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US Airways Wins More Financing, but With a Catch

By Keith L. Alexander
Washington Post Staff Writer
Wednesday, March 16, 2005; Page E02

US Airways Group Inc. will receive an investment of $125 million from Republic Airways Holdings Inc. on the condition that the Arlington carrier secure an additional $100 million before exiting bankruptcy court protection, Republic said yesterday.

The additional financing requirement adds a fresh hurdle to US Airways' plan to emerge from Chapter 11 proceedings on schedule by June 30.

If Air Wisconsin and Republic secure ownership in US Airways, it will mark the first time a major carrier has been partly owned by its regional partners. (Charles Bennett -- AP)

Indianapolis-based Republic, a small regional airline, agreed late Monday to invest $125 million, bringing US Airways' total exit-financing pledges to $250 million. Since December, US Airways had maintained that it needed a maximum of $250 million to successfully emerge from bankruptcy protection.

But Republic made its pledge contingent on US Airways lining up $100 million more because it thinks the carrier cannot successfully resume operations outside of bankruptcy protection without capital of $350 million. Higher fuel prices and increased competition from low-cost airlines require that US Airways emerge in a stronger financial position than first proposed, Republic said.

"We wanted a higher level of equity investment than what they originally contemplated to ensure the reorganized US Airways was adequately capitalized," said Warren Wilkinson, a Republic spokesman.

A US Airways spokesman said the airline agrees with Republic.

Prior to Monday's announcement, US Airways was halfway to its financing goal. Last month, the airline received its first pledge of $125 million in equity financing from Air Wisconsin Airlines Corp.'s financing arm, Eastshore Aviation LLC.

As part of their agreements with US Airways, Air Wisconsin and Republic sought pledges that US Airways would send substantial business to them as part of the US Airways Express regional jet operation. Republic is already one of US Airways' regional operators. Republic and Air Wisconsin also sought an equity stake of about 19 percent in US Airways and representation on US Airways' board.

If Air Wisconsin and Republic secure ownership stakes in US Airways, it will mark the first time a major carrier has been partly owned by its regional partners, said Standard & Poor's airline analyst Philip Baggaley. Major carriers typically own either all or part of their regional providers.

US Airways could face difficulty in securing the additional $100 million because of the weak financial condition of the airline industry, Baggaley said. He said US Airways' only possible investors could be other major customers that have a substantial financial interest in US Airways' survival, such as another regional airline or a supplier. If US Airways does not survive, Air Wisconsin and Republic lose one of their largest customers. US Airways pays fees to its regional airlines to operate its 70- to 90-seat feeder aircraft.

Baggaley said Mesa Air Group Inc., also a US Airways regional carrier, might step up and make such an investment to ensure its competitors do not squeeze it out. Calls to Jonathan E. Ornstein, Mesa's chief executive, were not returned yesterday.

Republic executives praised steps US Airways has taken toward reorganization since its Chapter 11 filing in September. Republic -- along with its majority owner, Wexford Capital LLC -- also offered US Airways an option on an additional $110 million, but only if the carrier sells some assets, including several of its smaller regional planes and some of its commuter aircraft landing slots at Reagan National Airport and New York's LaGuardia.

"We have been very impressed with the substantial progress US Airways has made in the past four or five months," Bryan K. Bedford, Republic's chairman and chief executive said on a conference call with airline analysts. "[US Airways] has a great franchise on the East Coast. It has obtained a low-cost-carrier-type labor agreement and restructured its debt and their aircraft issues."

US Airways has secured more than $1 billion in pay and benefit cuts from its employees and renegotiated its aircraft leases. It must emerge from bankruptcy protection by June 30 to meet financing agreements with its largest creditor, General Electric Co.

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