: " 'Look what happened here. We're just prolonging the agony,' " he says.
Familiar Crisis
For America West, the current crisis is a familiar one. The airline was launched in August 1983 with three planes. From its base in the West, the company built up service across the country. In 1991, with the industry reeling from the Gulf War, the carrier was forced to file for bankruptcy protection.
In 1992, the board brought in William Franke, who had turned around convenience-store operator Circle K, as CEO. After big cuts in staff and planes, America West made a profit in 1993 and emerged from bankruptcy reorganization in 1994, with the financial backing of financier David Bonderman, whose
Texas Pacific Group still controls a majority of voting rights in America West.
Mr. Franke found himself routinely battling with employees and working to fix operational problems. As he turned management over to a younger generation, led by Mr. Parker, America West appeared to be on the upswing.
Still, cash remained tight as the company struggled to win back customers. Then Sept. 11 took its toll. The parent company, America West Holdings Corp., posted a 2001 loss of $147.9 million on revenue of $2.07 billion. In 2000, the company earned $7.7 million on revenue of $2.34 billion.
The week after Sept. 11, Mr. Parker flew to Washington to begin his induction into national politics and the fraternity of airline CEOs. Like a kid on his first day at a new school, Mr. Parker loaded onto a bus with a dozen airline CEOs -- most of whom he'd never met -- to jointly lobby Congress to come to the rescue of their ailing industry.
"I was certainly lowest in seniority," he recalls. And the most in need. To save America West, Mr. Parker lobbied for flexible terms in the loan-guarantee legislation. Some richer rivals argued for loan payback periods of between two and three years. But America West would need more time. "This was where, having held together as an airline industry, we began having factions," he says.
The final regulations for the loan guarantees, issued Oct. 5, called for a seven-year payback period. Cash-starved America West had to move quickly. By mid-October, the airline's application process was already well under way.
The applications were reviewed by the Air Transportation Stabilization Board, set up by Congress to help the industry get through the Sept. 11 crisis in a way that promotes its long-term health. As the first carrier to apply, America West was dealing with a new, opaque process that seemed to unfold through trial and error. The loan board erected one hurdle after another in front of America West, requiring new financing, warrants for an equity stake in the carrier and labor-cost caps.
The airline also faced an uphill battle against a Bush administration largely opposed to the congressionally created program. Bigger airlines were whispering in the background that the government shouldn't be rescuing airlines that looked doomed anyway. Federal Reserve Chairman Alan Greenspan and Treasury Secretary Paul O'Neill had publicly voiced opposition to the concept of the loan guarantees before the board was created -- and they were two of the board's original three voting members. Their designees now fill their posts.
To qualify, America West had to line up enough financing and concessions to show the loan board it had cooperation from existing creditors. That meant winning favors from the more than 20 companies that leased aircraft to the airline, as well as aircraft manufacturers and other creditors. Some of them Mr. Parker hardly knew. Most balked unless they knew other lenders and leasing firms were cooperating, and not giving fewer concessions than they were.
Henri Courpron, head of European plane maker
Airbus Industrie's North American unit, met with Mr. Parker and America West executives and listened to details of the airline's financial woes and turnaround plan. Mr. Parker assured him that powerhouse GE Capital Aviation Services,
General Electric Co.
ge -0.63% 's aircraft financing arm and America West's largest aircraft lessor, would be making concessions. He needed Airbus to agree to defer some of the 28 aircraft on order.
Mr. Parker was a hard bargainer who "asks nicely," says Mr. Courpron. "He's just going to tell you. 'Look Henri, this is what I need, this is why I need it,' " Mr. Courpron says. Airbus agreed to defer 17 orders.
In enlisting GE to its cause, Mr. Parker tapped goodwill he built up during a previous leasing negotiation. Typically, airlines arrange several leasing companies in different rooms during negotiations, and shuttle back and forth playing one against the other. But during a negotiation with GE just before Sept. 11, Mr. Parker didn't do that, and GE took note, says Michael Chen, senior vice president at GE Capital Aviation Services. After they struck a deal, Mr. Parker took the GE officials to a down-to-earth neighborhood bar, instead of a fancy restaurant to celebrate.
