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BA [British Airways]/USAir RBZoellick
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Records of the White House Office of the Chief of Staff to the President (George H. W. Bush Administration)
Robert B. Zoellick Files
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Originally Processed With FOIA(s):
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2023-1267-S
CASE
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This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin: Chief of Staff, White House Office of
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Zoellick, Robert B., Files
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OA/ID Number:
45577
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45577-004
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BA [British Airways]/USAir RBZoellick
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G
SENT BY:DOT S-1
12-18-92 ; 8:08AM ;
2023663956-> West Wing (1st Flr) ;# 1
U.S. Department of
Chief of Staff
400 Seventh St., S.W.
Transportation
Washington, D.C. 20590
Office of the Secretary
of Transportation
FAX TRANSMISSION COVER
Date: 12/18/92
TO:
BOB Zoellick
FAX: 456-1121
FROM:
Michael P. Jackson
(202) 366-1103
(202) 366-3956 (fax)
Number of pages to follow: 2
Comments:
As discussed - let me know
if you have questions or need
changes.
my
SENT BY:DOT S-1
12-18-92 ; 8:08AM ;
2023663956- West Wing (1st Flr) ;# 2
U.S.-U.K. LIBERALIZATION TALKS
I. KEY ELEMENTS OF AN "OPEN SKIES" AGREEMENT (JULY 1992 PROPOSAL)
Major elements:
No limit on the number of airlines that may serve the
bilateral market, or any city-pair (e.g., Baltimore to
London) within the market.
No limit on the number of cities in each party's territory
that may be served by the airlines of each side
( international services only -- not cabotage).
The airlines of one party may carry passengers and cargo
between the territory of the other party and third
countries without limitation (fifth freedom).
No regulation of the number of flights per week operated
by the airlines of both sides or of aircraft type.
No regulation of the fares or rates charged by the airines
of both sides.
Charter flights may be operated between the territories of
the parties under the most liberal rules of either party,
subject only to compliance with consumer protection
requirements.
No barriers to the normal conduct of ancillary activities
(e.g., installation, operation, and marketing of computer
reservation systems, "self-handling" of passenger check-
in, baggage, and cargo, maintenance and provisioning of
aircraft, etc.).
II. U.K. OBJECTIVES
The U.K. seeks DOT approval of British Airways' investment in, and
integration with, USAir. In return, they are prepared to enter
into an agreement that liberalizes the bilateral regime for air
services. In the formal negotiations, however, the U.K. has taken
the position that essential elements of that more liberal regime
must be:
0
a fast-track dispute resolution mechanism to address
anticompetitive airline behavior (which the U.K. believes
will be rampant absent strict government controls);
the unfettered ability of U.K. nationals to own and
control U.S. airlines; and
the ability of U.K. airlines to operate within the U.S.
domestic market (cabotage).
SENT BY:DOT S-1
12-18-92 ; 8:09AM ;
2023663956- West Wing (1st Flr) :# 3
- 2 -
III. IS SUCCESS POSSIBLE?
The essential requirements for a meaningful breakthrough at this
point are that the U.K. (1) drop the demand for a change in U.S.
law (ownership and cabotage) as part of the package; and (2) agree
to complete and unconditional implementation of an "open skies"
agreement including all of the elements listed in Section I of
this paper. The U.S. proposal tabled in July 1992 contained all
of those elements, with the intention that they come into effect
immediately upon reaching agreement.
Secretary Card has said both in Washington and London that he
needs "immediate open skies" as a basis for ruling favorably on
the BA/USAir transaction. The essential requirement is that we
have a fixed and irrevocable schedule for liberalization leading
to full open skies in the very near term. (In October 1992, the
U.S. proposed a two-year phase-in of the July package, but the
proposal was vehemently opposed by most of the U.S. airline
industry. In addition, restating their view that U.S. statutory
changes are needed, the British did not seriously engage in a
discussion of our October proposal.)
If the Prime Minister drops the requirement for statutory changes
as elements of the package, there might well be a basis for
agreement. That possibility will vanish, however, if it is
necessary to spend time negotiating a complicated formula for
phasing in benefits. Any such negotiation will divide the U.S.
airline industry against itself and against the Administration,
will have to cover a parallel phase-in of the BA/USAir transaction
as well, and will have only the dimmest prospects for success.
It is still possible to approve the BA/USAir transaction and bring
the decision to closure prior to January 20, but time has almost
run out. Given the level of control vested in BA by the proposed
agreement, approval would require a deliberate departure from a
long-standing interpretation of the Federal Aviation Act -- a
departure based on our willingness to adopt a more flexible policy
in the context of a truly liberalized aviation market. To be
defensible in court, the decision would have to be preceded by
notice and a reasonable opportunity (a few weeks, at least) for
public comment.
All of this makes very clear that, at this point, we will have to
have an open skies agreement that can be negotiated virtually
overnight. A simple, straightforward opening of the market in
keeping with the elements listed in Section I would be such an
agreement. (Our open skies agreement with the Netherlands was
concluded in three days.) Experience with the U.K. in aviation
teaches that any undertaking to negotiate a more calibrated regime
will involve much more time than is available to us.
U.S. Department of
Chief of Staff
400 Seventh St., S.W.
Transportation
Washington, D.C. 20590
Office of the Secretary
of Transportation
October 19, 1992
MEMORANDUM FOR ROBERT ZOELLICK
FROM:
MICHAEL JACKSON NY
SUBJECT:
Request for a Telephone Call by Mr. Baker to
Douglas Hurd
As discussed, it would be helpful if Mr. Baker could make a call
to Foreign Secretary Douglas Hurd to reinforce the President's
cable to the Prime Minister. Attached are several documents:
The President's cable.
t classified)
Draft talking points.
Background on the BA/USAir investment, Secretary Card's
conversations with the British and our negotiations
this week in London.
Of course we understand if Mr. Baker is unable to make the call.
We are therefore grateful for the offer you made to touch base
with the British if Mr. Baker is unable to do so. Thanks for
your help.
JAB:
1) I think this would be a ford call to mike if you have a moment
3) 2) you only let need to look of POTUS, letter t the talking points
Please me know CONFIDENTIAL. I if you dont ATTACHMENT call, b/c I'll try to do something
more in that care
BBG
UNCLASSIFIED UPON
REMOVAL OF CLASSIFIED
ATTACHMENTS
It 08/07/23
WHITE HOUSE COMMCTR
TUE 20 OCT 92 12:32
PG.02
CONFIDENTIAL
NATIONAL SECURITY COUNCIL
WASHINGTON, D.C. 20506
October 19, 1992
MEMORANDUM FOR THE HONORABLE ANDREW CARD
The Secretary of Transportation
SUBJECT:
Message to Prime Minister John Major
The attached cable was sent to Prime Minister John Major in
response to your memo to General Scowcroft dated October 15,
1992.
