The Airline Pilots’ Association‘s investment bankers at US Airways Group Inc. warned yesterday that the carrier could fail in the near future and is highly likely to file for chapter 11 bankruptcy protection by mid-September without substantial cost cuts.
Such a bankruptcy filing would be known as a “chapter 22” because US Air is already operating under a structure adopted under a reorganization plan approved in a previous chapter 11 case in 2002-03.
Arlington, Va.-based US Airways said it concurs with the report’s conclusion that it is in the best interest of the company and its labor unions to reach consensual agreements quickly that will reduce expenses and help it implement its turnaround plan.
Although US Air is not far from its previous chapter 11 reorganization, the company has not been profitable because the domestic flight market is now controlled by discount airlines that have low costs and low fares. Add to that the recent spike in fuel prices and, before you know it, US Air posted a net loss of $143 million during the first part of its fiscal year.
Frankly, I do not understand how US Air can avoid going into the tank even with union concessions. It has a $130 million pension-plan contribution due on Sept. 15 that will consume liquidity if it is made. Its regional-jet financing arrangements with two manufacturers and General Electric Co. mature on Sept. 30 in the absence of a turnaround, and it is on the verge of defaulting on Sept. 30 on the terms of a federally guaranteed loan that provided the company with a portion of its exit financing out of Chapter 11 in 2003.
As Professor Ribstein has insightfully noted on several occasions, the market needs to be allowed to put at least one of these financially-strapped airlines out of its misery.