This article from NYTimes.com has been sent to you by psa188@juno.com. Bankruptcy Move Jolts Confidence in Large Airlines August 13, 2002 By EDWARD WONG US Airways flew smoothly yesterday through its first 24 hours of operating under bankruptcy court protection. But the airline industry hit one of its roughest days since the Sept. 11 attacks, with stocks plummeting and some passengers wondering how travel would be affected by the carrier's reorganization. Investors seemed to focus on the prospect that other carriers - especially the beleaguered United Airlines - would also file for bankruptcy. Analysts, however, said that the restructuring of US Airways was likely to strengthen the industry by forcing widespread cost-cutting and a reduction in capacity. Shares of UAL, the parent company of United, fell almost 27 percent, to $3.80, leading a severe downswing in the stocks of the biggest carriers. Many of those stocks ended the day at their lowest point in years. Airlines have a mixed record of surviving bankruptcy filings, but US Airways, which sought Chapter 11 protection on Sunday, has a number of factors working in its favor, experts said. Corporate travel managers said yesterday that they had seen no rush to cancel trips on US Airways, but added that clients were asking about the future of the airline, the nation's sixth-largest carrier. Some travelers seemed unsure whether to keep booking flights on the airline or to switch to other carriers. Others said it was all business as usual. US Airways tried to reassure customers, saying that it planned to keep serving almost all its destinations, although the frequency of flights on many routes will be curtailed and some flights will be rerouted through different hubs. The airline won approval yesterday from a bankruptcy court judge in Alexandria, Va., to receive $75 million of $500 million in financing it had lined up. It operated nearly 3,800 flights yesterday, the same daily level as last week. But that volume will decline as US Airways rolls out its restructuring plan. The company said it hoped to complete the plan and exit bankruptcy protection by the first quarter of 2003. Under terms of its financing arrangements, one of the largest shareholders then will be the Texas Pacific Group, a private equity firm that led the reorganization of both Continental Airlines and America West Airlines almost a decade ago. If it successfully revamps, US Airways is also likely to get a $900 million loan guarantee it has requested from the government. "Our operations at the current time are normal; I'm not going to tell you what's going to happen in the future yet," said Chris Chiames, the airline's senior vice president for corporate affairs. "Our intention is to strengthen our hubs, focus on profitable flying and find ways to make the things that aren't profitable profitable." The company took another step yesterday toward trimming its labor costs by presenting a proposal for concessions to the International Association of Machinists, which represents US Airways' 5,500 fleet service workers. The union, which also represents 6,800 mechanics at the carrier, said both of those groups of workers would vote on concessions before the end of the month. US Airways has already reached agreements with its pilots and flight attendants for concessions that would save about $550 million a year. It is that kind of cost-cutting during bankruptcy, analysts said, that will not only help salvage US Airways, but the industry as a whole. The major carriers lost $1.4 billion last quarter and $11 billion last year. Analysts argue that the airlines are operating with too many seats, high fixed costs - especially those stemming from generous wages and work rules - and a broken fare structure. By bringing down its costs, US Airways will put competitive pressure on other carriers to do the same and give them more leverage in negotiations with their unions, analysts said. Cutting back its capacity is likely to mean more revenue for competitors, nudging them toward profitability. And US Airways could lower its costs enough to make room to experiment with a simplified fare structure. "Any time in this business where you can have any cost advantage over anyone else, you can use it to your advantage and your rivals' disadvantage," said Darryl Jenkins, director of the Aviation Institute at George Washington University. "This will put a lot of pressure on the other airlines to change their operations or their labor contracts to compete with US Airways." Despite analysts' confidence that the carriers' long-term health might actually improve, investors fled the airline industry yesterday, fearful that a wave of bankruptcy filings would follow that of US Airways. Its stock, which has lost 87 percent of its value the last year, was suspended before the start of trading yesterday. Shares of AMR, the parent company of American Airlines, dropped 13 percent; Continental Airlines was down 10 percent; Northwest Airlines fell 7 percent; and Delta Air Lines declined 4 percent. "The market seems to be embracing a domino theory," said Sam Buttrick, an analyst at UBS Warburg. "That is at odds with basic supply- and-demand fundamentals. Companies in bankruptcy shrink, and each successive reduction in industry capacity enhances the probability of financial returns. From our vantage point, each successive bankruptcy makes the next one less likely." Analysts said that if any carrier followed US Airways into Chapter 11, it would be United, which sought to buy US Airways until the Justice Department blocked the deal last year. United lost $341 million in the second quarter, more than any of its rivals, and $2.1 billion last year, an industry record. It has $2.7 billion in cash and is using up less than $1 million a day, but it is burdened with debt and expects to spend large sums to cover aircraft essentials and operating losses. Like US Airways, United applied for loan guarantees from the federal government, after Congress set up a $10 billion program for that purpose last fall. Last month, the Air Transportation Stabilization Board, which administers the program, approved $900 million in backing for $1 billion in private loans to US Airways, provided that the airline obtain significant cuts and enhance its proposal to give the government an ownership stake. On Sunday night, after US Airways filed for bankruptcy protection, the board reiterated its willingness to issue the loan guarantee as long as those conditions were met. United has asked for $1.8 billion of backing on a $2 billion private loan, but it has failed to win concessions from its labor groups. United's pilots' union is the only one so far to agree to immediate pay cuts, and even that pledge is dependent on other unions' reaching similar agreements. Negotiations are complicated by the fact that employees own 55 percent of United. "We've made it very clear that United management should not expect further cuts or dig deeper into our members' pockets," said Joe Tiberi, a spokesman for the machinists' union, which represents 35,000 workers at United. Even though US Airways' restructuring in bankruptcy court is likely to speed the cuts needed to satisfy the government, a United spokesman said yesterday that the filing would not necessarily be a template for its own turnaround efforts. "The fact that US Airways has filed for bankruptcy doesn't change anything at United Airlines," said the spokesman, Joe Hopkins. "We're pursuing a loan guarantee and concessions from our unions." But if the unions continue to resist, analysts said, United might have no choice but to file for bankruptcy protection. Indeed, the government may have narrowed United's options by demonstrating that it would not act to prevent a carrier from entering bankruptcy protection, said Michael E. Levine, a former airline executive who teaches about government regulation at the Yale Law School. "The most important message here is we don't care if you're going bankrupt," Mr. Levine said. "All that matters to us is that you have a credible plan." What seemed to matter most to travelers yesterday was whether US Airways could be relied on. Some passengers on a flight into LaGuardia Airport from Rochester discussed whether to switch to JetBlue, which would mean flying into Kennedy Airport. Other travelers at LaGuardia appeared more blasé. "I think as long as they keep flying, it's not going to be a problem," said David Tomick, an executive at SpectraSite, a company based in North Carolina that owns and leases cellphone towers. "But I think if they go out of business, you'll see rates on other airlines double and triple." US Airways has begun a campaign to bolster confidence. It is taking out full-page ads in big newspapers and sending e-mail messaes to members of its frequent-flier program, saying that the program will not be affected and that partner marketing agreements, like those with credit card issuers, will be honored. But one traveler, Don Allen of North Carolina, said with relief that he had recently bought four tickets with 250,000 frequent-flier miles, because he had been prescient enough to see that US Airways was moving toward bankruptcy. http://www.nytimes.com/2002/08/13/business/13AIR.html?ex=1030243992&ei=1&en=ce22f6dc158b8a71 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company