Bill Sittmann
Executive Secretary
DECLASSIFIED
White House Guidelines
E.O. 13526, SEC 3.4 (b), September 11, 2006
By MB NARA, Date 5/22/17
CONF IDENTIAL
Declassify on: OADR
WHITE HOUSE COMMCTR
TUE 20 OCT 92 12:33
PG.03
CONFIDENTIAL
CONFIDENTIAL
Dear John:
Andy Card, my Secretary of Transportation, met recently with
John MacGregor to review aviation issues. As Andy indicated, we
would like to find a way to approve the proposed investment by
British Air in USAir. However, as BA's proposal would change
dramatically the structure of international aviation, it would be
very difficult to approve without a true liberalization of our
bilateral aviation market.
Tomorrow our officials resume negotiations on our air
services agreement. My officials are prepared to discuss a
detailed "Open Skies" proposal. They are prepared also to
negotiate for a rapid conclusion of a new agreement. I believe
we have the opportunity now to secure a truly liberal regime that
would benefit our two countries and set a standard for other
countries as well.
With the proper political will on both sides, we should be
able to conclude two precedent setting cases shortly: an "open
skies" agreement between our two countries and BA's investment in
USAir.
Because of the importance I attach to these issues, I have
asked Andy Card to meet with John MacGregor this week in London.
I would be grateful for your personal review of these issues.
Sincerely,
George Bush
DECLASSIFIED
PER DOS WAIVER, November 6, 2015
By It NARA, Date 08/07/23
CONFIDENTIAL
Declassify on: OADR
DRAFT TALKING POINTS
Telephone Call With Foreign Secretary Hurd
The President has just sent a message to Prime Minister
Major about the very important aviation bilateral
negotiations that are underway between our two countries.
According to the reports I receive, these talks show signs
of dragging on for a considerable time.
I think something dramatic is possible in this negotiation
-- a new and truly liberal aviation agreement. It would be
a good thing for both of our countries, and create precisely
the kind of model you have tried to persuade the EC to
embrace.
Of course the backdrop for these negotiations is our review
of the proposed investment by British Airways in USAir.
We truly would like to find a way to approve the BA deal.
We are committed to improving the climate for foreign
investment.
Unfortunately, Secretary Card simply cannot approve the deal
without a true liberalization. We ought to be able to make
both work.
If both things are to happen, we will need to close a deal
in the very near future -- this week if at all possible.
For this reason, the President has Secretary Card to travel
to London to meet with John MacGregor on Wednesday.
I'd be grateful for your personal review of this matter.
#
#
#
As you may have heard, Ross Perot slammed the President last night in the last
10/19/92 Sone risk
debate for considering this deal. So we're fighting for what's right, at
Can't you take the same approach? We both know open transatlantic competition
+ open investment are the right results, but we writ get there
if the U.K. doesn't show its Serious m liberalization.
BACKGROUND ON PROPOSED BRITISH AIRWAYS-USAIR INVESTMENT
October 19, 1992
The Deal: British Airways ("BA") has proposed to invest $750
million in USAir. In return, BA would exercise a degree of
oversight of USAir's management that would be unprecedented for a
foreign airline. Ultimately, the two airlines would operate as
one. The proposal, which requires DOT approval, is extremely
controversial; DOT has received more than 100,000 letters on the
subject on all sides of the issue.
The investment clearly would be a good thing for USAir, a carrier
that, like so many others, has experienced a serious erosion of
profits during the past few years. Communities in which USAir is
a major employer, together with their Congressional delegations,
strongly favor early approval of the BA/USAir transaction.
Most other U.S. airlines, however, including all of the "majors,"
say that the investment should not be approved until the U.K.
agrees to liberalize access to its international aviation market
(not the U.K. domestic market, in which our airlines have little
interest). They say that BA, already the strongest airline in
the bilateral market by a substantial measure, will satisfy its
remaining aspirations for service to the U.S. through its new
partnership, and that we then will have lost whatever leverage we
might have had to negotiate a more open market for U.S. airline
services to Britain. The Administration, the airlines say,
should insist on liberalization as a prerequisite to approval of
the deal.
They make a powerful argument. Although we have long attempted
to persuade the U.K. to relax its regulation of trans-Atlantic
flights, the U.S.-U.K. aviation agreement ("Bermuda 2") remains
one of the most protectionist that we have. The U.K. insists on
a highly regulatory regime that limits the number of U.S. and
U.K. cities that can be served with nonstop flights, limits the
number of airlines that can serve each city pair, limits the
schedules of the airlines that do serve, and requires
governmental approval of every fare. Bermuda 2 prohibits any
additional U.S. airline service to London and other U.K. cities,
even from U.S. communities that do not currently enjoy any direct
service at all. A number of cities that seek new or additional
air service to the U.K. have joined the airlines in opposing the
BA investment.
Update on DOT Negotiations: Secretary Card met with the U.K.
Secretary of State for Transport, John MacGregor, on September
23. They agreed to an accelerated schedule of negotiations on a
new bilateral aviation agreement. The first round of
negotiations took place two weeks ago. Although some modest
improvements in the approach of the British team were evident,
2
the results were far short of the meaningful steps toward
liberalization that we advocate.
Last week, after consulting with Larry Eagleburger, Secretary
Card spoke by telephone to MacGregor and conveyed his
disappointment that the first round had not made more progress.
MacGregor persisted in saying that the British are interested in
liberalization.
Our team is meeting for the second round in London this week. We
expect to table a very detailed "Open Skies" proposal that
provides for: (1) a clear agreement on the end result -- truly
open markets; and (2) a fixed and predictable schedule of steps
over three years that will allow us to get to Open Skies.
While there has been no overt linkage in our discussions with the
British government between the bilateral agreement and the
proposed British Airways investment in USAir, that deal has, of
course, been looming large in the background of these
discussions.
Secretary Card has publicly stated on a number of occasions that
our aviation relationship is a very significant variable in the
"environment" of issues affecting review of the BA/USAir deal.
He has met privately with all the airline CEOs and spoken to
numerous others. We have received over 100,000 letters on this
subject representing all sides of the issue.
Secretary Card told MacGregor in private on September 23 that he
did not see how he could justify approval of the BA deal unless
there were a true liberalization of our aviation bilateral.
003
09/04/92
15:45
202 647 0753
003/004
09/03/92
10:15
202 898 4224
COMMERCIAL WASH
11
RECRETARY OF Or STATE
DEPARTMENT OF TRANSPORT
2 MARSHAM STREET LONDON SWIP 31
My ref:
PRANSPORT
Your ref.
Andrew H Card JI
Secretary of Transportation
know Letter signals smothing dff tone
remain coul
400 Seventh Street, SW
Washington, DC 20590
But not sVentical
Invited stret to come in 14th
Feel stallin
Signal set up for Minic - seria
Dear Secretary Card,
I am very much looking forward to meeting you during my visit to
Washington on 22 and 23 September, when I am scheduled to address
the British-American Business Association and International
Aviation Club on aviation issues.
I felt you might like to know in advance something about what I
am currently intending to say in that speech, especially given
the possibility of developments on the USAir/BA deal before then.
I shall be setting the scene by describing the efforts we have
been making to liberalise arrangements both in Europe and
elsewhere and our satisfaction with the results. I shall be
laying particular emphasis on our belief in a highly competitive
multi-airline industry and the benefits we have seen from the
privatisation of BA. I shall also mention the battle we are
continuing to fight in Europe against state subsidy in the
airline industry, a battle which I am pleased to say has already
been won so far as the UK/US market is concerned.
