In re Us Airways Group, Inc.

• Decision Date: 07 March 2003
• Docket Number: No. 02-83984-SSM.,02-83984-SSM.
• Citation: 296 B.R. 734
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re US AIRWAYS GROUP, INC., et al., Debtors.

296 B.R. 734

In re US AIRWAYS GROUP, INC., et al., Debtors.

No. 02-83984-SSM.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

March 7, 2003.

John Wm. Butler, Jr., Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for debtors in possession.

Lawrence E. Rifken, McGuire Woods, LLP, McLean, VA, Local Counsel for debtors in possession.

Scott L. Hazan, Otterbourg, Steindler, Houston & Rosen, P.C., New York City, for Official Committee of Unsecured Creditors.

Malcolm M. Mitchell, Jr., Vorys, Sater, Seymour & Pease, L.L.P., Alexandria, VA, Local Counsel for Official Committee of Unsecured Creditors.

Dennis J. Early, Alexandria, VA, Office of the U.S. Trustee.

Richard M. Seltzer, Cohen, Weiss and Simon LLP, New York City, for Air Line Pilots Association, International.

Brian F. Kenney, Miles & Stockbridge, P.C., McLean, VA, Local Counsel for Air Line Pilots Association, International.

Sherwin S. Kaplan, Thelen Reid & Priest, LLP, for Retired Pilots Association of US Airways ("Soaring Eagles").

Harvey A. Levin, Birch, Horton, Bittner and Cherot, Washington, DC, Local Counsel for Retired Pilots Association of US Airways ("Soaring Eagles").

William Daniel Sullivan, Howrey, Simon, Arnold & White, LLP, Washington, DC, for Piedmont Silver Eagles, Capt. Paul Snell, and Capt. Dan Bowen.

Harvey M. Katz, Brown, Rudnick, Berlack, Israels LLP, New York City, for Lump Sum Eligible Pilots.

Edward Rosenthal, Rich, Greenberg, Rosenthal & Costle, LLP, Alexandria, VA, Local Counsel for Lump Sum Eligible Pilots.

Michael F. Ruggio, Duane Morris, LLP, Washington, DC, for Elwood F. Menear, Edward Graf, et al.

MEMORANDUM OPINION

STEPHEN S. MITCHELL, Bankruptcy Judge.

A hearing was held in open court on February 21, February 24, February 28, and March 1, 2003, on the debtors' motion for a determination that they satisfy the financial requirements for a "distress" termination of the retirement income plan for pilots of U.S. Airways, Inc. The motion also seeks approval of the termination, a finding that termination would not violate the terms of the collective bargaining agreement between the debtors and the pilots' union, and approval of a follow-on defined contribution retirement plan for the pilots.

The motion is supported by the Official Committee of Unsecured Creditors but opposed by the Air Line Pilots Association ("ALPA") — the union bargaining representative for the debtors' pilots — as well as by the Retired Pilots Association of U.S. Airways ("the Soaring Eagles"), the Piedmont Silver Eagles, eighteen pilots known as the Lump Sum Eligible Pilots, another group of pilots led by Elwood Menear and Edward Graf, and by approximately 49 pro se active and retired pilots, at least one widow of a pilot, and at least one former spouse of a pilot. The Pension Benefit Guaranty Corporation ("PBGC") — which would be responsible for paying insured benefits under the terminated plan — filed a response taking no position on whether the plan should be terminated but urging the court to require appropriate proof and to make adequate findings.

At the conclusion of the hearing, the court made findings orally on the record and ruled that the debtors satisfied the requirements for a distress termination and would be allowed to terminate the plan, subject to a determination that doing so would not violate the collective bargaining agreement between the debtors and ALPA. That issue, the court ruled, would have to be resolved under the arbitration mechanism established by the collective bargaining agreement itself. An order reflecting the court's ruling was entered on March 2, 2003. The purpose of this opinion is to supplement the oral findings of fact and to explain in somewhat more detail, particularly for parties who were not present at the hearing, the reasons for the court's ruling.

Findings of Fact and Procedural Background

US Airways is the seventh largest air passenger carrier in the United States, and the largest east of the Mississippi River. Its parent holding company, U.S. Airways Group, Inc., and seven subsidiaries — among them U.S. Airways, Inc., Allegheny Airlines, Inc., Piedmont Airlines, Inc., and PSA Airlines, Inc.¹ — filed voluntary petitions in this court on August 11, 2002, for reorganization under chapter 11 of the Bankruptcy Code. Since that date, they have continued to operate their business as debtors in possession. A joint plan of reorganization has been proposed and has been submitted to creditors for a vote. A hearing on plan confirmation is scheduled for March 18, 2003.

