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March
19, 2003 Perry
Hayes US
Airways MEC President Association
of Flight Attendants One
Thorn Run Center 1187
Thorn Run Road, Suite 320 Coraopolis,
PA 15108 Dear
Mr. Hayes, On behalf of the
Association of Flight Attendants (AFA) US Airways MEC, Eclat Consulting has
reviewed US Airways’ Plan of Reorganization (POR) to evaluate the potential
returns associated with either a Profit Sharing Plan (PSS) or an equity stake
in the Company. After review of the
company’s projections and corporate valuation it is the opinion of our firm
that the best interests of the Flight Attendants are served by accepting an
equity stake in US Airways. Profit
Sharing Under the proposed
profit sharing plan, the Flight Attendants would receive 1.31% of the
available pre-tax profit. This number
is derived by taking the total percentage available to all employees, fifteen
percent (15%), and multiplying it by the Flight Attendant portion, 8.7%. This 8.7% share figure is calculated by
using the total amount of concessions made by all employees, including
management, in July for a 6.5 year term ($871 million), and dividing that
figure by the total amount given specifically by the Flight Attendant group
($75.8 million) over the same period of time. Thus, by applying this
1.31% to the pre-tax profit projections provided under the plan of reorganization,
the total amount received by the Flight Attendants would be approximately $30
million over the next six (6) years.
This number is then discounted back to 2003 dollars so that a
meaningful comparison can be made to the equity plan. When a discount factor of ten-percent
(10%) is applied the profit sharing plan is anticipated to yield an
equivalent of $23 million in today’s dollars. Under a second round
profit sharing the employees will receive fifty-percent (50%) of any monies
US Airways receives in excess of a 7% pre-tax margin (not to exceed a $100
million cap). This portion does not
require an either/or decision, but rather was negotiated to occur
automatically. Under the current projections however, the company is not
anticipated to exceed this 7% hurdle and therefore this provision is not
currently expected to yield any returns.
Should US Airways have a pre-tax profit in excess of 7% the Flight
Attendants would receive approximately 10% of the money available to all
employees. As of yet an exact percent
figure has not yet been provided by the company. It should be noted that
the profit sharing numbers are an estimate only and depend entirely on the
actual profits of US Airways. For
example, if in any year the company fails to make a pre-tax profit the Flight
Attendants will receive no cash distribution under this plan – the exact
scenario predicted for 2003.
Conversely however, if US Airways was perform better than anticipated
this number would rise proportionately.
That being said, it is the opinion of Eclat that the projections
presented by US Airways in the Plan of Reorganization are reasonable and
serve as a good proxy for what lies ahead over the next several years. Equity
Analysis An equity analysis of a
company emerging from bankruptcy is by definition less robust than a profit
sharing examination. This is due to
the fact that such a valuation is subject to the whims and undulations of the
public markets. Specifically this
means that even though US Airways might be performing well financially, the
markets may view the company’s prospects as weak and thus not “fairly” value
the price of the equity. In this
circumstance the problem becomes even more acute as the stock of the
reorganized company is not currently being traded. In other words there is no guarantee as to how the markets will
view a restructured US Airways. As a result, the Debtors
(or US Airways) hired Seabury Securities to prepare a valuation analysis of
the likely range of equity values that may occur upon emergence from
bankruptcy. Seabury has predicted a
range of $400 million to $670 million with a midpoint of approximately $535
million. A similar, and independent
evaluation made available to AFA also concluded that Seabury’s estimates fell
within a reasonable range. Such estimates fall in
line with the current equity values found in the market today (see Appendix
1). Comparing US Airways to other
similar firms trading in the market is a good benchmark. In other words, it is unlikely (but not
impossible) to see a network airline trading at values far in excess of their
competitors. The reason for this is
several-fold. One reason is that the
market tends to value companies in the same industry in a similar
fashion. This is because many of the
same factors effect all in approximately the same way. For example, when fuel prices rise almost
all airlines are negatively impacted.
The result is that often entire industries can languish under lower
valuations even though few and select companies might be performing
well. This is certainly the case with
the airline industry. The only
exceptions are Southwest and JetBlue Airlines which seem to have convinced
investors that they should not be lumped in with other passenger carriers. Although the airline
industry is currently struggling, it is unlikely that this will continue over
the next several years. Over the past
decades the industry has displayed a cyclical nature and a tendency to
rebound strongly after some difficult periods. This is not coincidental and will probably be the case again as
many structural changes are being made now so that the companies will prosper
in the future. The result should be
much higher equity valuations going forward.
Most profitable
companies trade at what is called a “multiple”. This means that the market tries to anticipate future earnings
based on the current situation and therefore gives a company a higher value
than the immediate financial situation indicates. For example, if a company were to have earnings in any one year
of $100 million, the stock market might place a multiple of around 7.0
(generally appropriate for airlines) on this amount. In this example, the result would be a
company with an equity valuation of $700 million. The reason for this explanation is that the airline industry is
current not receiving any multiple at all.
In fact in most instances (Southwest excluded) the opposite is
occurring and a discount is being applied.
Using the previous example, this means that the $100 million company
is being traded at a value of around $50 million. The valuations available
to AFA have such a discount applied.
This is both reasonable and correct since the valuation should reflect
the current mood of the market and the very risky nature of an airline emerging
from bankruptcy. In the future, once
the stock has traded for a while and US Airways delivers on its cash flow
projections, the company should once again receive a multiple. This multiple will add volatility and
considerably more value to shareholders receiving stock in this poor
environment. In other words, by
receiving stock now there is a far greater upside potential (due to the
multiple) than with profit sharing. Eclat has analyzed both
the amount of value the current stock would yield and given a hypothetical
example of the types of returns the Flight Attendants would receive if US
Airways achieves the types of results they are projecting. The potential Flight Attendant portion of
the reorganized company is 2.2% (or 1,679,700 shares of the 76,350,000 shares
available). If the company were to be valued at approximately $700 million
(an approximation based on the analysis of Seabury, and Eclat) this equates
to Flight Attendants receiving stock currently valued at approximately $15.4
million. However, as described above
this amount has the potential to rise considerably and at a rate far in
excess of the profit sharing plan. To this end, it is
conceivable that in several years US Airways could be at equity values
approaching $3.0 Billion. In that
circumstance the same 2.2% would be valued at approximately $66 million. Considering this equity will vest in four
(4) periods, each of 25% (first 25% 60 days following emergence; second 25%
effective 1/1/04; third 25% effective 1/1/05; and fourth 25% effective
1/1/06), the individual Flight Attendant will have total control over their
own risk tolerance and be able to make personal decisions as to how quickly
they need the corresponding cash. As a result of the
analysis conducted by Eclat and a review of the work submitted by other
firms, it appears the strategy that offers the most upside and potential
reward for the Flight Attendants is the stock plan. Sincerely,
Bill
Swelbar Managing
Director
Russell
Wodiska Senior Consultant |
