USAirways Chairman Bronner says U has 50/50 chance

[Ty Webb]

Miracle man Bronner may taste rare defeat

He says there's 'basically a 50-50 chance' that US Airways will go bankrupt
Sunday, August 15, 2004 By GEORGE TALBOT
Business Reporter
MONTGOMERY -- Alabama's man of success is contemplating defeat.

"Failure," he says, a wisp of smoke rising from his Cohiba cigar, "is not a crime. Aiming low is."

Success has been the hallmark of David G. Bronner's 31-year tenure as chief executive of the Retirement Systems of Alabama. His unorthodox, uncompromising approach to investing has transformed the state pension fund from an obscure, debt-ridden bureaucracy into a $25 billion powerhouse.

Aiming high led him to invest $240 million in US Airways in March 2003, gambling that the troubled airline could return to profitability and, along the way, provide a boost to Alabama's economy.

What began as a long shot, however, is teetering toward the impossible. It is increasingly likely that sometime in the next 30 days, the nation's seventh-largest airline will enter bankruptcy for the second time in two years, and Bronner will record the most expensive loss in his mercurial career at RSA.

"It's basically a 50-50 chance at this point, whether we'll go back in bankruptcy," Bronner said during a recent interview in his fifth-floor office at RSA's headquarters in Montgomery. "Bankruptcy means we probably lose control, and we lose our money. And I will say 'Thank you very much for the lesson' and go home."

US Airways' dim prospects evoked a seldom-seen humility from Bronner, 59, whose image is built on brash confidence and a sharp tongue.

"Nobody wants to lose a quarter of a billion dollars," he said. "But what'll hurt me more is knowing how beneficial this thing could be for our state. It really is unique both as an investment and as a promotional tool. Forget my ego. Think of the missed opportunities for Alabama."

He's not yet giving up. The Arlington, Va.-based airline on Thursday began negotiating with its labor unions to cut more than $800 million in wages and other benefits. The cuts are part of a $1.5 billion plan to scrap US Airways' traditional hub-and-spoke network and recreate the airline as a low-cost carrier, flying smaller planes on regional routes.

Such a radical restructuring has never been attempted, much less accomplished, by a major airline. As if the odds weren't already long, the plan is being launched at a time when US Airways and other so-called "legacy" carriers are being whipsawed by high fuel prices and intense competition from discount airlines.

Bronner's success will determine the fate of 28,000 US Airways employees and the $240 million investment belonging to Alabama teachers, troopers and judges.

"No legacy carrier, with all of the billions of dollars in costs they're saddled with, has ever made the transition to a low-cost business plan, much less tried to do it on the fly," Bronner said. "We'll either succeed and make history or we'll fail, and all the experts can have a field day with us."

There is the added pressure of time. A deadline looms Sept. 30, when US Airways will undergo a crucial review by its biggest creditor, the federal government, and a series of pension payments come due. The airline's talks with its labor leaders gained urgency Friday after a financial analyst hired by the pilots' union warned that the airline would collapse within a month.

"We've got to have those concessions or else we go under. It's that simple," said Bronner.

Bronner said he is being supported by the airline's business partners, including General Electric Capital Corp., Boeing Co. and Airbus.

"We've got some important, influential people cheering for us. But there's a bigger group that is hoping we fail," he said. "The other airlines are at the top of that list. In fact, they're doing a lot more than hoping. They're actively trying to send us to the grave. Because if we go away, then it allows them to keep going a little longer with their own shaky financial situations."

RSA owns a 37 percent stake of the airline, and its entire investment is bound up in US Airways stock. Based on Friday's closing price of $1.98 per share, the pension fund's $240 million investment, which includes a mix of common and preferred stock, is worth about $99 million.

The shares are expected to be rendered worthless in bankruptcy, where stockholders take a back seat to creditors. Because the airline's current debt -- about $2.8 billion -- exceeds the estimated value of its assets, there's virtually no chance that RSA could recover its money, even if US Airways is liquidated.

Losing his investment, Bronner said, would be painful, but it would not threaten the retirement system's stability. The investment in US Airways represents less than 1 percent of RSA's total assets, he said, and is only slightly larger than the $236 million RSA lost in 2002 from its investments in WorldCom. RSA is suing WorldCom, which now operates as MCI, to recoup its losses.

 

[Ty Webb]

"You've got to keep it in perspective. Every point in the Dow is worth a million dollars to the retirement fund," he said, swiveling his chair toward a computer on the credenza behind his desk.

"Right now, it's down 31 points, so I've lost $31 million sitting here talking to you," he said. "You make your bets and take your losses. We took the risk on US Airways because the potential reward was just so huge."

Bronner said US Airways' problems began almost immediately after the company emerged from seven months in Chapter 11 bankruptcy protection on March 31, 2003.

The reorganized airline had to cut more than $1 billion in costs and, with RSA's financial muscle, was ready to battle traditional rivals, including Continental Airlines Inc. and UAL Corp.'s United Airlines. But the competitive landscape was changing, Bronner said.

