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AA Tentative Agreement - 2 Views

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chase

Well-known member
Joined
Nov 27, 2001
Posts
1,217
I started this new thread since the last one seemed to drift a little. Two very different opinions on why or why not the TA should be voted in. As you can see from the documents the authors have some degree of authority in the area.

An opinion that opposes the current TA as is:
_________________
Statement from Equity Fund Manager

{This is written by John Danhakl. Mr. Danhakl runs Leonard Green LP, one of the largest private equity funds in the U.S. His firm purchases distressed companies, often in bankruptcy, changes their management and turns them around. He runs a 4 billion dollar fund that controls 20 billion dollars in assets. He is the lead partner of three in his firm and was named 2002 Buyout Executive of the year (Financial News). He sits on the BOD of several major corporations (BOD Seat) and has been a financer for several companies that have undergone re-organization. He has a Harvard MBA, was previously an investment banker at Drexel Burnham Lambert and was the director of investment banking at DLJ before he became a partner at Leonard Green. John is the brother of SFO Based First Officer Jim Danhakl - Ed.]

Statement from John Danhakl:

There are many valid points but they are shaded to favor the outcome that has been predetermined. At the end of the day there are a lot of judgments required here about the risks versus benefits of bankruptcy.

From where I sit, it appears that your union played a really terrible hand of poker.

Specifically, they caved to all points proffered by management based on the threat by management that they would file bankruptcy and bad things would happen. My sense is some fairly senior pilots feel that their pensions are more important than their jobs--probably a valid point at this stage of their careers, but a lousy one for those like you left behind. The judgment was that a near term bankruptcy would threaten the pensions. I don't believe this to be the case. I believe that improving the cost position and balance sheet of the airline by going through bankruptcy now would put the company in a better position to compete going forward providing the greatest assurance that the pension obligations would be me. The important point is to note that funds already contributed to the pension remain in the pension. The company can't get at them, even in bankruptcy. The pension issue really addresses future contributions, and to my way of thinking, the future is pretty murky such that I would highly discount future contributions.

There are several indefensible positions forwarded by management--particularly the duration of the agreement, that were essentially rammed down your guys throats. While this was a nice thing for AMR to have, it is not at all clear to me why it is needed in terms of addressing the financial challenges short term. You could do a one to two year contract and if things don't get better extend it in two years. Why agree to six years now? Why not ten years? Why not fifteen years? It is an arbitrary number.

The magnitudes of the cuts are also arbitrary, but I don't have any basis to comment on whether they are too much or too little or fall disproportionately on you guys versus other labor groups or management. I would comment that based on your characterization of the discussions and the other terms your guys agreed to, my sense is that you probably got screwed here.

I do know that there would be nothing stopping the company from giving you a substantially greater equity interest. If you are giving up $660 million per year, why not get $200 million per year back in stock? There are no cash flow or credit issues associated with that kind of approach. The only thing stopping management from agreeing is 1. Greed and; 2. They view you as patsies.

While the strains on the business from bankruptcy are considerable, the protections and benefits afforded by bankruptcy are also considerable. Important points not addressed by the letter are that all pre-petition claims, other than secured claims against equipment you want to keep flying are treated as follows:

No payments of interest or principal are required prior to the emergence from bankruptcy--this is a tremendous source of cash (lack of a use of cash)

Unsecured claims to vendors pre-bankruptcy will be held in abeyance.

While your counsel suggests that vendors will put the company on COD, what more typically happens is that they will actually extend the company more credit. They are likely tightening up now because they expect the company to file. A bankrupt company can't again file, so they are protected from the treatment discussed at the end of this point. Post-petition claims typically are fully satisfied while pre-petition claims are compromised. These pre-petition claims will probably receive no cash and be flushed into equity, meaning a much better balance sheet post transaction.

Existing equity holders will be wiped out. This means that if you sign now and subsequently go into bankruptcy, your equity will be worthless.
Additionally, the company will be able to reject contracts and leases that it finds unattractive, substantially reducing costs. This may include some labor contracts, however there have been protections put in place to mitigate the companies ability to entirely reject labor contracts as a result of the Continental bankruptcies in the 80's-so you enjoy special protections.

