US Airways Group Inc. is scheduled to emerge from bankruptcy tomorrow after having shed almost 17,000 employees, 128 airplanes and $2.1 billion in debt in what is being hailed as a textbook restructuring that could serve as a model for the teetering aviation industry.
The airline will emerge under the control of the Retirement Systems of Alabama, which provided a critical $500 million in financing during the company's restructuring and will invest $240 million in the company once it leaves bankruptcy.
Legal experts say the carrier's reorganization is notable for its duration of just eight months, during which it came perilously close to liquidation as a sluggish economy and the prospect of war in Iraq decimated its original revenue projections.
The speedy conclusion puts US Airways, which dominated the market at Baltimore-Washington International Airport until the late 1990s, a step ahead of many of its larger rivals, which are still battling their unions and vendors for cost reductions in hopes of avoiding bankruptcy.
"The opportunity is US Airways' to win or squander," said Henry Harteveldt, a senior analyst with Forrester Research.
The highly leveraged airline, which lost $1.6 billion last year, entered a two-year industry slump with the highest operating costs of any major airline.
Battered by low-fare competitors infiltrating the East Coast market, the Arlington, Va., airline became the first to enter bankruptcy after the Sept. 11, 2001, terrorist attacks. Since then, analysts say, the carrier has been a leader in making the kinds of cuts the industry needs to return to profitability.
"They've done everything right," said Adam Pilarski, senior vice president of Avitas, an aviation consulting firm in Washington. "They tried to have decent relations with creditors and unions, they have a goal, they know where they are going."
US Airways still must contend with high fuel costs and a travel downturn that has worsened with the outbreak of war. With demand down by double-digit percentages since hostilities began in Iraq, the company said Thursday that it will reduce capacity by an additional 5 percent and cut some trans-Atlantic flights. Employee salaries also will be cut by 5 percent effective tomorrow.
Despite the latest obstacles, airline analysts are giving US Airways a better-than-even shot at surviving as a smaller carrier.
"They have a future as a different type of airline," Pilarski said. "They will be more like a regional carrier."
Ultimately, the company's reorganization hinged on the negotiating expertise of Chief Executive Officer David N. Siegel and the resolve of the remaining US Airways employees, analysts and company officials said.
Faced with liquidation, workers decided they wanted to keep flying despite the price they were being asked to pay.
"It was painful and it was extraordinary," said William Pollock, a pilot and chairman of the US Airways unit of the Air Line Pilots Association. Pollock will serve on the restructured airline's board of directors.
"I think the pilots were really forced to make a decision as to whether the company would survive or not," he said.
After two rounds of negotiations, the final tab for unionized labor and managers came to about $1.2 billion in annual pay and benefit reductions, combined with a roughly 50 percent cut in most pilot pensions.
The airline won approval Friday from the Pension Benefit Guarantee Corp., a government agency set up to pay retirement benefits if a company fails, to end its pilot pension plan and replace it with a new defined contribution plan.
Winning government approval for the plan was among the last obstacles the airline had to clear in order to complete its bankruptcy reorganization. The previous pension plan was facing a $2 billion shortfall.
The rest of the savings achieved in bankruptcy - totaling $1.9 billion annually - will come from vendors and lease holders.
"The pilots, mechanics and flight staff blended together almost as a family to say we want to survive and we'll do whatever it takes to see it survive," said David G. Bronner, chief executive of the Retirement Systems of Alabama, which will own almost 37 percent of the restructured company.
Pension fund in control
The Alabama pension fund will get eight seats on the 15-member board of directors, along with 72 percent voting control. Labor unions will get four seats and management three seats.
Existing shares of the company's stock will become worthless. New shares will be distributed among Bronner's group, employees, management and certain creditors. The shares will be publicly traded under the company's existing ticker symbol, U.
Dependent to a large extent on drastic cost reductions, the airline's recovery also hinges on the introduction of up to 300 additional small regional jets, which will gradually replace the airline's larger jets in some low-volume markets.
The plan also features a code-share agreement with United Airlines that will allow passengers to book tickets on both carriers' flights.
The deal is projected to boost revenue by about $150 million annually, assuming United is able to survive its own bankruptcy restructuring. Pairing with United, which has warned it could face liquidation, might be the one weak link in US Airways' revamped business plan, analysts said.
In a December bankruptcy court filing, US Airways projected it would lose $229 million this year, break even next year and make a profit of $587 million by 2009. Whether it meets that goal or not depends on the economy and the outcome of the war, analysts said.
"The only question now is; will it work in what remains a very tough industry environment?" said Ray Neidl, an analyst with Blaylock & Partners. "I don't think there's much more they could have done. There's not much more cost-cutting you can do."
The restructuring took its toll at BWI, where US Airways shut down its low-fare MetroJet division and closed its crew base after the Sept. 11 terrorist attacks.