"We had a good plan to start with. What we did not anticipate was the low-cost carriers becoming the darlings of Wall Street," he said. "Before, they were like gnats on an elephant. JetBlue, for instance, had 36 planes. We had 350. I mean, who cares! But while all the big airlines were losing money, Wall Street looked at the discount guys and said, 'Hey, you're good,' and opened its purses."

The effect was revolutionary, Bronner said. Fueled by unprecedented access to cash and the airport gates that had been abandoned by traditional airlines, the discounters got bigger as their fleets got better. Newer planes meant fewer repairs and lower maintenance costs. Newly hired workers earned lower wages and didn't burden the airlines with hefty pensions.

Passengers left the traditional carriers in droves. Traffic on the nation's six largest airlines fell 8 percent between June 2001 and June 2003. It rose 38 percent on the six largest discount carriers during that same span.

"They cut our heads off," Bronner said. "They flew more people at cheaper prices than we could even think about offering."

US Airways has slashed ticket prices as part of its GoFares promotion but still has some of the highest operating expenses in the industry. It costs US Airways $11.18 to fly one seat a mile, the highest of any domestic carrier and double JetBlue's costs. US Airways lost $457 million last year, compared to a profit of $101 million at Airtran Airways.

"The only way we can compete now is to try and cut our operating costs and to do that we've got to get some concessions from the unions," Bronner said. "We've got to get in the ballpark with (discounters) if we're going to play the game."

Bronner, who serves as chairman of the airline's board of directors, receives no compensation from US Airways but earned $308,000 last year from the retirement systems. He declined a standing offer to airline board members allowing them and their family members free tickets on US Airways' flights.

He said he is sympathetic to the airline's workers, many of whom are being asked to accept deep salary cuts.

"I had a pilot look me in the eye and say, 'You know, I went from a $225,000 a year guy to a $70,000 a year guy. And I love my job, but my wife left me.'

"That's hard," Bronner said. "But as bad as that is, I guarantee you he'll do worse if we land in Chapter 11. Because if it goes back into bankruptcy, my guess is it never comes out."

Even in a worst-case scenario -- a complete liquidation of the airline's assets -- RSA's investment has paid dividends in Alabama, Bronner said.

US Airways sent about a dozen of its Airbus jets to Mobile's Brookley Field for $10 million worth of heavy maintenance work at ST Mobile Aerospace Engineering Inc.

In-flight videos promoting Alabama tourism are seen daily by more than 225,000 US Airways passengers, and Bronner has had brochures for his Robert Trent Jones Golf Trail mailed to passengers who check golf clubs as baggage. The company in May brought its annual meeting to The Legends at Capitol Hill, an RSA-owned resort in Prattville.

But Bronner's bigger plans, at least for now, are on hold.

US Airways is squeezing every nickel to survive, he said. Still, the airline last year spent $7.5 billion on everything from planes to peanuts.

"Just think about the number of services and products that a company of this size buys in an average year. It's huge," he said. "There's tons of things that, if we can just stabilize it and get it into the black, we can introduce Alabama companies to and say, 'OK, you're gonna have to bid for it, but if you can give us a comparable product at a comparable price, then you'll get a shot,'" he said.

Bronner openly expressed a desire to move airline operations, including call centers and other back-office work, to Alabama and suggested that US Airways or one of its regional offices would make a fine anchor tenant in his RSA Tower now under construction in downtown Mobile.

There's also a chance he could sway Bombardier Inc., a Montreal-based aircraft manufacturer, into building airplanes in Alabama. The world's third-largest maker of civil aircraft counts US Airways as its biggest customer and recently announced that it was evaluating global sites for a new assembly plant.

"When you own a major airline in this country, people answer your phone calls," Bronner said. "It's opened doors that never would have existed for us otherwise, and it absolutely has made us a lot of new friends around the world."

He said he is continuing to spend a "significant" amount of his time -- often as much as 30 to 40 hours a week -- focusing on the airline.

"The reason I'm working so hard, besides trying to save the jobs of 28,000 people I do not know, is because if I lose on this one, I know it makes the next deal that much harder," he said.

Bronner said a high-profile loss on US Airways could increase pressure on him to make safer, more traditional investments, reining in his ability to create a stronger Alabama.

"There's nothing worse in this business than being gun shy. If you ever start doubting yourself, you're done."

Most pension funds around the country, he said, make traditional investments that do nothing to improve their states.

"That isn't the way I've chosen to operate. The reason I look forward on Sunday night to getting back into the office is because I love the challenge of trying to do something for Alabama. I love raising expectations and proving the naysayers wrong.

"I love," he said, taking a last deep draw on his cigar and rocking forward in his chair, "to win."

 

[MLBWINGBORN]

This guy is scary..

This "all or nothing attitude" with someone elses money is how alot of businesses got into trouble in the 90s..

After such a failure, people like this guy run out and try to recoup their losses/reputations with an even bigger deal..

Taking more risks with other peoples money..

Mike

 

[MW44]

"I had a pilot look me in the eye and say, 'You know, I went from a $225,000 a year guy to a $70,000 a year guy. And I love my job, but my wife left me."

Sounds like a great lady!

 

[Pilot Doc]

This guy is scary.. [snip]

Taking more risks with other peoples money..