Bankruptcy has been very good for airlines in certain circumstances. Continental emerged stronger and better in the early nineties. U.S. Air is emerging now with a substantially improved balance sheet. The companies that don't do well are marginal players with lousy balance sheets who are effectively obsolete--the Braniffs, PanAms, etc. AMR is a too big to fail company in my opinion. The "liquidation" scenario is not realistic because you serve too many people and you fly too many airplanes. There would be no one to buy them. In addition, the points your attorney makes about the strains of bankruptcy are mitigated by the fact that the whole industry ex Southwest is essentially in bankruptcy or **CENSORED****CENSORED****CENSORED****CENSORED** close and thus the stigma would be less. People are getting comfortable with the concept of buying tickets on bankrupt airlines.

I believe his comment about the access to credit is just wrong. How is it that U.S. Air can get access to a DIP without pre-determined contracts. How can United get a $1.5 billion DIP without predetermined contracts? Trust me - if management was really ready to file at 3:00, they had DIP financing lined up. The point is bull**CENSORED****CENSORED****CENSORED****CENSORED**.

Regarding management always getting what they want in bankruptcy, that point is simply wrong. CBA's can not be abrogated wholesale, and despite what your lawyers suggest, there is broad latitude given to judges. In the UAL bankruptcy there is a hearing on the very day that you vote (April 14th) regarding disposition of their flight attendants contract. Why not postpone the vote until you see the results of that judge's verdict? You might feel pretty stupid voting in a contract because you fear that a judge will slaughter you, and then find out a day later that judges are, in fact, pretty reasonable. (Most of the time)

Also, regarding timing, AMR's quarterly earnings report is coming out on the April 15th, the day after the vote. Seems like things could be much clearer for you in a couple of weeks. Why the rush for a vote when you have nothing to gain?

As far as creditor committees always not taking employees into consideration, that point is also wrong. Creditor committees almost always have a union member on them. In the recent Hawaiian airlines bankruptcy a pilot was named as the chairman of the creditors committee.

Looking at the numbers that you have provided me, my approach to the members, assuming you want to continue fighting is as follows:

AMR is in financial trouble. Who is being asked to help?


Pilots 37% or $660 million $66,000 per person
Mechanics 34% or $620 million $21,000 per person
Flight Attendants 19% or $340 million $17,000 per person
Agents 4% or $80 million $4,000 per person
Management 6% or $10 million $10,000 per person
Lenders 0%
Equipment Lessors 0%



The pilots are being asked to disproportionately share the burden resulting from horrible financial decisions by management. I haven't heard about wide scale personnel cuts nor compensation cuts by management. Lenders are giving nothing. Lessors are giving nothing. Bankruptcy is probably inevitable for the company and it is the correct thing for the company to do to make sure everyone is contributing to the solution. The pilots should only agree to the contract if all interested parties are contributing (i.e. through bankruptcy) and only if you get material ownership of the company and a material board role going forward.

John Danhakl
 
In support of the TA Pt 1

__________________
Directly from the APA

Ralph Mabey, Partner
Steve Tumblin, Partner
LeBoeuf, Lamb, Greene & MacRae

Our firm is based in New York and has approximately 750 attorneys, one of the largest in the U.S. We have been involved in most major airline bankruptcies in the past 20 years. Last October the APA Board of Directors requested that our firm provide general restructuring and bankruptcy advice to the board, initially with respect to US Airways and the potential bankruptcy filing of UAL, as well as to be prepared in the event AMR filed bankruptcy.

APA formed a highly competent and experienced team of financial advisors, airline analysts, accountants and labor, ERISA and bankruptcy counsel to begin an in-depth analysis of the company\'s internal financial numbers. Together with a financial review team of APA representatives, we reviewed boxes of financial and other information, more information than reported to the Securities and Exchange Commission, more information than many employees inside the company would have access to.

