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
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