"It was more like he was one of us, where he could talk about his family and basketball," says Mr. Chen. "It made it like a more personal level where you build trust in the guy."
Although that was part of the $200 million financing that fell apart after Sept. 11, GE was ready to step up for the carrier again. After meetings Mr. Parker had with Henry Hubschman, president of GE Capital Aviation Services, and other top officials, GE committed to be a co-guarantor for the $429 million loan.
The battle moved to the loan board itself, which fired questions and requests at unexpected times. Mr. Parker, living at the Willard Inter-Continental Hotel near the White House, showered with his cellphone on the bathroom sink and worked out of a conference room loaned by GE. He and his staff shot back answers and promises.
In late November, a seven-hour meeting with the loan-board staff left the America West side deflated. The board didn't like the structure of the proposed loan, which was primarily from Citibank. Among other concerns, there wasn't enough payback for the government, and the underlying assumptions about how quickly the economy would bounce back were too optimistic.
The staff scrambled to amend the application, submitting a new version on Dec. 10. Rumors swirled that the airline was within days of seeking bankruptcy-court protection. Meetings with the loan board dragged on. Fed up, the airline on Dec. 18 filed its seven-year business plan with the Securities and Exchange Commission, a way to publicly declare the airline had a viable plan. The next day, America West handed in its third version, with even more concessions. This time, it got approved -- but with conditions.
The loan board demanded warrants from America West that represent 33% of the company's common stock on a fully diluted basis. The warrants have an exercise price of $3 and an exercise period of 10 years, but they don't carry voting rights. The company expects to file a registration statement with the SEC within the next 30 days that will allow the government to sell the warrants, if it chooses to do so. The warrants will be counted when calculating the company's diluted earnings per share.
'Mixed Emotions'
While Mr. Parker agreed to the terms, he says he had "mixed emotions" about them. "We thought what we submitted was adequate compensation and still do."
Already, America West has found itself flying through even more turbulence, raising serious questions about its future and the government's loan guarantee. In a March 20 SEC filing, the airline had to revise some of the projections it submitted just three months earlier. Higher-than-expected insurance, security and airport costs will hurt the bottom line. And the airline's seat capacity will grow between 0% and 2% this year, instead of its prior 3% projection.
"The fact that company officials have revised their projections so soon after the loan filing is not a cause for optimism that no further negative surprises are in store," said Morgan Stanley's Mr. Murphy.
After losses this year, America West still projects a "modest profit" next year, followed by five decent years. The carrier does have advantages, such as a low cost structure that most other major carriers would envy. None of that changes the high fuel costs, tight competition and drought of business travelers that can squeeze margins across the industry.
"There's absolutely no reason that an efficient, low-cost carrier like America West can't earn reasonable returns in good years. The question is how many good years will the industry have -- and when exactly," says UBS Warburg analyst Sam Buttrick.
Sticking to its business plan won't be easy. America West's pilots, who have been in mediation over a new contract for almost a year, are expecting big raises. But Mr. Parker promised in Washington to keep labor-cost increases in line with projections in the business plan or be forced to repay part of the loan early. A 10-year captain at America West makes about $126,000 a year, according to Air Inc., an Atlanta-based career-information service for airline pilots, compared with about $186,000 at some other major carriers.
While America West's business plan does leave room for some pay increases, the pilots union says the numbers don't even come close to bridging the huge gap. Mr. Parker says that would be impossible in any case. "We can't pay what American, United and Delta do," he says. "We don't have the same revenue-generating capabilities."
But pilots, sounding warnings of slowdowns and overtime refusals, say Mr. Parker is going to have to come up with some creative ways to meet their demands. "We can make the contract either work for the company or work against the company," says Ted Phipps, secretary-treasurer of the Air Line Pilots Association at America West.
Rival airlines, meanwhile, have their guns trained on America West. After the carrier launched its new fare structure, its rivals quickly cut prices on flights to Phoenix, apparently trying to hurt America West on its home turf.