=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2004/09= /14/BUGQ08OAVE1.DTL --------------------------------------------------------------------- Tuesday, September 14, 2004 (SF Chronicle) Troubled airline still flies, but how long? Kathleen Pender An old joke says US Airways, formed by the merger of Mohawk and Allegheny airlines, should have been named Mo' Agony. That is exactly what the airline's investors and employees must be feeli= ng since it filed Chapter 11 bankruptcy papers on Sunday for the second time in two years. The filing should be a wake-up call for investors and employees of other teetering airlines. Bankruptcy is not always a way station on the road to recovery. Sometimes it's a final resting place. Although US Airways says it expects to have a reorganization in place by year end, most analysts give it slim odds of re-emerging from bankruptcy. Analyst Ray Neidl of Calyon Securities gives US Airways less than a 50-50 chance of surviving. Ron Kuhlmann, vice president of Unisys R2A Transportation and Management Consultants, says, "I think the chances they go away eventually are very good." Only one major airline, Continental, has emerged from Chapter 11 twice. Based in Arlington, Va., US Airways is the second-largest carrier in markets east of the Mississippi. A liquidation of the airline would have little direct impact on the Bay Area. It has only 11 flights a day out of San Francisco International -- mainly to Pittsburgh, Philadelphia, Baltimore and Charlotte, N.C. If it dropped those routes, other airlines would probably pick them up, says SFO spokesman Mike McCarron. United Airlines, by comparison, says it has 152 departures per day out of SFO. Liquidation of US Airways would not help United much because the two airlines don't compete on many routes. It could hurt United somewhat because the two airlines have a code- sharing agreement that lets them sell seats on each other's flights. "It would effectively reduce salable capacity in places where they code share," Kuhlmann says. Customers of United and US Airways can put their feet up in both airline= s' airport lounges and use their frequent-flier miles to book free flights on both airlines, space permitting. United spokeswoman Jean Medina would not say how her airline would be affected if US Airways were to go under. "Certainly, our agreement with them is an important one," she says, "but it would not be appropriate for us to speculate on US Airways' financial operations or outlook." If US Air were to dissolve, it could have a psychological impact on the employees of other struggling airlines such as United, which is also in Chapter 11, and Delta, which could be there soon. "It could make employees more conscious about what could happen to them," says analyst Neidl. It could also have an impact on investors in legacy carriers -- the airlines created before deregulation that tend to have higher costs than their discount rivals. "Not only in the U.S. but around the world there are carriers, mostly legacy carriers, that are destroying capital and not creating any return on investment, and there are carriers that are returning money on their investment," says Kuhlman. "Is this a wake-up call to those people who have assets in the legacy carriers who are going to say, 'This is a slippery slope; let's get out while we have something that is worth selling?' " The biggest investor in US Airways is the Retirement Systems of Alabama, the pension fund for that state's public employees. After US Airways filed for bankruptcy the first time, in August 2002, the Alabama pension fund invested $240 million for a 37.5 percent stake in the newly reorganized airline. It beat a competing $200 million bid for the same stake from Texas Pacif= ic Group, a private investment firm with offices in Fort Worth, Texas, and San Francisco. The chief executive of the pension fund, David Bronner, became chairman = of the airline. The fund also got to select a majority of US Airways' directors. Bronner has said he wanted to use the airline to create jobs and promote tourism in Alabama. He tried to bring aircraft maintenance to the state, over the objections of US Airways mechanics. With the latest bankruptcy filing, the Alabama fund, which has $25 billi= on in assets, could lose all or most of its US Airways investment. Typically when a company files for bankruptcy, its existing shareholders, who get what's left after all creditors have been paid, get nothing. If the company reorganizes, its lenders generally give up some of the money they are owed in exchange for stock in the reorganized company. The company also may sell stock in the reorganized company to new investors. These new shares essentially replace the old shares, which become worthless. Bronner has not ruled out the possibility that the Alabama fund could ma= ke an additional investment in US Airways. Abbott Leban, an attorney with Grant & Eisenhofer who consults with publ= ic pension funds, says it is not unusual to see them making private-equity investments that may have some collateral benefit to the state. Nor is it unusual to see them investing in distressed, even bankrupt, companies. But "it is unusual to see a retirement system acting as the financier of= a company in bankruptcy to get them out of bankruptcy, which is precisely what (the Alabama fund) did." Richard Koppes, a lawyer with Jones Day, agrees that the investment was "one of a kind. It raises a lot of fiduciary issues. I don't know where the law would go with it because it is so unique." The fourth-largest stockholder of US Airways, with a 1.6 percent stake, = is Farallon Capital Management of San Francisco. In August, 2003 an investment group led by Farallon, headed by Thomas Steyer, agreed to buy about 5 million shares of US Airways stock for $7.34 per share, before stock in the reorganized airline began trading publicly. The group included Goldman Sachs, which took $7 million of the $35 milli= on private placement. The stock closed at $1.02 Monday, down 44 cents. As of June 30, Farallon owned about 830,000 shares, after selling about 1 million shares during the second quarter. Farallon declined to comment. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@xxxxxxxxxxxxxxxx --------------------------------------------------= -------------------- Copyright 2004 SF Chronicle