US Airways Files for Bankruptcy Protection
Va.-Based Airline Says Service Won't Be Cut

By Keith L. Alexander
Washington Post Staff Writer
Monday, August 12, 2002; Page A01

US Airways filed for bankruptcy yesterday, saying it needs the protection of the court to reorganize its $7.83 billion in debt and reduce its operating costs.

David N. Siegel, president and chief executive, said the Arlington-based airline plans no cuts in service. "It will be business as usual for our customers," Siegel said.

The airline, which listed $7.8 billion in assets in its court filing, has lined up $500 million in financing so it can keep operating through the bankruptcy process. It hopes to emerge as a restructured airline with a lighter debt load and lower expenses as early as the first quarter of next year.

US Airways said the aftermath of the Sept. 11 terrorist attacks were at the heart of its financial woes, pointing to the three-week closure of Reagan National Airport, where the airline is the dominant carrier, as well as higher security costs and the recession-induced cutback in travel. It is the first major airline to file for bankruptcy since the attacks, although most airlines are struggling to regain profitability and three small carriers -- Vanguard, Midway and Sun Country -- have filed for bankruptcy.

The first hearing in the Chapter 11 case is scheduled for today in Alexandria, before Judge Robert G. Mayer of the U.S. Bankruptcy Court for the Eastern District of Virginia.

The filing comes as little surprise. US Airways had long been plagued with the airline industry's highest labor costs. Recently, the carrier has lost valuable market share to competitors such as Southwest Airlines, AirTran and Delta Air Lines, which have increased their presence in the Northeast.

In June, US Airways alerted creditors that it was deferring lease payments on its oldest and unused jets. It is now seeking creditors or other airlines to assume those leases.

Immediately after the Sept. 11 attacks, US Airways reduced its operations by 20 percent and laid off more than 11,000 workers. Siegel, who joined the airline in March, warned in May that the airline might be forced to go into bankruptcy and immediately began pushing for more than $1.2 billion in concessions from employees and creditors.

Siegel said the airline has had the "least progress" in obtaining concessions from its creditors, one reason why it opted to file for bankruptcy now. "We said all along that voluntary was the preferred path and we had a limited amount of time in which to complete it. I've been clear we were running out of time to do this on a voluntary basis," he said.

Last week, the airline was successful in obtaining $570 million in annual pay cuts from its pilots, flight attendants and salaried employees in exchange for an equity stake in the carrier. The airline has had less success with its machinists and its reservation, gate and ticket agents, though early yesterday the machinists union said it would present the airline's latest proposal to its 13,000 members for a vote later this month. The airline is seeking $222 million a year in concessions from the machinists.

"Our members will not give up on US Airways, and neither should anyone else," said Robert Roach Jr., general vice president of the airline's machinists union. "We believe US Airways can successfully restructure while it continues to serve the traveling public and provide employment for our members."

Siegel stopped short of promising no further job reductions. If US Airways cannot get a third party to assume some of its leases, Siegel said, "we are anticipating some adjustments to the size of the airline."

Siegel said the airline would not attempt to get the court to nullify the already-negotiated labor concession packages and if the airline had to seek additional pay or job cuts from those employees who had already ratified agreements, the airline would consult with the unions.

Nearly two years ago, US Airways -- led by Chairman Stephen M. Wolf and then-chief executive Rakesh Gangwal -- tried to sell the carrier to United Airlines. Although they argued that the airline could not survive on its own in the long term, the executives were not able to persuade federal antitrust regulators to approve the deal. In response, US Airways executives downsized the airline by eliminating unprofitable routes, replacing larger jets with smaller, 60-passenger regional planes and seeking pay cuts from employees.

Siegel described the airline's plan as a "prepackaged" bankruptcy and said he hoped it would be completed on a "fast-track" basis. A group led by Credit Suisse First Boston and Bank of America will provide the $500 million bankruptcy financing. Meanwhile, Texas Pacific Group, a Texas-based private equity firm, has agreed to invest $200 million in US Airways stock once the company emerges from bankruptcy.

It is likely that current stockholders, however, will lose all their investment. US Airways shares closed at $2.45 Friday.

US Airways hasn't had a profitable period since the second quarter of 2000; it lost nearly $2 billion in 2001. It had $600 million in cash at the end of the second quarter.

Last month, the federal government tentatively awarded the airline $900 million in loan guarantees if it could restructure to return to profitability, including securing concessions from its employees, creditors and suppliers. Siegel said the government was aware that the airline could possibly file for bankruptcy protection when it applied for the loan guarantees in June. A spokeswoman for the Air Transportation Stabilization Board, which oversees the loan guarantees, said US Airways' conditional approval "remains in effect" during the airline's bankruptcy. The board would review the airline's reorganization plan to determine if it meets its original conditions.

US Airways executives also said the airline's recent code-sharing alliance with United Airlines was also expected to remain in effect. Last month, the two financially struggling carriers announced a deal that would allow their passengers to book a wider range of trips and earn and redeem frequent-flier miles on both carriers' flights. A US Airways spokeswoman said the alliance was still expected to begin in the fall after the Transportation Department completes its review.

As part of its $200 million investment, the Texas Pacific Group -- pending final agreement and court approval -- would own about 38 percent of the airline post-bankruptcy.

The Texas Pacific Group is a $10 billion buyout and private equity firm, lead by financier David Bonderman. Last month, it was part of a team that paid $2.26 billion to buy the Burger King restaurant chain from a British liquor company.

Texas Pacific assumed 59 percent control of America West Airlines after it invested in the airline to help it emerge from bankruptcy in 1994. Also in the early 1990s, the Texas firm provided financing to Continental Airlines, Siegel's former employer, when it emerged from bankruptcy.

Helane Becker, a Buckingham Research Group airline analyst, said the prearranged financial backing makes it "likely" US Airways could emerge in early 2003 if it is able to solve the lease problem.