NYT: Lenders and U.S. Tighten Screws on Struggling Airlines

New York Times ^ | December 7, 2004 | MICHELINE MAYNARD

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In the airline industry's dark months after the September 2001 attacks, the federal government, banks, aircraft lenders and others came forward to help, giving the wounded companies plenty of leeway in the face of extraordinary circumstances.

But three years later, the benevolence is gone.

In a form of tough love that is quickly spreading, these same backers are putting the clamps on the still-troubled airlines, particularly those operating under bankruptcy protection. The backers are giving chief executives at United Airlines, US Airways and ATA Airlines their marching orders: enforce strict timetables, conserve cash, reduce spending and eliminate jobs - or else.

"There is simply no patience for the industry not to fix its own house," said Michael Palumbo, the chief financial officer at Delta Air Lines, which barely averted bankruptcy this fall by reaching deals with pilots, lenders and other financial partners.

Executives already have their hands full with stiff competition and high fuel prices. Collectively, airlines are expected to lose $5.5 billion this year alone, on top of the $30 billion lost since 2000.

"The whole world is starting to cave in on them now," said Kevin P. Mitchell, chairman of the Business Travel Coalition, which represents corporate travel groups and business travelers.

Where once the idea of losing an airline was unthinkable, both the government and lenders now seem perfectly willing to let that happen. The mood swing was foretold in June, when a federal loan board turned down an application by United Airlines that the airline had thought was a sure bet. Since then, lenders have sat on their hands, watching the company take a chainsaw to its operations, refusing to commit until the airline's final shape is known.

Aircraft lenders, who did their part after the attacks by loosening the terms of some deals, are tightening up again.

What is different now, experts say, is the growth of markets outside the United States, like Europe and Asia, where new airlines are forming, attracting passengers and expanding, making them far more attractive to lenders and airplane leaseholders.

"The market for aircraft is dramatically better around the world than it was 18 months ago and certainly two years ago," said Henry Hubschman, president of GE Capital Aviation Services, the industry's most powerful aircraft financing company.

About 49.1 percent of planes used by the domestic airlines are leased, rather than owned, according to Back Aviation Solutions, a consulting firm. That gives leaseholders a voice to which the airlines must pay heed.

United Airlines found that out the day after Thanksgiving, when it had to go to court to temporarily stop a group of leaseholders from confiscating 14 big jets. Had the leaseholders been successful, United could have been forced to cancel flights during the busiest travel season of the year.

Lawyers for the group did not comment. United, which won its bid to block the move, said the leaseholders wanted to force the company to pay higher rates than other companies paid.

A judge will consider the issue next week.

But Mr. Hubschman of GE Capital Aviation said, "We can flex our muscles by moving our assets."

His company did just that last month at US Airways, when it struck a deal to take back 25 planes it had financed.

That freed up $140 million for US Airways, which will use it for a fleet of regional jets. But GE Capital Aviation also demanded that US Airways put all of its restructuring plan into place by mid-January and be out of bankruptcy by the end of June, the first time any such timetable had been mapped out.

US Airways is in its second round of bankruptcy protection in two years. And it is warning that it could liquidate next year unless it can make deep cuts in both operations and union contracts; that would be the third such round of concessions for employees.

GE Capital Aviation is not the airline's only overseer. It is operating under strict cash limits set by the federal Air Transportation Stabilization Board, created to oversee $10 billion in loan guarantees that were part of a post-Sept. 11 bailout plan.

By filing for bankruptcy, US Airways defaulted on its $717 million loan balance, which is secured by its cash, airplanes, routes and airport gates.

The board agreed the airline could use its cash. But representatives of the board, along with other lenders, must decide soon whether to extend the arrangement beyond mid-January.

The loan board has a similar cash operating deal with ATA Airlines, the industry's 10th-largest company, which filed for Chapter 11 protection in October. ATA, a low-fare carrier, owes $140 million on its federal loan package.

But as with US Airways, ATA has more to worry about than just the loan board. As it went into bankruptcy, ATA cut a deal to sell its gates in Chicago, New York and Washington to another low-fare company, AirTran.

Under bankruptcy law, however, the court must entertain competing bids. So ATA now faces the prospect that it might be acquired by America West Airlines, which wants all of the airline, or that its gates in Chicago could go to Southwest Airlines, its biggest competitor there. The bids are due by Friday and will be unsealed on Dec. 16.

Until then, the company is in limbo, an uncomfortable position for its chief executive, J. George Mikelsons, who founded ATA as a travel company in Indianapolis more than 30 years ago. In an interview in his office there last week, Mr. Mikelsons, 67, said that he thought airlines would have bounced back long before now.

"What has happened to this industry is unprecedented. Nobody thought it would be this bad for this long," Mr. Mikelsons said. If he loses control of the airline, he said, "I will feel like I sold my child into slavery."

Mr. Mitchell of the Business Travel Coalition said the government, lenders and leaseholders were "backing management farther and father into a corner."

"They're not really running the business, they're playing defense," Mr. Mitchell said.

On the offense, Mr. Hubschman says he wishes he could take more planes back from US Airways and its competitors. His company has found customers for 10 of the former US Airways aircraft, all outside the United States, proof that the company's activism is working to its advantage.

"We have wonderful demand in places around the world," Mr. Hubschman said.

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[jammer]

Where once the idea of losing an airline was unthinkable, both the government and lenders now seem perfectly willing to let that happen. The mood swing was foretold in June,...

Well, we have an industry that is not much more popular than the drug industry being allowed to face the judgement of the "market". Not surprising.

But the mood swing was foretold much earlier than June...say about December of 2001, when this ineffective, bread-and-circuses, "security" boondoggle was emplaced, seemingly designed to put airlines out of business.