However, I am planning that one of the key points of my speech
should be on my commitment to pursue efforts to move away from
the current arcane air services agreement and replace it with a
modern, more liberal agreement designed to foster the same type
of vigorous, competitive market we have been trying to encourage
in the UK.
I know that some people in the US have been arguing that if the
proposed BA/USAir deal were to go through we would lose interest
in liberalisation. This is wrong. We want to press ahead with
liberalisation because we believe that, provided we get it right,
it should benefit both the consumer and the industry. Nothing
in the proposed deal changes that. The UK airlines have been
understandably cautious about abandoning the safeguards the
existing agreement offers largely because of the greater power
and greater access to the US domestic market enjoyed by the US
majors. To the extent that the proposed deal improves BA's
access to the US market,
Extended Page 2.1
Resisting change Literyn and And increase their appetite for new for
1C is likely to reduce their grounds
"Prover DA a
opportunities not available under the existing agreement.
There will also be an immediate spin off in terms of extra
services. Because BA will be taking on USAir's existing routes
to the UK, traffic rights on three routes will be freed for
distribution among the other us carriers. Two of those could be
to cities with no service at all at present.
I know that there have also been suggestions that I might take
a more restrictive attitude to a proposal by a US carrier wishing
to make a comparable investment in a UK carrier. This is not
borne out by precedent: the UK has in the past welcomed foreign
investment. There are substantial foreign shareholdings in
several UK carriers and of course BA itself is 25% owned by
Americans. My people have already been in touch with yours about
the assurances we might give both in terms of UK and EC rules on
this point and, if it would help remove obstacles in the way of
the USAir proposal I would, be happy to say in my speech that I
would be disposed to approve a minority American investment in
a UK airline in comparable circumstances.
The proposed deal represents a substantial capital injection
freely negotiated between two independent private sector entities
which should improve the viability of USAir and so enhance
competition and service to the consumer. It would bring
immediate benefits in terms of opening up new routes and give new
impetus to our efforts to promote liberalisation.
If, on the other hand, the proposal were to be blocked, there
would be understandable feeling that the US was interested in new
opportunities and extra competition only where this would
reinforce the supremacy of the largest US carriers. In those
circumstances it. would be far more difficult for me to press
ahead towards the liberalisation both of us would like to see.
I am asking the Embassy to pass this message on to acting
Secretary Eagleburger and to Secretary Brady.
Yours In cerely,
Knowny.
from
(Approved PT. by the Secretary of State
JOHN MACGREGOR
and signed in his absence)
DIEU
British Embassy
Washington
3100 Massachusetts Ave N.W.
Washington D.C. 20008-3600
2 September 1992
Telephone: (202) 898 4250
Telex: RCA 211427 or 216760-WUI 64224
Facsimile: (202) 898-4255
Mr Robert B Zoellick
Deputy Chief of Staff
White House
Washington DC 20500
Dear Bob,
At the meeting with Mrs Hogg on 27 August we spoke about
the proposed USAir/British Airways deal, and you and I
have since spoken further about this on the telephone.
I now enclose a copy of a letter which the Secretary of
State for Transport, John MacGregor, has today sent to
Secretary of Transportation, Andrew Card on this subject.
This, of course, follows the discussion which
Larry Eagleburger had with Douglas Hurd in London
on 26 August.
Sincerely,
Christaghe
C J R Meyer
Chargé d'Affaires
11
SECRETARY or STATE
DEPARTMENT OF TRANSPORT
2 MARSHAM STREET LONDON SWIP 3EB
My ref:
FOR RANSYORT
Your ref:
Andrew H Card Jr
Secretary of Transportation
400 Seventh Street, SW
Washington, DC 20590
Dear Secretary Card,
I am very much looking forward to meeting you during my visit to
Washington on 22 and 23 September, when I am scheduled to address
the British. American Business Association and International
Aviation Club on aviation issues.
I felt you might like to know in advance something about what I
am currently intending to say in that speech, especially given
the possibility of developments on the USAir/BA deal before then.
I shall bc setting the scene by describing the efforts we have
been making to liberalise arrangements both in Europe and
elscwhere and our satisfaction with the results. I shall be
laying particular emphasis on our belief in a highly competitive
multi-airline industry and the benefits we have seen from the
privatisation of BA. I shall also mention the battle we are
continuing to fight in Europe against state subsidy in the
airline industry, a battle which I am pleased to say has already
been won so far as the UK/US market is concerned.
However, I am planning that one of the key points of my speech
should be on my commitment to pursue efforts to move away from
the current arcane air services agreement and replace it with a
modern, more liberal agreement designed to foster the same type
of vigorous, competitive market we have been trying to encourage
in the UK.
I know that some people in the US have been arguing that if the
proposed BA/USAir deal were to go through we would lose interest
in liberalisation. This is wrong. We want to press ahead with
liberalisation because we believe that, provided we get it right,
it should benefit both the consumer and the industry. Nothing
in the proposed deal changes that. The UK airlines have been
understandably cautious about abandoning the safeguards the
existing agreement offers largely because of the greater power
and greater access to the US domestic market enjoyed by the US
majors. To the extent that the proposed deal improves BA's
access to the US market, it is likely to reduce their grounds for
resisting change and increase their appetite for new
opportunities not available under the existing agreement.
There will also be an immediate spin off in terms of extra
services. Because BA will be taking on USAir's existing routes
to the UK, traffic rights on three routes will be freed for
distribution among the other US carriers. Two of these could be
to cities with no service at all at present.
I know that there have also been suggestions that I might take
a more restrictive attitude to a proposal by a US carrier wishing
to make a comparable investment in a UK carrier. This is not
borne out by precedent: the UK has in the past welcomed foreign
investment. There are substantial foreign shareholdings in
several UK carriers and of course BA itself is 25% owned by
Americans. My people have already been in touch with yours about
the assurances we might give both in terms of UK and EC rules on
this point and, if it would help remove obstacles in the way of
the USAir proposal I would be happy to say in my speech that I
would be disposed to approve a minority American investment in
a UK airline in comparable circumstances.
The proposed deal represents a substantial capital injection
freely ncgotiated between two independent private sector entities
which should improve the viability of USAir and so enhance
competition and service to the consumer. It would bring
immediate benefits in terms of opening up new routes and give new
impetus to our efforts to promote libcralisation.
If, on the other hand, the proposal were to be blocked, there
would be understandable feeling that the US was interested in new
opportunities and extra competition only where this would
reinforce the supremacy of the largest US carriers. In those
circumstances it would be far more difficult for me to press
ahead towards the liberalisation both of us would like to SOC.
I am asking the Embassy to pass this message on to acting
Secretary Eaglcburger and to Sccretary Brady.
Yours cenely,
Huany. Am
PP
JOHN MACGREGOR
(Approved by the Secretary of State
and signed in his absence)
8/20
RBZ-
ON THE BRIEFING MEMO FOR LSE FOR
DELTA (TODAY), WE URGED LSE TO PROBE
DELTA ON WHAT RECIPROCAL MARKET
OPENINGS THEY WOULD HAVE us SEEK IN
THE UK. ALLEN'S RESPONSES (pq2) ARE
INSTRUCTIVE-
WE STULL must TRY TO GET A GOOD
DEAL, For COVER w/ CONGRESS. BUT IT
CONFIRMS OUR SUSPICIONS ON TRUE MOTIVES.
