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Experts applaud US Airways' unusual move

| Wednesday, June 26, 2002

Despite a jittery selloff that greeted US Airways stock early Tuesday, airline experts gave generally high marks to the carrier's decision to defer many payments to its aircraft lessors, lenders and vendors.

The money-saving move, disclosed after the stock market closed Monday, may be unorthodox, but it is a prudent means of helping avoid a bankruptcy sure to be messy and hurtful, these observers say.

"Normally you'd file Chapter 11 before you defer payments," said William Lauer, chairman of Allegheny Capital Management Inc., Tarentum.

"But this sort of thing clearly indicates they are trying to avoid bankruptcy," said Lauer, whose fund is a longtime holder of US Airways stock.

US Airways' shares fell almost 20 percent yesterday, after disclosing the postponed payments on Monday.

The airline, the nation's seventh largest, said it was suspending unspecified payments on Boeing and other older and retired aircraft. The carrier's move would not affect bond payments or customers, employees or airport operations, it assured.

Lauer believes the deferred payments come to tens of millions of dollars, but the airline would not confirm amounts.

"A creditor faced with the return of airplanes already out of service has a Hobson's choice," he said. Either such lessors and lenders can wait for US Airways to resume payments or they can take back impaired assets.

Meantime, US Airways faces a formidable deadline. It has until 5 p.m. Friday to document meaningful concession agreements it hopes to reach with unions in order to bolster chances of obtaining a $900 million loan guarantee.

"The major issues of pay and job security are still open," Air Line Pilots Association spokesman Roy Freundlich said late yesterday. The pilots and management are still nearly $200 million apart in wage and benefit givebacks.

For weeks, the airline has sought more than $1 billion in worker concessions so it could upgrade the business plan attached to its application that is pending with the Air Transportation Stabilization Board. The board was created after Sept. 11 to support the ailing airline industry.

"I don't think it's possible to get agreements before Friday, and you can't have a shotgun wedding," said Michael Boyd, head of the Boyd Group, an Evergreen, Colo.-based airline consultancy.

"But I'm afraid this (federal) board thinks that unless US Airways brings union heads into the room on a stick, they won't get this loan guarantee," the industry consultant said.

The government board already has rejected applications from Vanguard Airline and from Frontier Flying Service, a small Alaskan regional carrier, in part for submitting inadequate business plans.

Lauer noted there is "a lot of political pressure" being put on the loan board to approve US Airways' application. Six U.S. senators, including Pennsylvania's, are trying to sway the board because the airline has hubs or its headquarters in their three states.

Federal backing would help US Airways land about $1 billion in credit and avoid bankruptcy — which Boyd describes as "a financial root canal."

The loan guarantee is part of new Chief Executive David Siegel's restructuring plan. It also entails a fourfold increase from a fleet of 70 regional jets and a code-sharing agreement with another major carrier, both of which are pending.

The toughest nut in the plan is gaining about $1.3 billion in concessions from pilots, aircraft mechanics and other workers and suppliers. Thus, the gutsy maneuver to suspend payments on aircraft other than its newer Airbus fleet.

"Believe me, they didn't just do this payment moratorium to Boeing in a letter. US Airways talked to them ahead of time," Boyd said.

"What they did shows the company is absolutely on the right track," he said. "They want everybody to participate — vendors, employees, lenders."

Most US Airways stockholders, however, seemed to see the "pay later" tactic as more of a desperate act. US Airways stock opened at $3.51 yesterday and fell to $3.08 in the first hour of trading. The shares fell as low as $2.90 on the day and closed only 4 cents higher.

This weekend also coincides with the end of US Airways' third quarter — a period certain to bleed red.

While financial results won't be available for a few weeks, most Wall Street analysts believe the carrier is on course to lose about $200 million during the three-month period. The estimate is based on a consensus estimate of earnings per share and how much stock is outstanding.

Such a loss would follow $269 million in losses during January, February and March. During the month of March alone, US Airways posted a pretax loss of $102 million, the corporation said last month. This, while revenue industrywide is trending about 10 percent below year-ago levels.

"They've got to get their revenue up," Boyd said, noting bankruptcy wouldn't help management increase revenue.

"Once you do a restructuring through bankruptcy court, you lose control," he said.

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