After meeting with American regarding its restructuring plan and reviewing the financial situation of American, it became apparent that, absent some intervention on the cost reduction, the company\'s cash situation would quickly deteriorate to the point of forcing a bankruptcy filing. The economic factors, combined with the uncertain international situation, was causing the company\'s financial condition to decline rather than stabilize or improve. APA\'s outside professionals, as well as the APA representatives, came to the unanimous conclusion that, in the absence of any foreseeable revenue improvement or a substantial level of employee and lessor concessions, a Chapter 11 filing was highly likely.

Historically, airlines have not fared well in Chapter 11. Even those that have emerged from bankruptcy have often done so as a smaller, weaker carrier. There are several factors that contribute to the unique problems experienced by airlines in bankruptcy. First, bookings for airlines filing bankruptcy historically have dropped approximately 10%, with negligible offsetting cost savings. International carriers are particularly susceptible because of the misperception of foreign passengers and travel agents regarding U.S. bankruptcy laws.

Second, as a result of the loss of bookings, airlines are required to sell discounted tickets in order to generate sufficient operating cash. Operating in bankruptcy requires significant cash reserves. Bankruptcy-related costs for large airlines can easily range into the hundreds of millions of dollars. Multiple attorneys, accountants, analysts, investment bankers, etc. will be working full time, around the clock during the initial weeks. In addition, the company must pay all of the fees and expenses of professionals and consultants for secured creditors, DIP financing lenders and the committee of unsecured creditors. Vendors often put a bankrupt airline on COD terms, potentially creating additional hundreds of millions of dollars of cash needs. Because bankruptcy is a public process, if at any time the company\'s liquidity appears in jeopardy, passenger confidence wanes, creating a cycle of reduced bookings, more discounted tickets and lower cash generating ability.

Third, bankruptcy is primarily designed to reduce a company\'s debt. Although a large debt payment may trigger an airline filing bankruptcy, it is often not the main underlying concern. Small variations in passenger revenue and costs (such as fuel) can have enormous impacts when multiplied into an airline\'s high volume financial structure. If an airline is losing money on an operating basis, even before debt payments, this problem must be addressed first. However, bankruptcy will tend to increase operating losses, requiring deeper and deeper cost cutting measures.

Fourth, in the current environment with US Airways and UAL filing bankruptcy within the last year, the necessary loan financing for bankruptcy (referred to as debtor in possession or DIP financing) is becoming more expensive and more difficult to obtain.

Bankruptcy is also not an environment conducive to negotiating labor contracts. The bankruptcy trustee appoints an unsecured creditors\' committee. This committee, and many other individual creditors, are involved in virtually all negotiations during the bankruptcy. Because these creditors will likely be the ultimate owners of the company following bankruptcy, they have an incentive to drive labor costs as low as possible. What was a two-party negotiation prebankruptcy, becomes a three or more party negotiation, each with their own agenda and leverage.

In addition, bankruptcy is time intensive and draws the company operational and financial management teams away from labor negotiation where they are needed. Frequently good managers leave and less capable managers take over critical aspects of the company\'s business. The company begins managing toward the short-term goals of cost reduction, cash generation and a plan of reorganization acceptable to creditors, rather than focusing on the long-term relationship with employees and customers.

One part of bankruptcy law that does work well for airlines is contract rejection. In Chapter 11, an airline can reject any of its contracts and leases. The other party to the contract only receives a claim for damages, which is thrown into the pot with all of the other prebankrutpcy claims. While section 1113 of the Bankruptcy Code delays to some extent a company\'s ability to reject collective bargaining agreements, the bankruptcy court will readily abrogate a collective bargaining agreement that is inconsistent with the company\'s reorganization needs. The court does not pick and choose which parts of the agreement will be rejected; it is all rejected.

If American were to file Chapter 11, and inherit all of the negative implications of bankruptcy, it would certainly avail itself of the contract rejection laws to the maximum extent, either to reject a contract or leverage negotiations for a more favorable contract. Such negotiations would be with a smaller, weaker airline that would have to cut deeper and quicker than outside Chapter 11.

As APA\'s outside advisors counseled with the APA Board of Directors and National Officers, several concerns were raised repeatedly.