The pilots of U.S. Airways are represented by ALPA. U.S. Airways and ALPA are parties to a collective bargaining agreement that became effective on January 1, 1998. The collective bargaining agreement requires U.S. Airways to maintain for its pilots a defined benefit retirement plan with certain specified benefits. The plan has two components — a tax-qualified plan and a non-qualified or so-called "Top Hat" plan. By law, pilots are required to retire at age 60. The amount of the pension is calculated based on age, years of service, and final average earnings. Pilots who retire at age 60 may elect a lump-sum payment. There is also an option for joint and survivor benefits.

As a result of financial distress that predated, but was exacerbated by, the terrorist attacks of September 11, 2001 ("9/11"), U.S. Airways brought in new management in March 2002 and began efforts to restructure its operations. As part of that effort, it negotiated with its unions, including ALPA, for wage and other concessions that would make the airline more competitive. An agreement was reached with ALPA ("the first-round concessions") approximately a month prior to the chapter 11 filing. None of these concessions modified the terms of the pilots' pension plan, although the salary reductions did have the incidental effect of somewhat reducing the future obligations under the plan. As part of the agreement, the debtor agreed, if it were to file for chapter 11, not to seek relief from the collective bargaining agreement under §§ 1113 or 1114, Bankruptcy Code.

Prior to the chapter 11 filing, U.S. Airways submitted an application to the Air Transportation Stabilization Board ("ATSB") for a $900 million guarantee with respect to a proposed $1 billion loan. This approval was based on a 7-year business plan which required the debtor to achieve certain targeted reductions in operating costs. Tentative approval of the guarantee was given prior to the chapter 11 filing. Although U.S. Airways had initially hoped to effect its restructuring outside of chapter 11, it ultimately determined that it could not reach all necessary agreements without filing for chapter 11, which, as noted, occurred on August 11, 2002.

Since the outset of the case, the debtors have aggressively pursued a "fast track" reorganization, with the announced goal of being out of chapter 11 by the end of first-quarter 2003. They achieved substantial "first-round" concessions from those unions with which they had not reached agreement prior to the chapter 11 filing, have saved large sums by abandoning unneeded aircraft, and have negotiated substantial reductions in payments on aircraft they have kept. To maintain cash liquidity during the reorganization process, the debtors, with court approval, entered into a $500 million post-petition credit facility ("the DIP loan") with the Retirement Systems of Alabama ("RSA"). Of this amount $300 million has already been drawn down. RSA is also the "plan sponsor" under an agreement whereby it will invest $240 million at confirmation in exchange for a 37% interest in the reorganized debtors. Finally, RSA has agreed to loan $75 million of the non-guaranteed (or "at risk") portion of the $1 billion ATSB loan.

Despite the debtors' efforts, the path to profitability and emergence from chapter 11 has not been smooth. In particular, in the October to November 2002 time frame, two serious problems surfaced that threatened the debtor's business plan, which in turn was the foundation for the ATSB loan guarantee and a predicate for the RSA investment. The first was a dramatic shortfall in revenue, as airline passenger revenues throughout the industry remained substantially below pre-9/11 levels. As a result, the revised revenue projections for 2003 — the year of the planned emergence from chapter 11 — were $997 million below the original projections. Coupled with an increase of $51 million in fuel costs, this left the debtors with a projected pre-tax loss for 2003 of over $800 million instead of the modest $122 million profit that was projected in the business plan.

The second problem that emerged was a serious funding shortfall for the debtors' defined benefit pension plan over the 7-year period of the business plan. The debtor maintained four defined benefit plans, among them the ALPA plan. Two factors conspired to create the funding shortfall. First, protracted poor performance by the stock market had resulted in a significant decline in the value of the plan assets. Second, the decline in long-term interest rates to a 40-year historic low had increased the amount of the current liabilities for the plans, since current liabilities are determined based on the cost of an annuity to pay the specified benefit, and that cost, in turn, rises as long-term interest rates fall.

The debtors responded to the revenue shortfall by seeking additional savings from its labor force, its aircraft lenders and lessors, and its vendors. The negotiations with its unions, including ALPA, for a "second-round" of concessions took place in early December 2002, as the debtors struggled to meet their goal of filing a plan of reorganization by December 20, 2002. The concessions by ALPA — which was the only labor group to agree to the full amount requested by the company — totaled $179 million, of which $101 million represented primarily work-rule changes and wage reductions, and $78...