The airline went from 149 flights per day at BWI down to 40. Only 14 of those remaining flights are on the carrier's larger mainline jets, compared with 75 prior to the terrorist attacks. The airline now employs 200 at BWI, down from 2,248.
"It's sad to see the difference of what used to be [at BWI] and what it is now," said Robert Kenia, a flight attendant and president of the Association of Flight Attendants' Washington chapter. "It's sad to see all those Southwest [Airlines] planes parked there."
US Airways laid the groundwork for its restructuring in the summer of 2001, after federal regulators rejected its proposed merger with United. Facing a bleak future, US Airways began implementing a plan to refocus its hubs and replace large jets with more efficient regional jets.
The Sept. 11 terrorist attacks threw those goals into disarray, forcing then Chairman Stephen M. Wolf to accelerate plans to shrink the airline's fleet of 407 planes and staff of more than 46,000.
A US Airways spokesman said the airline flies 279 planes today and employs just under 30,000, not including employees at its regional affiliates.
By the time Siegel took over as CEO in March 2002, it was increasingly clear that the airline wouldn't be able to negotiate new union contracts and restructure its debt fast enough to avoid bankruptcy. The company filed for bankruptcy protection in August, with Siegel pledging to bring it out of Chapter 11 by March 31.
Many saw that goal as ambitious and chalked it up to youthful arrogance. The 41-year-old Siegel seemed almost too self-assured to many observers within the company's union ranks.
In a complex bankruptcy, legal experts said, it can often take more than eight months just to get creditors to agree on a new business plan, much less complete a restructuring.
But unlike his counterparts at United, Siegel had already lined up bankruptcy financing and secured preliminary approval for a $900 million federal loan guarantee before heading into Chapter 11. The federal government will get warrants to buy up to 10 percent of the restructured company's shares in exchange for the guarantee.
"I think it's extraordinary the speed with which they moved through the bankruptcy," said Jon Schneider, a lawyer who has worked on several major airline bankruptcies. "I think what all this reflects is that US Airways was far ahead of the curve in terms of having a business plan developed."
Siegel, whose salary and bonus totaled about $1.4 million last year, brought in outside teams of experts to negotiate with labor and vendors, persuading both groups to accept difficult cuts last summer.
Labor leaders were struck by the difference in style between Siegel and his predecessor, Wolf.
People close to the negotiations say the chief executive was often on the job by 7 a.m. and didn't leave until after 11 p.m. He showed up at meetings in casual business attire, drank water out of a bottle and signed memos with the familiar "Dave."
After one meeting with pilots at a Pittsburgh hotel, Siegel hitched a ride back to the airport in the middle seat of a senior pilot's 1968 pickup. For some, it was a welcome change after Wolf, who had been criticized for seeming elitist and out of touch with employees.
"He [Siegel] could well be one of the strongest managers out there right now," said Darryl Jenkins, executive director of George Washington University's Aviation Institute. "He did what was needed and, because of him, I think US Airways will be a very strong competitor."
Labor leaders say they are optimistic, but are waiting to see if management can deliver on promises made in exchange for concessions that some feel went beyond what was needed. Many still harbor bitterness after being forced to give up contract provisions that had been in place for decades.
"They threatened us with liquidation," said Kenia, the Washington-area flight attendant. "We basically had no choice."
After Bronner of the Alabama retirement fund threatened to pull the company's bankruptcy financing last winter, labor leaders were forced to give up another $200 million in pay and benefit concessions to keep the company flying through an extended slump in traffic.
After a tentative deal was struck with flight attendants, Kenia remembers, he received a call from a US Airways director on Christmas Eve. The executive was unhappy about something the union official had written in a newsletter distributed to flight attendants.
"He said, 'We had our foot on your throat and we knew it,'" Kenia recalled. "They pulled from this contract things that had just always bothered them."
Chris Chaimes, a US Airways spokesman, said the company's finances were closely monitored by numerous outside financial interests, and all determined the cuts were necessary.
"As painful as they have been, they have been critical to our being able to pull this off," Chaimes said.
The pilots union, which will get 19 percent of the reorganized company's class A shares, remains tentative about Siegel's management team. More than 1,800, or 30 percent, of the union's members have been laid off since the airline's troubles began. Many hope to get jobs flying the new regional jets the company has pledged to buy.
"What it's going to take is for the management team to deliver on their end of it and convince people that their investment [in the company] was worthwhile," said Pollock, of the pilots union.
Others expressed relief that the reorganization is coming to an end, but still blanch at the thought of what they gave up.
"In 2008, we'll be making less than we were before Sept. 11," said Tina Perry, president of the Communications Workers of America Local 13301, which represents the airline's passenger services employees. "So there's really not a lot to look forward to there."