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Dear Council 41 Member,
During the summer 2002 restructuring negotiations AFA was given a Profit sharing plan in return for our concessions. When US Airways filed for bankruptcy in August 2002 the Company offered AFA a choice between the profit sharing plan outlined in the summer agreement or an equity share in the Company once they emerged from bankruptcy.
The MEC elected to hire Eclat Consultants to evaluate both plans and make a recommendation to the MEC as to which plan would be more beneficial. Eclat's recommendation was to opt for the equity plan. While this looks like an obvious decision I wanted them to make a detailed analysis of both plans for you and me. Below you will see what Eclat put together for your review.
The next decision of the MEC is to decide how the equity will be distributed among the flight attendants.
SICK CLAIMS
I was notified on Wednesday morning that the Company will implement their version of the "new" sick policy effective April 1, 2003. This new policy is not AFA's understanding during the December 2002 meetings with the Company. We can not explain their version of this new policy. YOU WILL NEED TO DISCUSS THIS WITH YOUR SUPERVISOR. AFA will file a grievance on this issue. I realize this is a very difficult and frustrating situation. I will let you know more as soon as I possibly can.
Sincerely,
Bob Kenia
____________________________________________________________________
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
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Bob Kenia, LEC President
703-690-6859 office
703-690-9350 Fax
bkenia@afasuairways.org
Alin Boswell, LEC VP
703-212-8090 office
703-212-8089 fax
alin@afausairways.org
Katie Whitney, LEC Secretary
703-719-6940 office
703-719-6935 fax
kwhitney@afausiarways.org
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