Double Dip. It is possible that American may in the future be required to file bankruptcy in spite of the employees\' substantial concessions. In this case, the employees may be required to give additional concessions. But it is the unanimous view of APA\'s outside advisors that these cuts, in total, would not be more than would be required in bankruptcy anyway and may actually be less. Nevertheless, there are risks. The pension plans are at particular risk. Outside events could also create the need for additional concessions. DIP lenders and creditors could require deeper cost cutting. But without prefiling labor concessions, these risks would become a certainty instead of just a risk.

Bankruptcy Inevitability. It is our view that management is attempting every maneuver possible to avoid bankruptcy. However, even if the company were forced into bankruptcy, due to economic conditions or the failure of one labor group to ratify, we believe it is better for APA to have some prebankruptcy agreement.
First, we do not believe that another union would receive a better deal by holding out. On the contrary, the bankruptcy judge and the creditors will have little sympathy for an employee group that triggers a Chapter 11 filing. Second, in Chapter 11, our fate is tied to the health of the airline and the sooner the airline exits bankruptcy, the better for all concerned. Companies that have prenegotiated contracts with employees and major creditors have a higher chance of a prompt reorganization and better public perception. Third, labor negotiations in bankruptcy are destabilizing and 1113 is particularly so. If the company views the savings from the additional concessions proposed under 1113 to be outweighed by the cost of labor unrest, the employee group may potentially avoid the 1113 action which would have been inevitable without the prebankruptcy agreement. Further, the company will agree prebankruptcy not to file an 1113 motion unless required to do so by a material adverse change in its financial situation. This is not an absolute protection against 1113, but it is better than no protection.


Better in Bankruptcy. For all of the reasons above, we do not believe that a better deal would be available in bankruptcy, all things being equal.

Change in Management. Large companies filing bankruptcy often undergo a change in management before the reorganization is complete. However, this has seldom resulted in better employee relations because creditors want a hard-line, cost-cutting manager. Frequently, new management\'s first request is for additional labor concessions. A labor management battle or a change in top management during Chapter 11 usually raises considerable uncertainty in the minds of the investor community and the traveling public.

(continued below)
 
Pt 2

(continued from thread above)

Pension. The pension has been preserved in its current form, although the wage cuts will impact pilots accruals. While the pension is still vulnerable in a Chapter 11 scenario, the pay cuts, when combined with the projected furloughs, significantly reduces the A Plan\'s underfunding, making this issue somewhat easier for the company to accept.

Duration. The interaction of the Railway Labor Act and collective bargaining agreement rejection under 1113 in bankruptcy is a gray area of bankruptcy law where there is no statutory guidance and relatively little precedent. It is not at all clear that allowing an airline to reject a contract would result in a shorter duration than a negotiated contract.

Equity. Stock or options received prior to bankruptcy will likely be worthless in the event of bankruptcy. There is no assurance that employees would receive any additional equity in bankruptcy. This is one of the risks of a prebankruptcy agreement that is difficult to work around. Pilots should not base their decision solely on the potential value of the options.

___________

Urge those interested in discussing this TOPIC ONLY contribute, otherwise start own thread or go back to the other AA TA thread & continue to rant.:D
 
Airbaker,

That is very true. In the same light :

"Last October the APA Board of Directors requested that our firm provide general restructuring and bankruptcy advice to the board"

That firm is being paid by the APA to say whatever the APA wants it to say. Lawyers represent their clients and by definition are biast. Of course the APA wants it's membership to think they got the best deal they could even if it's a $hit burger. The truth is probably somewhere in between.

Counselair
 
It would also appear that APA's financial consultant is not exactly "un-biased" either as shown by the following quote from "PDP":

"As you are probably aware, the voting process on our Tentative Agreement has been postponed until 9:00am CST tomorrow, April 15th, due to a high volume of calls to the American Arbitration Association.

PDP has learned that APA's financial consultant has a vested interest in membership ratification of the tentative agreement. If the equity plan for the employees goes into effect, this gentleman will receive a bonus paid in stock reportedly equal to approximately $5 million.

It the equity plan does not go forward, Mr. Presser will be paid only a much smaller consulting fee"
 

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