MBB.
PS - I ASKED FOR THIS MEMO BECAUSE I
THOUGHT YOU'D BE INTERESIED. Dr DiD NOI
SAY YOU'D ASKED.
United States Department of State
Washington, D.C. 20520
August 20, 1992
NOTE TO BOB ZOELLICK
FROM: DICK HECKLINGER
PM
You asked for a summary of the key points from the Acting
Secretary's meetings with the Chairmen of the four U.S.
airlines primarily concerned with the BA/USAir deal. All
were fairly brief meetings, over the course of the last two
weeks.
United (Aug.
Wolf: O This is a very significant, watershed event;
not just a regulatory issue for DOT; has
broader implications; needs cabinet-level
attention; other foreigners will follow
quickly.
Not saying don't approve, but get the
appropriate price in return; if it does get
approval -- in modified form -- we must get
the EC market; tell BA to work on EC
politically to get access to US, and then we
do phased deal where each side gets equal
benefits at each step; can't settle for
anything less than EC.
US aviation industry is a great success story
for this country and we don't get credit.
LSE:
O
understand your position, although your
industry makes it hard on me by never agreeing
among yourselves.
agree aviation is a success story; I should do
a speech.
plan to call Card and tell him State has
views; the regulatory issues are his to
decide, however.
O
This issue has foreign policy implication; if
it is not on Scowcroft's agenda, it should be.
- 2 -
American (JULY 29)
Crandall made essentially the same points as Wolf,
including:
O
not necessarily opposed, but US must get
significant access in return.
UK is not enough; must get EC access as well;
understand UK may not be able to deliver.
O
USAir is not in the extreme financial
difficulties it claims.
LSE questioned and commented along the line of the Wolf
meeting.
Delta (Aug. 20)
LSE posed several general questions that led to the
following Delta views:
Allen: O we are opposed to this deal; it's not a matter
of what concessions we get.
O deal is an illegal takeover of the control of
a major US carrier by a foreign interest -- in
direct violation of US law.
BA would get access to entire US market while
UK denies us equivalent access.
if deal goes ahead, no incentive for UK to
liberalize.
O
USG approval would make it impossible for US
carriers to compete on an equal basis on the
North Atlantic.
O
this is a significant policy question; should
not be decided on a case-by-case basis;
requires a new, coherent US aviation policy
that provides equal competitive opportunities.
LSE:
O
We don't have the answers yet; understand the
importance of the issue to you and the
industry.
NOTE: SCOWCROFT MTG. WAS AUG. 13.
mgb.
- 3 -
USAir (Aug 19)
Schofield: O USAir is in trouble; its survival is unclear;
financial problems become severe in the early
part of next year -- have to have this capital
infusion.
O
The deal is not control in the sense BA would
run the day-to-day operations; BA can veto
major decisions to protect its $750 million
investment from being misused.
O
There is a question of international
competition that's not getting much attention;
Big Three will survive under any scenario; if
USAir (and Northwest) fail internationally,
there will be only three carriers, an
oligopoly with its disadvantages.
LSE:
O
understand the high stake this represents for
USAir.
our concerns are international competition and
foreign policy consideration.
O
matter of "control" is Card's issue.
O
We don't have answers at this point.
SENT BY:DOT S-1
; 9-21-92 ; 7:45AM ;
2023663956- West Wing (1st Flr) ;# 2
U.S. Department of
Chief of Staff
400 Seventh St., S.W.
Transportation
Washington, D.C. 20590
Office of the Secretary
of Transportation
September 21, 1992
MEMORANDUM FOR ROBERT ZOELLICK
ASSISTANT TO THE PRESIDENT AND
DEPUTY CHIEF OF STAFF
FROM:
MICHAEL P. JACKSON my
SUBJECT:
British Airways-USAir Talking Points
For 9/21 Mon 4 PM mtg w/British Amb Renwick
As discussed last week, attached are a few talking points for
your meeting with the British Ambassador today.
The last talking point is an approach that would not insist on
delivery of an open skies agreement in one stroke, but seeks a
commitment by the British to achieving open skies on a fixed
schedule. Andy will privately raise this approach with his
counterpart Wednesday. It is your call as to whether you mention
this approach.
We would recommend against your suggesting the particulars of
what might constitute an initial package of liberalization, such
as specific new flights that might be allowed.
Also attached is an excellent editorial, which I suspect you saw
in today's Wall Street Journal.
Attachments
SENT BY:DOT S-1
; 9-21-92 ; 7:46AM ;
2023663956- West Wing (1st Flr) ;# 3
TALKING POINTS
British Airways-USAir
Bermuda 2 may be the most restrictive bilateral aviation
agreement that we have with any of our major partners.
MacGreggor is said to be coming to Washington with the offer
of some small concessions to the U.S. as an expression of
U.K. seriousness about the liberalization process (e.g., new
routs to Manchester, Birmingham, etc.).
It is essential, however, that the Card-MacGreggor meeting
create greater visible momentum for liberalization -- real
progress not just prospects. Our hope is to be able to sit
down with a U.K delegation authorized to negotiate
meaningful reforms quickly -- by early October.
In short, what the U.S. is seeking is an "open skies"
agreement such as that recently signed with the Dutch.
(Note: that agreement took only three days to negotiate.)
our proposal for liberalization has been laid on the table
by U.S. negotiators since early this summer. The terms of
an open skies agreement would include changes such as:
-- an end to limits on gateway cities that may be served
in each country;
-- an end to restrictions on entry;
-- an end to price and capacity regulations;
-- elimination of restrictions on charter operations;
-- enhanced U.S. airline opportunities to carry locally
boarded traffic beyond the United Kingdom (fifth
freedom rights).
0
We recognize that implementation of a liberalized regime may
not be possible in one stroke. What we seek is a signed
agreement that sets forth a mutual vision of open skies and
a fixed, accelerated timetable for achieving it.
