Aviation: an American carrier emerges from Chap 11

A Virginia judge yesterday approved plans for US Airways to come out of administration, called Chapter 11 Protection in the USA.

But in doing so, it will be a much changed airline.

US Airways website is headed "International Airline of the United States of America." A statement on its website refers to "A new look for US Airways and American West." The statement issued in mid August says "when we merge together" this autumn. Together the airlines have a plan: "to create the world's largest low-fare, full-service airline with flights to more than 200 cities world-wide, including coast-to-coast destinations across the U.S., and a multitude of destinations in Canada, Mexico, Central America, the Caribbean, and Europe."

This may be one of those "yeah, right" moments. For justifying investment even to paint the aircraft may be rather tough: for shares in airlines are, at best, volatile now - and prices are not high. So any new issue won't raise a lot of money per share. The cost of re-liverying each aeroplane will be about USD50,000 - and that doesn't include the cost o

f keeping it on the ground for a week.

The famous black livery of US Airways will make way to the lighter colours in part because it will actually save money over time - the aircraft will cool faster and will reflect more heat reducing the cost of cooling both on the ground and in the air.

American West shareholders overwhelmingly voted for the "merger" - "Stockholders holding voting rights of Class B America West stock voted in favour of the merger with the breakout as follows: 85.2 percent voted for the merger, 4.4 percent voted against and 10.4 percent abstained. Stockholders holding voting rights of Class A America West stock voted in favour of the merger, with 100 percent voting for the merger. The result is the merger agreement has received America West stockholder approval with 95.5 percent of total voting shares in favour of the merger."

There is to be some new money: Total new money will be more than USD500 million:The Tudor Group has committed to invest USD65 million. The other equity partners funding the US Airways POR and merger with America West are ACE Aviation Holdings Inc., ($75 million commitment) a Canadian holding company that owns Air Canada, Canada's largest airline with over $7.5 milliard in annual revenues; PAR Investment Partners, L.P., ($100 million commitment) a Boston-based investment firm; Peninsula Investment Partners, L.P., ($50 million commitment) a Virginia-based investment firm; Eastshore Holdings LLC, ($125 million commitment and agreement to provide regional airline services), which is owned by Air Wisconsin Airlines Corp., and its shareholders; and Wellington Management Company, a Boston-based investment management firm ($150 million commitment). The rights offering could provide an additional $150 million of equity financing, says the company.

The Plan of Reorganisation approved by the Court for 10% dividend to be paid to unsecured creditors owed less than USD50,000. All other unsecured creditors "will receive stock in the reorganized company. The value of their recoveries will depend on the value of the shares of stock at emergence, as well as the total amount of allowed claims, including the amounts of disputed claims that have not yet been determined." At the time the Plan was announced, in June 2005, it was said that a mix of injected cash and supplier arrangements would mean that the company would have USD1.5 milliard in cash.

But quite how it intends to square the circle that is sinking so many airlines is unclear: for example, it aims to be the world's biggest "low cost" airline but intends to provide "amenities that include a robust frequent flyer program, airport clubs, assigned seating and First Class cabin service." That doesn't mean that there will be First Class Cabins, although currently both airlines do in fact provide two-tier (first/economy) accommodation.

A joint statement in May 2005 said "The combined airline’s headquarters will be consolidated into America West’s headquarters in Tempe, Ariz. For regulatory purposes, both airlines will operate under separate operating certificates for a transition period of two to three years, keeping flight crew, maintenance and safety procedures for each airline separate. To ensure that the substantial consumer benefits are realised quickly, however, the airlines will work together to co-ordinate schedules, frequent flyer programs and other marketing programs as soon as practical."

So, in essence, economies of scale will be applicable mainly to senior management and customer-facing technology. And by sale of some aircraft and sale and leaseback of others.America West was in trouble in2001, according to a World Airline News report in December that year. The article says that the company offered the federal government up to 10% of the airline to in return for government guaranteeing loans it needed.

America West is unusual in the US: it has more Airbus aircraft than Boeings.

But one of they key underlying factors for the restructuring had fallen apart even before it was approved: the company pinned its operating costs to oil prices in 2005 peaking at USD50 per barrel (it's been 40% more than that for almost 50% of the time since that prediction was made and is showing no signs of material decline) and at an average of USD50 per barrel throughout 2006. That's possible but not many analysts see that figure until well into the year and so it will be difficult for it to be an average.

The "merger is actually a reverse take-over: US Airways will be in the left hand seat even though it's the one currently in administration: shares in US Airways stock will be cancelled and shares of the new company will be distributed to existing America West shareholders, stakeholders of US Airways, and the new equity investors.

Still, United managed to lose almost USD8 milliard during its administration. US Airlines has done rather better than that.