KAREN WALKER / WASHINGTON DC
Airline enters bankruptcy protection as US Airways leaves Chapter 11 and American Airlines escapes with last-minute deal
The air transport industry crisis claimed its fourth North American victim last week when Air Canada filed for bankruptcy protection, but American Airlines managed to narrowly escape the same fate.
The Canadian carrier filed for bankruptcy protection on 1 April under Canada's Companies Creditors Arrangement Act (CCAA), the equivalent of US Chapter 11, joining fellow founding Star Alliance partner United Airlines, which has been operating under Chapter 11 since December, and Hawaiian Airlines, which filed a week earlier.
On 31 March, just one day before Air Canada's filing, US Airways emerged from Chapter 11 less than eight months after entering bankruptcy protection. On emerging, US Airways closed financing deals worth $1.24 billion, including $1 billion in private loans of which $900 million is guaranteed by the US government. The restructured carrier is expected soon to announce an order for up to 200 regional jets.
US Airways' Chapter 11 success story has been monitored with envy by rival carriers similarly suffering the impact of a prolonged recession, terrorism and war in Iraq. From within the protection of Chapter 11, US Airways has been able to force its employee groups, lessors and creditors to take cuts that will save the carrier $1.9 billion annually. Company debt is reduced to $8 billion from $10.7 billion and it has the boost of new liquidity.
Air Canada chief executive Robert Milton, in explaining his decision to file for bankruptcy protection, says: "My idea is to be on a par with our neighbours down south. There is a strong statement of US government support, such as with US Airways."
Like US Airways, Air Canada intends regional jets to play a key role in its restructuring plan. Milton says the airline will get rid of its Boeing 747-400s, Boeing 737-200s and BAe 146s, but grow its regional jet fleet, adding more 50-seaters and introducing 90-seaters. The airline has 35 50-seat Bombardier CRJs.
Air Canada's main funding through bankruptcy comes from a $700 million debtor-in-possession (DIP) facility provided by lessor GE Capital Canada.
Oneworld's American Airlines, meanwhile, was on the brink of filing for Chapter 11 last week when eleventh-hour concession agreements with its employee groups, including its pilot and flight attendant unions, provided American with the $1.8 billion annual savings in labour costs it sought.
American is "not out of the woods entirely", analyst JP Morgan points out, but "now enjoys the relative luxury of time". Common consensus on Wall Street is that the labour cost cuts, combined with the likelihood of government aid for US carriers because of the war, will give American about a year of extra breathing space, although Bear Stearns stresses that American continues to burn "dangerous amounts of cash".
American, having secured critical labour cost cuts, has turned up the heat on its non-company stakeholders, warning it "absolutely must secure meaningful concessions from vendors, lessors and suppliers".
The pressure on lessors to restructure payments has become acute as one after another airline has toppled. GE Capital Aviation Services (GECAS), for instance, has Air Canada, American, United and US Airways among its top customers. GECAS has managed to keep almost all of its 1,161 aircraft active, but other lessors have repossessed aircraft or are in legal disputes with their cash-strapped customers. US cargo operator Atlas Air, for instance, has been forced to return a Boeing 747 freighter to one of its lessors.
The carrier says it continues to negotiate with the lessor despite the fact that the lessor also has launched legal action against Atlas. Hawaiian, meanwhile, is embroiled in an angry dispute with Boeing Capital and blames lessors for pushing it into Chapter 11.
United's pilots have reached a tentative agreement on a new, cheaper contract that also increases productivity. In United's case however, the jury remains out on whether Chapter 11 can save the day.
Rating agency Fitch warns the deepening revenue crisis will make reorganising difficult. "United clearly has a need for fresh cash to avoid a liquidity crisis later in the year," says Fitch.
So far, there are few signs of anyone willing to step in and provide that extra financing. United parent UAL was delisted from the New York stock exchange last week after more than 30 years of trading. Some analysts have raised chances of United being liquidated to 70%.
Source: Flight International