- Progress, not big bang
-- BA not bluffing (If gets much beyond Nov 3, they might disergy
-- Virtuam Circle a not Good Hand to liberative if he dent
-- Any progress want satisfy other us airlines
Pant want to be awkward
SENT BY:DOT S-1
9-21-92 ; 7:46AM
2023663956- West Wing (1st Fir) ;# 4
THE WALL STREET JOURNAL MONDAY, SEPTEMBER 21, 1992
REVIEW & OUTLOOK
Her Majesty's Sky
We hope John Major's phone will
true watershed. He's right. The bur-
ring one day soon. And that George
den here is on John Major's govern-
Bush is on the other end, inviting the
ment either to pitch aviation toward
British prime minister to join him in
truly destructive protectionism. or
giving the global village a quantum
open up to the real world.
boost. The President will ask Mr. Ma-
We're glad that Transportation
for If he wants to join in opening the
Secretary Andrew Card is finally tak-
world's air routes to free and produc-
ing notice of the opportunity that
tive use. or whether he wants to con-
comes his way. Britain's Secretary of
tinue to preside over one of the world's
State for Transportation John Mac-
most insular and protectionist airline
Gregor will stop by this week to pitch
regimes.
support for the BA takeover. Washing-
Getting down to details. Mr. Bush
ton should show some backbone, be-
will order his Transportation Secre-
cause It has shown that It has the right
tary to let British Airways take effec-
strategy. KLM Royal Dutch Airlines
tive control of USAir, as It now wants
applied recently to mesh its schedules
to do, if Mr. Major will open Britain's
and marketing with those of North-
skies and airports to all U.S. carriers.
west Airlines (KLM owns 20% of
The dawn of free air trade will then
Northwest), and the White House
begin.
beamed approvingly - but only be-
The British carrier's proposal to in-
cause The Hague had just inked an
vest $750 million in USAir has been
open-skies pact with the U.S. What's
hanging fire since midsummer. while
good enough for the Dutch is good
Washington tries to figure out what to
enough for the British.
do. Fifty percent of the world's passen-
With a little push from Uncle Sam,
ger boardings take place here. By
the edifice of aviation protectionism
plugging USAir's domestic system
might well disappear - poof - as
into its international routes, BA cre-
quickly as the Warsaw Pact did. Tell-
ates & global network that - as the
world is now set up -- no U.S. competi-
ingly. the Dutch open-skies agreement
seems to have lit a match under the
tor could hope to match.
That's because landing rights in
European Community, which now con-
templates trading airline access with
the global economy are ruled by a suf-
the U.S. as a bloc.
focating blanket of treaties, the main
purpose of which is to nix competition
Under the lash of deregulation. the
and keep a lot of superfluous national
U.S. megacarriers have come up with
airlines flying around (the Thatcher
clever new ways to run their busi-
government privatized British Air-
nesses and deserve a chance to test
ways). The Department of Transpor-
their mettle abroad. American Air-
fation's Jeff Shane says most of these
lines, United and Delta have trimmed
people "know they can't compete with
their costs to about 9.5 cents per pas-
the guys coming out of the jungle of
senger per mile. By European stan-
the deregulated U.S. market."
dards. British Airways does well at
In aviation, the British are as cold-
14.5 cents. Lufthansa and Air France
bloodedly mercantilistic as they come.
bleed at 20 cents.
They shot down FDR's plan for univer-
Europe's white elephants with
sal open skies in 1944, and together
wings tremble at the prospect of
we've set the tone for the world ever
American intruders. But overpriced,
since. (The U.S. stiff-armed a Cana-
inconvenient air service keeps a flood
dian request for open skies at the out-
of tourists and investors at home.
set of negotiating the recent Free
When Toyota or IBM is looking for
Trade Agreement.) With Britain open,
somewhere to stick factories and labs,
much of the world would follow.
it prefers a place with top-notch access
Given what's going on in the free
to the airline grid.
market of acquisitions, open skies
About now George Bush's finger
can't come too soon. Lufthansa has
should be getting itchy. Heaven
been pow-wowing with Marvin Davis
knows, the British aren't shy about di-
about buying bankrupt Continental
aling for aviation favors. Mrs.
Airlines. As with the BA-USAir deal,
Thatcher didn't hesitate to ask Ronald
Lufthansa smells R way into the U.S.
Reagan to kill the antitrust investige-
domestic market without having to
tion into the demise of Laker Airways,
open up at home. Once inside the
smoothing the way for British Air-
world's richest market, they lose all
ways' privatization.
incentive to negotiate for open skies.
Last week In Detroit, President
That's why Dan Kasper, an avia-
Bush promised to "seize every oppor-
8/25
A. Card
Sept 24 us Air Labor K, Couly off Period exper.
Finan Situature not great, hut not terrable
Pant thank usAin can afford impersion y slippage hunt stockwole
Druta USAIR expect layoths /wanning f
Wrikforce favors the deal ; ALPA doesnt from
hear AC wants to turn down, say no on Mon, h/c pul pressure
Can Survive fn at least a yr; might he able to restonce. Do need K.
Are important for u.s competition; but Wall Street sees too much capacity
Also have problem of access to UK airogstem.
Other U.S. airlines concerned
Will have to alliw all others in i) uk Air agreement is the most restructive
get Shane went to Lordon; raised; stiffed
Tears if delay, have to say yes
Airlines against; bignesh; ALPA
Delta.
Candi Feither party cm take walk by Sept 19; Dec 24 - exth CN
us Air Hubs: N.C, Mo, Penn
If turn down, do soon:
1. us Airget altan
100%
<30% 2. BA may offer a belter real sighth on control; face saver 30% on access
3. Leaser pul pressure to approve
1/. May have Hernoture (KLM)
Ifsey yes, well never jet Ec access
22,000 Eis
An Issue of National Policy, Competition and Fairness
The Case Against the British Airways Takeover of USAir
August 20, 1992
This document was prepared by the corporations listed below. Inquiries should be directed to:
American Airlines (817) 967-1577
Delta Air Lines (404) 715-2533
Corporate Communications
Public Relations
United Airlines (708) 952-5770
United Parcel Service (202) 675-4240
Corporate Communications
Public Affairs
Or Contact:
Jerry M. Ray
Powell Tate, Washington, D.C.
(202) 434-8559
OVERVIEW
The move by British Airways to acquire control of USAir represents a most serious threat to the
entire U.S. airline industry for the following reasons:
It is an illegal takeover of control of a major U.S. carrier by a foreign interest,
in direct violation of U.S. law.
It would give British Airways access to the entire U.S. air transportation market
while the British government denies U.S. airlines equivalent access to the British
market.
If the U.S. government allows the transaction to go forward in the face of the
steadfast refusal by the British government to open the British market, the British
will not have any incentive to open their market to U.S. carriers.
If other governments see that they can achieve access to the U.S. market by
purchasing control of a U.S. carrier, they will no longer have any incentive to
enter into agreements with the U.S. government to open their markets to U.S.
carriers.
Thus, approval of the British Airways takeover of USAir would make it
impossible for U.S. airlines to compete on an equal basis in the transatlantic
market and undermine the ability of the United States to negotiate free aviation
markets around the world.
If this is allowed to occur, the U.S. airline industry will either be sold off to
foreign interests, lose its ability to compete effectively in international markets,
or both. Jobs in the already threatened U.S. airline industry will be seriously
jeopardized.
For the above reasons, the U.S. government must not approve this transaction. Any such
transaction would require major changes in U.S. law and policy. Such significant policy
questions should not be decided on a case-by-case basis, but through the development of a
comprehensive, coherent international aviation policy that fosters new competitive opportunities
for all airlines and does not sell out U.S. interests.
1
STATEMENT OF POSITION
The British Airways/USAir transaction is nothing less than the takeover by a foreign competitor
-- British Airways - of a major U.S. airline in direct violation of U.S. law. It is plainly illegal
and must not be allowed to go forward. Moreover, British Airways seeks to obtain a U.S. and
global franchise while remaining protected from competition in its own markets. Such a result
would substantially impair U.S. airlines' ability to compete in the global marketplace and would
threaten U.S. jobs.
