US Airways: Phila. Is Key to Survival With few options and little cash, it vows to rebound

Posted: September 14, 2004

ALEXANDRIA, Va. — US Airways Group Inc., pleading for a new lease on life in Bankruptcy Court yesterday, pegged its survival on expanding in Philadelphia and the Northeast while cutting back elsewhere.

But the airline's future will hinge on a financing plan some experts called precarious, staked almost solely on limited cash reserves with no additional financing in sight or assets left to put up, according to documents unveiled yesterday.

US Airways, the biggest airline in the Philadelphia region and seventh largest nationwide, filed for Chapter 11 bankruptcy protection Sunday, its second such filing since 2002.

Its stock sank 44 cents per share, or about 30 percent, to $1.02. Standard & Poor's analysts dropped its credit rating to "default." Philadelphia city officials were preparing a contingency plan for the airline's demise or liquidation.

And so far, there's no sign that a major new investor will step up to save the airline, as happened before.

Still, company executives, who have promised uninterrupted service to customers and vendors during bankruptcy, vowed in court to make their two-year-old transformation plan a success.

"Bankruptcy is just another tool to get to the right place," chief executive officer Bruce R. Lakefield said outside the U.S. Bankruptcy Court for the Eastern District of Virginia. "Anything to get on your feet."

"The management team isn't here to preside over a liquidation," the firm's attorney, Brian P. Leitch, told the court. Rather, he said, it plans to "transform US Airways into a vibrant competitor."

Under bankruptcy protection, the company said, its aim would be to complete its transformation of Philadelphia as the "core of US Airways' network," with a wider array of domestic and international flights, more nonstop flights, and "refreshed" facilities at Philadelphia International Airport.

The company also said it intended to keep beefing up its presence in other Northeast airports and pulling back from Pittsburgh, leaving the Allegheny County airport a shadow of its former self as a major US Airways hub.

The transformation plan, while not new, showed that the company is staking its resurrection on the Northeast, centered on Philadelphia International, where it already carries two-thirds of the travelers each year.

The city is taking no chances. Officials are preparing a contingency plan for a possible US Airways liquidation or total bankruptcy, including a strategy to entice other airlines to expand to destinations abandoned by US Airways, according to an official familiar with airport operations, speaking on condition he not be identified.

Other parts of the city's plan, which is still being finalized, may involve delaying expenditures or cutting marginal costs at the airport to cope with a US Airways shutdown, if it occurs.

Joseph Messina, a divisional deputy city solicitor, would say only that the city was taking appropriate precautions.

"We are being prudent," Messina said. "We will implement whatever is necessary to protect the city's interest."

Mayor Street said his administration was concerned about the bankruptcy filing and was monitoring the situation, but "we think we'll be made whole in any bankruptcy proceeding."

"We are fortunate to be able to have low-cost carriers and other folks dying to get into our airport," Street said. "Depending on the state of US Airways, we will have plenty of options to use the runways we now have."

The city is seeking a nonvoting seat on a creditors' committee, expected to be formed this week by the Bankruptcy Court. The city has retained the Philadelphia firm of Klehr, Harrison, Harvey, Branzburg & Ellers to represent it on the committee, as it did during US Airways' previous trip through bankruptcy in 2002 and 2003.

The airline owes Philadelphia International about $4 million in landing and gate-rental fees for August. City officials were not optimistic about getting that money "for some time," but the company will be obligated to make future payments under bankruptcy protection, the unnamed official said.

At the hearing, the airline won unanimous backing from its major creditors, investors and Judge Stephen Mitchell to use part of a $1 billion federal loan to keep operating at least until the next hearing, scheduled for Oct. 14.

Among the major investors are the federal Air Transportation Stabilization Board, the Retirement Systems of Alabama Holdings L.L.C., and Bank of America.

The judge also approved US Airways' requests to forestall payments to its creditors, including suppliers of turbo-prop aircraft that the company had ordered for modernizing its fleet but no longer wants.

The company's biggest unsecured creditors include the Brazilian airplane manufacturer Embraer, owed $1.4 billion; Canada-based Bombardier Inc. (owed $948 million); and GE Capital and GE Engine Services ($279 million). Among airports, Philadelphia was owed the most ($4.06 million), followed by Charlotte-Douglas International Airport in North Carolina ($2.8 million) and Pittsburgh International Airport ($1.14 million).

In its initial filing, US Airways listed assets of $8.8 billion and liabilities of $8.7 billion. Its filing came after it was unable to obtain $800 million in cost cuts from its unions, including $295 million from pilots after talks failed last week.

Unions were bracing for the likelihood of court-supervised negotiations with the company, which now can move to nullify their contracts.

"We'll review a motion if and when it is filed, and we will respond appropriately at that time," said Joe Tiberi, a spokesman for the International Brotherhood of Machinists and Aerospace Workers, representing 9,450 mechanics and baggage handlers who have refused any contract concessions up to now.

While concessions did not come up yesterday, attorneys did spar over the airline's $110 million pension payment due tomorrow. Union attorneys criticized the company's expected motion to delay the payment.

"I strongly recommend the company to reconsider," said Richard Seltzer, an attorney for the Air Line Pilots Association.

No decision was made. But delaying pension payments and lowering labor costs will be crucial, according Philip Baggaley, an airline analyst and senior vice president at Standard & Poor's. No other savings or revenue opportunities alone can make the plan work.

"They have to make do with the financing they have now," Baggaley said. He said that made the bankruptcy process "more precarious for them, absolutely."

Lakefield, speaking to reporters, expressed confidence that employees and managers would make the right decision.

"I think our people are professional. They understand the reality. They will come around," Lakefield said.

In a statement late Sunday, David G. Bronner, chief executive officer of the Alabama retirement system, which lifted the airline from bankruptcy last time with a $240 million investment, faulted unions for "refusal to acknowledge the realities of the airline industry."

"There are thousands of jobs at stake, but if any of them are going to be saved, then all employees are going to have to make sacrifices," Bronner said.

But overall, yesterday's hearing lacked the acrimony of other major bankruptcy proceedings, if just for a day.

"The day went as well as expected," said Jack Stephan, spokesman for the pilots' union.

Lakefield echoed the sentiment, adding, "We got a lot of work to do, a lot of decisions to make."

Contact staff writer Thomas Ginsberg at 215-854-4177 or tginsberg@phillynews.com.

Inquirer staff writer Angela Couloumbis contributed to this article.

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