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US Air files Chapter 11
Talks with labor unions for $800 million in concessions go nowhere.
September 13, 2004: 9:14 AM EDT

NEW YORK (CNN/Money) - US Airways Group filed for bankruptcy protection Sunday for the second time in two years.

The Chapter 11 filing in the U.S. Bankruptcy Court in Alexandria, Va., came after the airline was unable to obtain $800 million in annual cost cuts from its workers' unions. The airline had warned during talks the concessions were needed to avoid the bankruptcy filing.

"Customers should not notice any changes to flight operations or customer service because of this filing," the airline said in a statement on its Web site. "All bookings will be honored and there are no changes to our ticketing policies."

A spokesman for US Air said Monday that the airline was operating as scheduled before the filing.

Bruce Lakefield, US Airways' president and chief executive, said in a statement released Sunday that failure to obtain concessions heightened the need for the company, the seventh largest airline, to conserve its cash and proceed with its plans to overhaul the business and become a low cost carrier.

US Airways said it needed to cut costs by $1.5 billion in order to make its business to operate more like its discount rivals. The centerpiece of the cost-cutting blueprint, which it had hoped to get voluntarily, was $800 million in concessions from labor unions.

But the airline failed to get another penny from pilots, flight attendants, mechanics and other unions, who yielded nearly $2 billion to help the company out of its first bankruptcy.

"We have made the difficult but necessary decision to complete this process with the help of the court," Lakefield said. A Chapter 11 bankruptcy proceeding gives a company protection from its creditors while it reorganizes its business operations under court supervision.

The airline said its existing marketing and vendor relationships will continue. US Air said it received court permission to continue its dividend miles program.

The filing comes one day after the third anniversary of the Sept. 11, 2001 hijack attacks, which accelerated a cyclical softening of business into the industry's worst-ever financial crisis.

But US Air had been one of the most troubled of the major airlines even before the Sept. 11 terrorist attack. Its plans to be purchased by United Airlines parent UAL Corp. had been blocked by federal antitrust regulators earlier that year. That had left the airline with a difficult challenge to reshape itself and cut costs even before the attacks.

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The attack hit the airline harder than perhaps any other. Its hub at Reagan National Airport in Washington D.C. stayed shut longer than any other airport. Concerns about flying plus security delays at the airport once it re-opened hit its shuttle service, severely limiting its most profitable business carrying passengers between Washington, New York and Boston.

The airline has also faced perhaps the most significant competition from low-fare carriers. Earlier this year Southwest Airlines moved into its hub in Philadelphia, and it has already been operating at Baltimore Washington International, near its Washington hub. Upstart Independence Air started operations at Dulles International Airport near Washington earlier this summer as well.

That competition coupled with high fuel prices caused losses to continue longer than the airline had previously hoped. But some analysts also argue the airline did not do enough to cut labor costs during its previous trip to bankruptcy court to let it compete in a new low-fare environment.

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"We're at the point now where major restructuring, major reforms have to be made," Ray Neidl, airline analyst with Blaylock & Partners, said. "Certain airlines are going to have to disappear. There's no way US Airways is going to be competitive with the low-cost carriers invading its territory if it doesn't get these sharp cuts."

The airline filed for bankruptcy protection in August 2002. It was able to emerge from bankruptcy protection in March 2003, using $900 million in a federal loan guarantee program set up after the Sept. 11 attack, as well as a $240 million equity investment from the Retirement Systems of Alabama Holdings.

But finding the financing it will need to emerge from bankruptcy this time will be far more difficult, and some analysts have suggested there is a good chance this trip to bankruptcy court could lead to liquidation rather than reorganization.

"Basically time is running out," said Phil Baggaley, airline analyst at credit rating agency Standard & Poor's. "They have a whole series of deadlines coming up in September. The problem is would US Airways be able to attract financing to emerge from bankruptcy again, even with a new round of labor concessions?"

Even airline Chairman David Bronner, CEO of the Alabama retirement system, was quoted in August as saying the airline would likely face liquidation if it was forced into bankruptcy.

But even those who suggest the airline could be forced out of business by this trip to bankruptcy suggest it could be months before it might cease operations. And some analysts believe even in its weakened state US Air may be able to dodge a shutdown.

"Liquidation is something that happens rarely in the airline industry," said industry economist David Swierenga, president of consulting group AeroEcon. "We've seen in the past, they can last for a long time even when they're losing money."

The Arlington, Va., based airline employs 28,000 people. "Employees will be paid and their benefits will continue," the airline said in its statement.

The Retirement Systems of Alabama pension fund, which agreed to finance US Airways' prior bankruptcy restructuring, holds the biggest stake in the airline at about 36 percent.

The Air Line Pilots Association holds a 19 percent stake. The U.S. government, which granted a $900 million loan guarantee as a crucial part of the airline's first restructuring, holds 10 percent. General Electric Co. (GE: Research, Estimates), a supplier of regional jet financing, owns 5 percent.

-- from staff and wire reports  Top of page

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