For more than 50 years, U.S. law and precedent have prohibited foreign interests from owning
or controlling U.S. airlines. This illegal acquisition would give British Airways direct control
of USAir, making USAir, in effect, the U.S. division of British Airways. Apart from being a
U.S. carrier's largest single equity holder, British Airways would have the right to dictate every
important aspect of USAir's business including, for example, who it can hire to run the
company, what markets it can serve, what airplanes it may acquire, and what prices it should
charge.
A transaction of this type and magnitude would require a fundamental change in law and U.S.
trade policy and any such change should not and cannot be made on a piecemeal basis, in the
context of a single transaction, especially in circumstances where there are no reciprocal
opportunities. The Legislative and Executive branches must jointly develop any such major
change in U.S. aviation law and policy, governing all future transactions involving U.S. air
carrier ownership, control and international competitive posture, on a fair and uniform basis.
Until that change in law and policy is accomplished, this transaction cannot be allowed.
Moreover, even if the illegal control aspects of the transaction were to be addressed, no
transaction between British Airways and a U.S. carrier should be allowed unless U.S. airlines
can enjoy reciprocal access to U.S.-U.K. and U.S.-European markets. The current highly
restrictive U.S.-U.K. bilateral agreement bars U.S. carriers from such access. It would be a
monumental mistake for the U.S. government to allow a foreign carrier to gain unprecedented
access to U.S. air transport markets, when U.S. airlines are foreclosed from comparable access
to foreign markets. A policy of unilateral economic disarmament would cripple the U.S.
government's ability to liberalize aviation markets not only with the U.K., but throughout
Europe and the rest of the world.
Allowing the proposed British Airways takeover to proceed would have far reaching adverse
impacts on U.S. trade policy, competition and jobs. This is not simply an issue of foreign
investment, but of foreign control of the U.S. airline industry. Hundreds of thousands of U.S.
jobs and U.S. competition in international markets would be placed in substantial jeopardy,
unless U.S. airlines can compete in all the markets to which British Airways would gain access
from the transaction.
2
THE ISSUES
I.
AS A MATTER OF LAW, THE DEAL MUST BE DISAPPROVED.
This is not a mere "alliance," but an illegal takeover of a U.S. carrier by foreign
interests, in clear violation of U.S. law.
The law is clear: U.S. carriers must be under the control of American citizens.
The terms of the investment agreement would give British Airways substantial
and effective control over virtually all business aspects of USAir.
British Airways would become the largest shareholder. At $750 million,
this is no passive investment, but one that would give British Airways a
major and undeniable source or influence and leverage over the business
affairs of USAir.
Under terms of the British Airways/USAir agreement, all critical business
decisions affecting the business affairs of USAir would require agreement
of at least 80 percent of its Board of Directors. However, British Airways
would control 25 percent of that Board, giving it veto power over matters
ranging from the composition and compensation of USAir senior
management to the acquisition of routes, the purchase of equipment,
operating budgets, commercial or marketing agreements and any merger
or consolidation.
The Department of Transportation (DOT) and Civil Aeronautics Board (CAB)
have consistently held that the exercise of veto power over corporate decisions
constitutes control. That is exactly what British Airways would wield over all
critical business decisions and operations of USAir, in clear violation of the
Federal Aviation Act, which requires that a U.S. carrier not only be majority
owned by U.S. citizens, but "in fact, must be controlled by U.S. citizens."
In their investment agreement, British Airways and USAir list as a "central
purpose" of the transaction their intent to create "a unified airline system." USAir
goes from being an internationally competitive U.S. carrier to being the North
American division of British Airways, with every significant aspect of its
operation controlled by British Airways. That is clearly a transfer of control to
a non-U.S. citizen, in violation of U.S. law.
Additionally, the planned integration of marketing and operational functions
would produce a single "airline system" controlled by British Airways and
operating under one "management structure." The British Airways system would
thereby extend into and throughout the United States, in clear violation of the
specific prohibition of U.S. law against cabotage -- foreign carriers operating
within the United States.
3
II.
AS A MATTER OF POLICY, THE DEAL MUST BE DISAPPROVED.
This is nothing more than a backdoor attempt by British Airways to achieve what
it could not get on a bilateral, reciprocal basis: broad operating rights within the
United States unlike any rights U.S. carriers enjoy in Britain or any other
country.
The well-established policy of the U.S. government is to permit limited ownership
flexibility only in cases where the United States has a liberalized aviation
relationship with the country of the foreign investor.
Britain has consistently denied wider market access in Britain to U.S. carriers.
The closed British aviation system, one of the most restrictive in the world,
precludes the U.S. government from granting British Airways such a large stake
in USAir.
Thus, even if the issue of illegal control was mitigated by changes in the deal, the
absence of an open aviation relationship between the United States and Britain
compels the U.S. government to disapprove the transaction.
If the U.S. government approves this transaction without first achieving truly
open access to the British market for U.S. carriers, Britain will have no incentive
to open its market.
It would be unilateral economic disarmament to grant such unfettered access to
a foreign carrier without complete liberalization of the U.S.-U.K. aviation accord.
A giveaway such as this would cripple the ability of the United States to negotiate
liberalized aviation relationships with other major trading partners. Other
countries would conclude that they could refuse to bargain with the United States,
thus protecting their own carriers from competition, while gaining access to the
U.S. markets by purchasing control of U.S. carriers.
Foreign carriers must not be awarded freedoms that U.S. carriers are denied. The
United States must not permit them to violate U.S. law or buy access into the
world's largest market without obtaining reciprocal and comparable rights for all
U.S. carriers.
This is not analogous to the KLM/Northwest case. KLM was not given the
opportunity to exercise control over Northwest. Moreover, the United States has
a liberal aviation relationship with the Netherlands, which was the basis for
approving that transaction. It has no such agreement with Britain.
4
III.
AS A THREAT TO COMPETITION, THE DEAL MUST BE DISAPPROVED.
If British Airways is granted virtually unlimited access to the world's largest
single market while remaining protected by the British government from U.S.
competition in the British market, the ability of U.S. carriers to compete on a
global basis will be undermined. Neither the British government nor any other
government will have any incentive to negotiate agreements enabling U.S. carriers
to compete openly in their markets.
British Airways would acquire a base of operations in the United States unlike
any U.S. carriers could ever expect to achieve abroad. Its ability to gather traffic
in the vast U.S. market and funnel it to Britain and beyond might never be
matched by any U.S. carrier because of restrictions imposed by Britain and other
governments.
IV.
THIS IS A DIRECT ASSAULT ON THE U.S. AIRLINE INDUSTRY.
This is not a question of British Airways acquiring a "toehold" in the lucrative
U.S. market, but a potential "stranglehold" over access to 55 million USAir
passengers and 200 million FTKs of air cargo a year.
British Airways is seeking a U.S. and global franchise while remaining protected
from competition in its own home market.
If this transaction is allowed, it is clear that other foreign carriers would pursue
similar deals. Thus, this transaction would set a dangerous precedent. With this
kind of penetration of the U.S. market something U.S. carriers are denied
abroad -- the ability of U.S. carriers to compete and survive would be threatened.
Taken over by British Airways, USAir would cease to exist as an international
carrier. "Passengers won't know if their pilot is British or American," British
Airways director of Corporate Strategy Roger Maynard told Business Week.