Clearly, you have more experience in the business than I do, but I don't understand why you find Bronner scary. He takes no salary as chairman of the board and refuses the travel benefits every employee receives. His interest, apart from gamesmanship, is _solely_ that the money does belong to other people. He sees the possibilty of the money improving the lives of many ordinary people both at US Airways and in Alabama.

I'm not putting him up for sainthood, but given the common stories of airline execs enriching themselves with little regard - risky or otherwise - for others money, I just don't see how David Bronner stands out among airline executives as scary.

Regards,

 

[Ty Webb]

Agreed.

Stephen Wolff, Siegelman, Lorenzo, Icahn, those are the sh!tbags.

Bronner saw an opportunity to make some money and bring business and recognition to AL. He is just being realistic. He knows it sucks for the pilots, the shareholders and the retirees of AL, whose money is tied up in this thing.

What surprises me, though, is that I thought they would have gotten better positioning fir their investment (in the event of liquidation).

 

[zonker]

nm...

 

[SWA/FO]

I can't believe that its only 1% of the AL retirement fund. Maybe some of the other airlines should have hired this guy to manage their funds.

 

[Fly-By-Cable]

Meanwhile, AirTran, sensing U's weakness desided to run a sale out of Philly.

Among others...
Nonstop to BOS --- $29.00
Nonstop to ATL, FLL, MCO, TPA --- $49.00

You can now travel half way across the country for less then it costs to fuel your SUV.

 

[miles otoole]

You can now travel half way across the country for less then it costs to fuel your SUV.

Just until U dies-then back to $519 PHL-BOS.

 

[FLB717]

Aint Supply and demand a B1tch!

 

[Mr. Irrelevant]

This was a monumentally stupid investment the Alabama Board made. Bronner may be head of the Board but I doubt he was solely making the decision. Based on some of the quotes, I get the impression Bronner may be a political figure-head and not a portfolio manager/investment analyst by education and experience. Seems hard to believe he's been running the Board for 31 years in the same position.

Given that any investment in U.S. Airways was what might be called an "alternative investment" or high-risk, I don't really understand why they purchased stock instead of becoming bond-holders and having first dibs on the assets. It's a little more complicated than that but if the Board knew anything about the airline industry.....

"We had a good plan to start with. What we did not anticipate was the low-cost carriers becoming the darlings of Wall Street," he said.

HELLO MCFLY....More like the darlings of the traveling public. Wall Street doesn't throw $240 million at troubled airlines......the LCC's are not much different than any other business with a good plan. Money is easy to get for winning companies.

Does anyone here think Alabama is going to get anything from Bombadier when U.S. Airways goes under??

Most pension funds around the country, he said, make traditional investments that do nothing to improve their states.

BULLSH!T. Of course, the mission of the pension funds is to get the best return for the funds participants while diversifying sufficiently to allow the state to guarantee pensions for state employees, provide better pensions and lower pension obligations for the state! State pension funds recruit the best portfolio management firms they can to accomplish this and typically allot around 5% of the total portfolio towards alternative investments. I.e. bankrupt airlines. I'm not too sure making that investment for the purpose of renting office space, having annual meetings, advertising gulf coast vacations, and getting legal kickbacks for the State of Alabama was a good reason for doing this.

I can't believe that its only 1% of the AL retirement fund. Maybe some of the other airlines should have hired this guy to manage their funds.

Don't mean to pick on you SWA/FO. Just quoting because this was an interesting observation. From 96-98 I was in a consulting role with my former company working with and evaluating the pension fund investments of the Florida State Board of Administration. They had about $100 billion back when I left this position in 1998. Alabama is pretty small when it comes to State Pension plans. No offense to Alabamans intended but I could name 15-20 states I'd be pretty sure have much larger plans than Alabama.

Like all pilots, I feel horrible for the employees at U.S. Airways because it's more than likely only a matter of time. It's not their fault their management failed to recognize a serious threat to the company's revenue streams and didn't take the necessary steps to counteract those threats. Becoming more of a national carrier instead of primarily an east coast one, reducing the fleet size, etc. Maybe pilot unions will recognize that a generous 401k plan like Southwest has is a far better option than a traditional pension plan in this industry.

Mr. I.

 

[Ty Webb]

I think if you did some research on Bronner, you'd be pretty surprised. He's a lot more savvy than you give him credit for, and if you look at his track record at the helm of RSA, you'd have to say, the guy has outperformed almost anyone you can name.

I wish he was handling my investments, I went from being up 20% for the year to under ten in the past three weeks.

 

[Mr. Irrelevant]

Hi Ty,

I think that article is somewhat misleading. In his role he is probably shaping the investment policies at the RSA and not actually choosing the investments. As the head, he is also the point man. I'm sure he's done an admirable job for the RSA. Having been involved in that business previously, although I could not find/name anyone running a state board for as long as is claimed in that article (31 years?), I'm sure I could find other States with track records that are just as good or better.

And Ty, don't sweat a rough three weeks, it's a marathon, not a sprint. Let me know how you've done in 20+ more years. That's what really counts.

Mr. I.