MIAMI – Today in Aviation marks 18 years since US Airways (US) entered its first bankruptcy protection. On August 10, 2002, the company filed for Chapter 11 but continued its operations.
At the time, the airline was the first major carrier to do so after 9/11, as reported by CNN. After this tragic event, US suffered a harder financial hit due to the subsequent overall drop-off in travel demand.
Two years later, the carrier filed again for bankruptcy protection. Its second emerging process then was achieved by the merger with America West (HP).
Chapter 11, 2002
Having lost nearly US$2bn during 2001, US Air, as was also known, decided to enter into Chapter 11 protection. At that moment, it was the sixth major airline in the US.
On a Sunday in August 2002, the airline filed the restructuring process into the U.S. Bankruptcy Court for the Eastern District of Virginia.
The Court then approved US$500m in debtor financing from Credit Suisse First Boston and Bank of America. Alongside money, it also granted a series of temporary relief orders.
These included the continuation of the airline’s Dividend Miles frequent flier program and payroll payments. In addition, US had to honor its obligations to other airlines, vendors, and shareholders.
Apart from this, the company also received a US$200m equity investment from the Texas Pacific Group. The later help was granted in exchange of a 38% stake in US Air once it emerged from bankruptcy protection.
Under the approved restructuring, the airline also ended 33 leased aircraft contracts that it was no longer operating.
Other decisions included a 20% pay cut for top management salaries.
On their part, the carrier’s Pilots and Flight Attendants agreed to make some concessions to preserve US Air’s cash.
Regarding staff sacrifices, the company’s CEO, David Siegel said that the airline committed to having a labor-friendly Chapter 11 reorganization in exchange for employees backing.
Thus, the process would honor new ratified agreements and provide labor a voice in the company’s governance.
US Airways Emerges
Before a year after the Chapter 11 filing had passed, the carrier announced its exit for the bankruptcy protection. On March 31, US Airways emerged as the first US major airline to make it through. In the US ranking, it was the seventh major carrier in performance.
In addition, newly approved plans were based on an expected US$1.9bn of annual cost savings. The company was focused on more East Coast and regional jets operations.
In other vital aspects, US Air kept ongoing negotiations with its Pilot union. The negotiations produced a US$800m pension plan spread over the next seven years.
Losers in the Restructuring
However, due to the restructuring process, stockholders were to become the biggest losers.
In the new plan, the airline’s creditors would receive less than 2 cents on the dollar, this based on claims of US$61bn against the company. Alas, under the law, investors would receive nothing unless creditors were fully repaid.
As a result, 100 stockholders called the reorganization unfair. According to them, they would get nothing when management would be given an 8% share in the business.
On its part, Siegel called the ruling an “important milestone.” But, during those hard years for the country, industry experts forecasted more losses.
As a result, just one year later, US Airways filed again for Chapter 11. But that is another story.
Featured image: US Airways A320. Photo: Eddie Maloney from Wikimedia Commons.