In the integration of British Airways and USAir operations, American jobs would
be threatened. The health of the U.S. airline industry would be placed at risk.
Unfair competition could send the U.S. airline industry the way of the U.S. steel
and auto industries. Jobs and dollars could well go overseas.
V.
AMERICAN CARRIERS ARE NOT AFRAID OF COMPETITION.
The fare wars of recent months provide ample evidence that U.S. carriers are
intensely competitive.
U.S. carriers are not attempting to avoid competition, but to preserve their ability
to compete on a level playing field in a global market that is anything but free.
5
VI.
THIS IS A WATERSHED FOR U.S. AVIATION POLICY.
This is the môst monumental policy decision since domestic deregulation.
Because of the effect on other countries, the outcome of this transaction will
determine the future ability of the U.S. airline industry to compete on an equal
footing in all global markets.
This is not a fight between British Airways and its U.S. competitors, but a pivotal
test of the principles that will govern the relationship between the United States
and its major trading partners in the area of commercial air transportation.
Never before has the U.S. government been presented with a situation that would
surrender so many rights to a foreign carrier.
If the policy of the last 50 years is to be changed, it should be done through
careful consideration of the issues and as part of a global liberalization of the
industry that proves fair to all carriers. It must not be made piecemeal or on the
basis of a single transaction.
The Department of Transportation should not and must not make such a radical
departure from longstanding policy without careful consultation with Congress.
Any revisions of current law must provide for a sound and fair international
foundation that ensures that foreign investments in U.S. carriers do not result in
the unfair treatment of U.S. carriers in world aviation markets.
6
MYTH VS. REALITY
MYTH:
This is an investment within the limits of the law.
REALITY: It is an illegal takeover in clear violation of U.S. law.
The issue is not ownership, but control. The percentages of equity and voting
stock may be within the numerical limits on foreign investment in U.S. carriers,
but the size of the investment -- $750 million - and terms of the agreement would
grant British Airways control over every significant aspect of USAir's business.
The Federal Aviation Act dictates that U.S. airlines remain not only under the
majority ownership of U.S. citizens, but also under the effective control of U.S.
citizens. This proposed takeover fails that crucial legal test.
British Airways would have at least 25 percent of the 16 seats on the USAir
Board of Directors, giving it veto power over decisions requiring an 80 percent
"super-majority" of the Board. That would include all decisions on:
Annual capital and operating budgets
Capital expenditures and investments in excess of $10
million a year, which would include all aircraft purchases
The incurrence of debt or certain other liabilities, including
leases, in excess of $25 million a year
The acquisition, sale, transfer or relinquishment of any
route authorities or operating rights
The appointment, compensation and dismissal of senior
executives
Commercial, marketing or joint venture agreements
Mergers or consolidations involving the sale of $25 million
or more in assets
The Department of Transportation has said that its standard for measuring control
is whether the foreign investor "will have a substantial ability to influence the
[U.S.] carrier's activities." That standard is clearly met in this case. As such, the
transaction must be blocked.
7
MYTH:
There is precedent for foreign investment of this kind.
REALITY:
Fifty years of DOT and CAB precedent clearly prohibit this transaction.
There is no precedent for approval of a foreign investment of this size and scope.
The law is clear. A takeover of this kind is illegal. The influence British Airways
would be able to wield under terms of its agreement with USAir violates the
absolute prohibition against foreign control of a U.S. carrier.
As a matter of policy, DOT has allowed limited ownership flexibility only in
cases where the United States has a liberalized aviation relationship with the
country of the foreign investor. The British market, in contrast, remains one of
the most restrictive in the world for U.S. carriers.
MYTH:
This is no different from KLM obtaining a sizable stake in Northwest.
REALITY:
In the KLM/Northwest case, "effective control" was not an issue.
Under the pressure of DOT concerns about its potential control over Northwest,
KLM was forced to scale back its investment in order to win approval.
The KLM/Northwest agreement was subjected to formal, public scrutiny to
ensure that control of Northwest would remain in American hands. Even a
cursory review of the British Airways/USAir deal makes clear that USAir would
cease to be a U.S. citizen, contrary to U.S. law and consistent interpretations by
DOT. To quote Salomon Brothers analyst Julius Maldutis: "It is clear that British
Airways is demanding effective control of a U.S. company."
As British Airways Chief Executive Sir Colin Marshall told Newsweek: "For $750
million I think you would expect to have some influence!"
MYTH:
Investment in USAir by British Airways will strengthen competition.
REALITY: This takeover will lessen competition in the transatlantic marketplace.
A failure by the U.S. government to require reciprocal market opportunities in
the U.K. and elsewhere will eliminate any prospect for replacing the restrictive
U.S.-U.K. aviation agreement with an "open skies" arrangement.
By admission, British Airways seeks to create "a unified airline system." USAir
would become the North American division of British Airways, giving British
Airways access to the U.S. market that far outweighs any benefit U.S. carriers
might expect from a more open British market.
U.S. carriers have consistently been denied wider market access in Britain. This
proposed takeover is nothing more than a backdoor attempt by British Airways
to achieve what it could not otherwise achieve on a bilateral, reciprocal basis.
8
MYTH:
American carriers are opposing this out of fear of competition.
REALITY: This deal must be stopped to keep competition alive.
No one can question the highly competitive nature of the U.S. airline industry.
However, by allowing British Airways virtually unlimited access to the world's
largest aviation market while it is protected from free and open competition from
U.S. carriers in the U.S.-U.K. and U.S.-European markets, this transaction
imperils the base from which U.S. airlines attempt to compete in a global market.
If approved, there would be no incentive for Britain or other trading partners to
negotiate "open skies" agreements. Their carriers would remain shielded from
competition from U.S. airlines.
MYTH:
U.S. carriers see this only as a bargaining chip for a better aviation pact with
Britain.
REALITY: U.S. carriers are opposing this as a matter of law, principle and policy.
Let there be no mistake: this is a deal that violates the law, runs counter to
established national policy and threatens the future livelihood of U.S. airlines in
a highly competitive, highly regulated global market.
The issue here is not fear of British Airways, but legitimate concern that a change
of this magnitude in U.S. aviation policy take place only in a truly liberalized
international environment. The goal of a global "open skies" environment of fair
competition and free markets is endangered by this proposed takeover.
The United States needs a consistent, coherent aviation policy that not only sets
acceptable levels for foreign investments, but creates the conditions for free, fair
competition. U.S. carriers are not seeking to keep British Airways out of the U.S.
market, but to ensure that a monumental change in U.S. policy - with a marked
impact on the future of the U.S. airline industry does not rest on a single
administrative decision by DOT.
Concessions by the British could not begin to adequately compensate U.S.
carriers for what British Airways stands to gain from its deal with USAir:
virtually unlimited entry to the world's largest aviation market and unprecedented
access to the 40 percent of all foreign-bound U.S. travelers who begin their trips
in cities other than regular gateways.
There is no comparison between the U.S. and British markets. If it takes over
USAir, British Airways has instant access to a market of 400 million boardings
a year. Even full access to the British market would offer U.S. carriers a
potential of only 11 million boardings a year.
