US Airways Accepts $240 Million Investment

By Keith L. Alexander and Sara Kehaulani Goo
Washington Post Staff Writers
Friday, September 27, 2002; Page E01

US Airways said yesterday it had accepted an offer by the Retirement Systems of Alabama to invest $240 million in the Arlington-based carrier in exchange for a 37.5 percent stake after the airline emerges from bankruptcy.

US Airways executives originally favored a bid by Texas Pacific Group, a private equity firm whose partners were close to US Airways chief executive David N. Siegel. But the carrier said at a bankruptcy hearing yesterday that it had accepted the offer by the pension fund led by David G. Bronner -- a manager known for his outspoken and unconventional style -- because it was $40 million higher.

In addition, the Alabama group, which had been providing financing for several aircraft, agreed to lower the lease payments US Airways must make. The pension fund also excluded the $7 million to $10 million in fees that Texas Pacific would have collected as part of its deal and agreed to provide $500 million in interim financing.

U.S. Bankruptcy Court Judge Stephen S. Mitchell in Alexandria gave interim approval to the fund's offer, which won praise from both unions and creditors.

Under the plan, Retirement Systems would get five of the 13 seats on the board, and creditors would get 8.5 to 11 percent of the equity after the company emerges from bankruptcy.

Other bidders now have 50 days to submit offers. US Airways expects to make a final decision by late December and then submit its reorganization plan. It plans to emerge from bankruptcy protection by the first quarter of 2003.

US Airways would pay Texas Pacific $2.5 million to cover fees associated with the earlier negotiations. Texas Pacific said in a statement that it will watch the reorganization "with interest" and that it believes US Airways has done "an excellent job in addressing the challenges" it faces.

According to the airline, the Retirement Systems of Alabama made its offer Sept. 18. The US Airways board met to consider the proposal last weekend and gave its approval two days ago. US Airways initially had criticized the offer, and Lawrence E. Tiftken, attorney for the creditors, said he and airline executives were initially skeptical until the group agreed to provide the $500 million in financing.

The pension fund could be a far different investor than Texas Pacific, which has a strong reputation in the airline industry because of its role in the turnaround of Continental Airlines Inc.

Bronner is known in pension fund circles as an unconventional businessman and a fierce promoter of Alabama. In 1990, after the state was criticized for a tournament at a private, all-white country club, Bonner invested Alabama's pension money in a string of public golf courses in a move to improve the state's image.

Other investments included a hotel, a conference center and office buildings in Alabama, 36 television stations and more than 200 small newspapers.

In the pension fund's 2001 annual report, the fund explained how its investments complement each other: Community Newspaper Holdings Inc., a pension fund investment, for example, "now provides approximately $30 million annually in free advertising to promote the state of Alabama."

Through these investments, Bronner grew a small state public pension fund into a $25 billion leveraged-buyout player. "He's our Warren Buffett down here in Alabama," said Mark Berson, director of the Alabama Bureau of Tourism and Travel.

"I know he's got something up his sleeve," Berson said.

Bonner said in an interview that he does have some ideas: "We'd be able to promote [US Airways] with our newspaper and television stations."

He added that he would like to see more flights to Alabama -- but only if it made sense financially. "We'll listen to management. . . . We find strong people to run them and, like a teacher, we talk to them on a quarterly basis," he said.

Bronner added that he recently met US Airways' Siegel and he liked what Siegel was doing to cut costs. He said he views the cyclical airline industry as a good long-term investment.

Bronner, who took over the state's pension fund at age 28, said, "I'm just a hick from Alabama. We see different things," explaining why he would be interested in buying an airline when the industry is doing so poorly.

The retirement system has more than $1 billion invested in airlines, including $400 million in Delta Air Lines. But its 37.5 percent stake in US Airways would be its largest airline stake.

Michael Clowes, editorial director of Pensions & Investments newspaper, said Bronner's style is different from most other pension fund managers. "He's been one of the more innovating pension fund managers in the country," Clowes said. "A lot of people swear at him and a lot of people swear by him. David can be abrasive."

Part of the interim financing provided by the Alabama pension fund will be used for aircraft lease payments and for repayment of earlier loans from Credit Suisse First Boston and Bank of America. The judge said he would take more time to decide whether to allow US Airways to cancel 150 leases because creditors have objected to the plan. Those payments are due Oct. 9.

US Airways is trying to reduce its lease payments by $300 million to meet the terms set by the Air Transportation Stabilization Board. The board has approved a $900 million federal loan guarantee for US Airways if it can meet certain financial conditions.

Within the past several weeks, US Airways has secured about $840 million in wage and benefit concessions from its workers. As a result, the employees will own about 30 percent of the carrier. Yesterday, US Airways named Chris Beebe, head of the pilots union, to its board of directors, and two more union representatives will be added.

Given the increased role of unions in the company, Siegel said US Airways needs a "labor friendly" investor, which he said the fund would be. "As the Alabama agency charged with investing and enhancing the pension funds of thousands of public service employees in Alabama," the group appreciates the need to treat employees fairly, Siegel said.

Lorraine S. McGowen, an attorney with Retirement Systems, said the group has no plans to alter the airline's new labor contracts, an assurance that pleased union leaders.

"This is an extraordinary day and accomplishment," said Richard M. Seltzer, attorney for the pilots union.