Phillyguy:
Your analysis is correct. The Office of Management and Budget lead by Mitch Daniels crafted the federal loan guarantee guidelines. These guidelines or rules require the applicant to submit a business plan that projects a seven- percent profit margin and B credit rating in seven years.
To validate the business plan and provide the credit rating recommendation, the ATSB signed a contract with one of the three national credit rating agencies, Fitch Rating (the other two rating agencies are S&P and Moody's).
Fitch acts as an independent auditor and looks at the business plan and how the applicant expects to improve the bottom line to obtain the 7 percent profit margin. This can be accomplished one or two ways: increase revenues and/or lower costs.
The company's plan was to cut costs by $1.2 to $1.3 billion and improve revenues by $600 million.
To obtain the cuts the company will obtain in the future $871 million in annual labor expense reduction and more than $300 million in other stakeholder cuts (creditors, vendors, and lessors).
To obtain the revenue improvements, the company projected that about 400 additional RJs would eventually generate $300 million, the domestic alliance about $200 million, and the international alliance about $100 million in additional revenue, to reach the $600 million target.
This financial projection and plan would provide a $1.8 to $1.9 billion bottom line turnaround and qualify for the loan guarantee. The ATSB provided unanimous conditional approval of this plan based on the costs cuts and revenue projections.
Although the company and its stakeholders have provided the financial cuts to make the original plan work, revenue has fallen off of the cliff and the company is not making their revenue projection.
Nobody likes this and this week saw unprecedented news regarding enormous airline loses and incredible fourth quarter negative projections.
The problem for US Airways is that it must prove to the bankruptcy court and its creditors it can turn a profit to obtain the loan guarantee, otherwise the court will have no option but to liquidate the airline.
If your revenues are not meeting projections, for whatever reason, crystal ball or not, the company has only one other option. Further cut costs so the business plan can produce a profit for both the bankruptcy Plan of Reorganization and the loan guarantee B credit rating.
I suspect with revenue deteriorating the company may have one option: cut costs further, (in my opinion on a temporary basis because of the cuts already imposed), or do the unthinkable and liquidate.
From a macroeconomic perspective, an airline failure would reduce capacity and improve the prospects for the rest of the industry, but for employees and the communities the failed airline serves, this would be tragic.
Finally, I do not agree with those who said management should have predicted the double dip recession, that fuel prices would be at $30 per barrel, the US would unilaterally declare war and invade a sovereign county, or that ticket prices would be at 20-year lows. Who could have predicted this?
This situation is bad and sucks, but there is nothing we can do about the fundamentals, except provide the best product possible and do out part to cut personal internal costs.
Chip
