Dear Council 70 Flying Partners,

FYI: An Interesting article below the ALERT.

ALERT: Strike/CHAOS Ballot

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Take Care and Fly Safe,

Mollie
Local 70

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Who will gamble on US Airways?

Struggling carrier needs bailout from big investor
TONY MECIA AND STAN CHOE - Staff Writers

After his $360 million investment in US Air soured in the early 1990s, fabled investor Warren Buffett once joked, in reference to Kitty Hawk: "There should have been some capitalist down there shooting Orville."

Over time, airlines have been notoriously poor investments, thanks to serial bankruptcies and lagging stock prices. Lately, high oil prices and fierce fare-cutting by low-fare airlines have propelled the industry to record losses.

It is against that backdrop that US Airways faces its next major challenge: attracting a big investor.

Company officials acknowledge they need hundreds of millions of dollars -- enough to lift them out of bankruptcy court protection and give them a comfortable operating cushion.

Without that cash infusion, the airline probably could not emerge from bankruptcy and would instead be forced to shut down.

US Airways chief executive Bruce Lakefield is staying mum on who might be willing to invest but says he's optimistic.

"People are looking, kicking the tires," said Lakefield, a former investment banker. "There's plenty of money available for the right company with the right economics."

US Airways, Charlotte's dominant carrier, is in bankruptcy court for the second time in two years. About 5,700 of the company's 27,000 workers are based in Charlotte.

This week, the airline heads back to bankruptcy court for hearings in which company lawyers will ask a judge to throw out union contracts, eliminate pensions and sharply cut retiree medical benefits. The carrier says it needs to cut labor and other costs quickly to compete with low-fare airlines, and to have a chance of attracting new capital.

Most analysts, and even some union members, believe the judge will accede to the company's demands. Then, the focus will shift to wooing an investor.

But it might not be an easy sell.

Historically, airlines have had little trouble attracting outside financing. Investors are often drawn by the mirage of big returns -- and the notion of controlling an airline.

"There's no shortage of people who seem willing to invest in this industry because of the romantic appeal," said William Warlick, an airline analyst with Fitch Ratings in Chicago. "There's been no shortage, historically, of people taking inordinate risks."

But Warlick and other analysts suggest that era of easy money might have ended.

No more easy money?

Consider United Airlines. United, the nation's second-largest carrier, has been lingering in bankruptcy court for two years. Despite cutting its labor costs in early 2003, the company has been unable to attract an investor that would allow it to emerge from court protection.

Now, United is turning to its unions again for additional concessions in hopes of developing a business plan that works. High oil costs, industry overcapacity and low fares make such a plan hard to develop.

Compared with US Airways, United is bigger and has better routes, including more international flights that might make it more attractive -- yet no investor has materialized for either airline.

"An outside investor needs to hear something that is very concrete and a clear plan for success going forward," said Russell Wodiska, a vice president with Eclat Consulting, an aviation consulting firm in Reston, Va. "In this environment, it's a hard story to come up with."

Both airlines are seeking equity investors, who would own substantial chunks of the companies after bankruptcy and probably control the board of directors. Their returns on those investments would depend on the airlines' success.

In an apparent nod to the difficulty of attracting such an investor, US Airways lawyers have said in court documents that after achieving labor cuts, it would try to obtain "meaningful" debtor-in-possession financing that would "serve as a bridge to an equity investment."

Debtor-in-possession, or DIP, financing is a loan that gives companies in bankruptcy protection cash to operate. When it filed for Chapter 11 in September, US Airways was unable to obtain DIP financing and is instead living off its available cash.

Although US Airways is proposing to have the lowest labor costs of any old-line carrier, its ability to attract new capital would be greatly enhanced if oil prices fell and at least one of its rivals folded, analysts say.

While analysts regard US Airways as the weakest major carrier, it could benefit from the shutdown of struggling low-fare airlines such as Independence Air, which has depressed US Airways' fares on the East Coast.

Attention from investors

Still, analysts expect plenty of interest from potential investors. Lakefield, the CEO, declined to say how many prospects he's talked with but said he has no concrete pledges to pour in money. There's lots of interest, but "you don't know who's real and who's not real" until the time comes to invest, he said.

Some investors have made money in airlines. Texas Pacific Group invested in Continental Airlines in 1993, cashed out five years later and reaped $700 million, 10 times what it paid.

But those examples are rare.

Who might be willing to take that gamble with US Airways?

Analysts say the top prospects are likely people who already have a financial relationship with the airline. At the top of the list is Retirement Systems of Alabama, the state pension fund that invested $240 million into US Airways in its first bankruptcy and now stands to lose all of that.

While some doubt RSA chief executive David Bronner has the stomach to invest more, Bronner told the Observer he is not ruling that out -- if US Airways has prospects to become profitable.

"If it's in the black, and you see a future, I still am a great believer in it," he said. "Who knows?"

He said it is unclear how much an investor would have to put in to US Airways. The airline's new contract with its pilots union calls for stock distribution to pilots based on a new investment of $250 million.

Other companies with financial ties to US Airways, such as aircraft lessors and credit card companies, could provide the company with short-term cash to keep it afloat until an equity investor arrives. On Friday, the airline said it reached agreement with General Electric Co. on aircraft leasing and financing terms. The deal will provide US Airways with $140 million in short-term liquidity and the deferral of aircraft debt and lease payments due over the next six months.

Last month, Delta Air Lines received a commitment for $500 million in loans from aircraft financier GE Commercial Finance and American Express. The deals helped keep Delta out of bankruptcy court.

In addition, analysts say new investment could come from an outside investor -- much as Bronner's RSA appeared out of the blue last time around. The most likely outside investors are hedge funds, which seek high-risk investment opportunities in pursuit of high returns.

Hedge funds known to be interested in airlines include Texas Pacific Group, which bid for US Airways last time but lost to RSA, and Cerberus Capital Management, which agreed to invest $250 million to propel Air Canada out of bankruptcy court last month. Officials at the funds could not be reached Friday.

Although Air Canada's experience shows that money is available to airlines, analyst Robert Mann says Air Canada is far different from US Airways. Air Canada is that country's largest airline, with lucrative international routes and little domestic competition, he says.

Boyd says he believes US Airways will have a tough time finding a new investor.

But you never know.

Says Warlick, the Fitch analyst: "It sometimes defies logic that institutional investors continue to be interested in an industry like this." 

-- STAFF WRITER KERRY HALL CONTRIBUTED.

-- TONY MECIA: (704) 358-5069; TMECIA@CHARLOTTEOBSERVER.COM