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Alabama group could spark bidding war for bankrupt carrier

Friday, September 20, 2002

By Frank Reeves, Post-Gazette Staff Writer

Alabama's public employee pension fund raised the stakes yesterday for a stake in US Airways, offering to buy a 37.5 percent chunk of the bankrupt airline for $240 million.

The move is almost certain to ignite a bidding war for control of the nation's seventh-largest airline and Pittsburgh's dominant carrier.

Texas Pacific Group, an investment company with a track record of turning around ailing companies, has already offered to invest $200 million in US Airways for a 37.5 percent stake. Texas Pacific bankrolled Continental Airline's successful turnaround, when a then-young David Siegel, now US Airways chief executive officer, headed that carrier's express operations.

US Airways confirmed yesterday that it had received a letter from the Retirement Systems of Alabama, but offered no further details. The company said a hearing would be held Thursday in the U.S. Bankruptcy Court of Eastern Virginia to establish the rules for bidders to make offers.

Despite US Airways' staggering losses, more than $2 billion in the past year, the head of the Montgomery-based Alabama Retirement Systems, David G. Bronner, said he expected the Arlington, Va.-based airline to emerge from bankruptcy as "a viable and great company."

He noted that the airline, which has long had among the highest labor costs in the industry, had been able to persuade its unions to accept deep cuts in wages and benefits and that the airline was still the largest carrier east of the Mississippi River. In addition, the government has given conditional approval to its request for $900 million in federal loan guarantees, he said.

"We might just as well make some money rather than a bunch of rich Texans," Bronner said.

Bronner described the arrangement between Texas Pacific and US Airways, which was announced on the day the company filed for bankruptcy, as a "sweetheart deal." He said the pension fund has yet to get access to Siegel and his management team "on the level of the Texas boys."

William Lauer of Tarentum-based Allegheny Capital Management said Alabama Retirement System and Texas Pacific appeared headed for a bidding war "on the least desirable airline property in the world."

He noted that the implied value of US Airways, if judged by their bids, was less than the market capitalization of No. 2 United Airlines, which was worth about $144 million, based on its low stock price and shares outstanding.

Lauer also said a bidding war could open the door to other bidders that may not share management's interest in running the airline or in retaining the existing management.

Separately, the U.S. Department of Transportation dealt a temporary setback yesterday to a planned alliance by US Airways and United, saying it wanted to review it for an additional 30 days. The two troubled carriers want the code-sharing arrangement in order to boost sagging passenger revenues.

If the arrangement is approved, US Airways and United's passengers would be able to earn and use frequent-flier miles on each airline and would have access to far more destinations. US Airways is dominant along many East Coast markets, while United has numerous transcontinental and trans-Pacific routes.

Last year, an attempted merger between the two airlines collapsed after the U.S. Justice Department objected to the deal, fearing it would stifle competition in the industry.

US Airways' spokesman David Castelveter said the carrier was confident the DOT would ultimately approve the alliance with United.

Frank Reeves can be reached at freeves@post-gazette.com or 412-263-1565.