9
MYTH:
Without this investment, USAir will not survive.
REALITY: USAir is poised for long-term survival on its own.
At the time of the announcement, USAir Chairman Seth Schofield denied this was
a rescue of USAir. Even without the British Airways investment, he said, "We
still had strong liquidity and we would have been a survivor."
USAir remains a viable carrier on its own. Its balance sheet reflects some of the
pressures other U.S. carriers have experienced, but its survival is not in question.
With cash and marketable securities of $320 million, a reasonable debt-to-equity
ratio and an available $875 million cushion against future losses, USAir has the
financial wherewithal to ride out any short-term adverse market conditions and
has the ingredients for long-term survival.
With a restructured route system and concessions from its unions, USAir is
poised for a turnaround. If it had been in serious financial difficulty, it would not
have spent $1.78 billion on equipment, routes and slots in two years.
If there are jobs at risk, as has been suggested, they are not so much USAir jobs,
but the jobs now held at other U.S. carriers and U.S. airline vendors. These jobs
could disappear or be transferred abroad in the event foreign carriers are allowed
to violate U.S. law, buy their way into the U.S. market and place U.S.
international carriers at a serious competitive disadvantage.
If USAir jobs are at risk, they are more at risk from a takeover by British
Airways. Economic logic dictates that an integration of operations with larger
British Airways will lead to consolidations resulting in a loss of USAir jobs.
MYTH:
This is a mere "business arrangement and not a political matter."
REALITY: The health and composition of the airline industry have long been matters of
national concern -- to the United States and to other governments.
This transaction is inexorably linked to U.S.-British aviation relations and to the
complex web of agreements governing international competition in the airline
industry.
It is no simple business arrangement, but an unprecedented transaction with
profound policy implications. It would give British Airways a degree of market
access that Britain and other European governments have long denied to U.S.
carriers.
In 1989, British Airways Chairman Lord King demanded cabotage the right to
fly domestic routes and the right of unlimited investment in the United States.
The U.S. government scoffed. Now, British Airways wants to buy from USAir
a right that has been at the heart of government-to-government negotiations.
10
MYTH:
This is a logical step in the global integration of the airline industry.
REALITY: This is a direct assault on the U.S. airline industry.
Make no mistake: where British Airways seeks to tread, other foreign carriers are
waiting to follow. This would open the door not only to foreign investment, but
a sell-off of the U.S. market to foreign carriers.
This transaction would set a dangerous precedent. With this kind of
unprecedented access to the U.S. market unlike anything U.S. carriers enjoy
abroad the ability of U.S. airlines to compete and even survive is threatened.
This is the most monumental decision to be made about U.S. aviation policy since
deregulation. The outcome will determine whether U.S. carriers have the
opportunity to compete on an equal basis with other carriers in global markets.
Never before has the U.S. government been presented with a situation that would
surrender so many rights to a foreign carrier. And if the policy of the last 50
years is to be changed, it should be done through careful consideration of the
issues and as part of a global liberalization of the industry. It must not be made
piecemeal or on the basis of a single transaction.
To allow this takeover would cripple the ability of the United States to negotiate
liberalized aviation relationships with other countries. A vital source of leverage
would be lost. The United States should not place the "for sale" sign on the U.S.
airline industry. Globally, this is still a tightly regulated industry, not a free
market.
The Department of Transportation should not embark on so risky a course without
first giving Congress and the domestic airline industry a chance to consider
revisions in the law and ensuring that a sound and fair international foundation
for such changes has been established.
11
Memorandum
U.S. Department of
Transportation
Closeltold
Office of the Secretary
of Transportation
INFORMATION: USAir's Financial Condition
AUG 2 I 1992
Subject: as of June 30, 1992, and its Projected
Date:
Capital Requirements through June 1993
From: Assistant Secretary for Policy and
Jeffrey N. Shane Jast
Reply to Regis P. Milan
Attn. of:
Timothy Carmody
International Aviation
P-55, X62348
To: The Secretary
Thru: The Deputy Secretary
My staff has prepared a comprehensive financial analysis of
USAir as it exists today, along with a 12-month forecast of the
carrier's capital requirements. A copy the report is attached.
USAir has told the Department informally that it (a) is not now
in serious financial distress, (b) will not file Chapter 11
bankruptcy, and (3) will not furlough employees or otherwise
change the fundamental character of the airline should the
Department disallow the investment agreement with British
Airways.
The staff analysis confirms USAir's representations that in the
short term the carrier is not in financial extremis and will
remain a strong, viable competitor. USAir, however, could have
a potential cash flow problem in the future if the economy does
not improve.
The fundamental financial question is whether USAir can survive
in the long term without a major capital infusion. On the one
hand, if the general economy, air traffic, and carrier yields
improve, USAir could continue to be a strong competitor on the
east coast. On the other hand, if the economy, traffic, and
yields do not improve, at least moderately, over the next 12
months, USAir and several other airlines could be financially
strained. Some airlines could be forced out altogether, and
USAir could be forced to further curtail its operations.
However, should this pessimistic scenario prevail, causing some
carriers to fail, the remaining carriers would benefit. We
note that USAir has a very dominant position in the northeast,
which puts it in a better position than perhaps any other
carrier to successfully "shrink" to a relatively solid core
system, should that be necessitated by a continuing sluggish
economy. When the economy does recover and traffic growth
resumes, USAir's position in the northeast should allow it to
return to profitability, albeit as a smaller airline.
Attachments
FOR OFFICIAL USE ONLY
USAIR'S FINANCIAL CONDITION AS OF JUNE 30, 1992
AND
ITS PROJECTED CAPITAL REQUIREMENTS THROUGH JUNE 1993
PREPARED BY THE
PUBLIC PROCEEDINGS DIVISION
OFFICE OF AVIATION ANALYSIS
SUMMARY
This report is an analysis of USAir's current financial
position and a forecast of its capital needs for the 12 months
ending June 1993. Our analysis focuses on the USAir's
projected financial condition through June 30, 1993, under two
scenarios, a most-likely scenario estimate and a pessimistic
estimate.
First, our most-likely estimate is that given a basically
status quo situation in which there is modest economic recovery
(2 to 3 percent growth rate in Gross Domestic Product), some
traffic growth, a slight increase in fares, and inflation-
related cost increases -- USAir could develop adequate cash
flows to permit it to continue operations, in a weakened state,
without the infusion of additional investment capital at the
level proposed by British Airways. Under this scenario, USAir
would incur net losses in three quarters, averaging $105
million per quarter, followed by a profitable second quarter of
1993.¹
In our pessimistic scenario there would be (a) no traffic
growth (with changes in traffic reflecting normal seasonal
patterns only), (b) no increase in fares and yields, and (c)
costs moving at the inflation rate, USAir would incur four
quarters of net losses averaging $116.5 million. Under this
scenario, the airline by June 1993 would have substantially
depleted its cash reserves and consequently would have a
critical cash flow problem. The airline could not continue to
sustain unprofitable operations, beyond several months, without
significant additional funding. However, under this grim
scenario the three major carriers now in bankruptcy (America
West, Continental, and TWA) probably would cease operations and
the "Big Three" carriers would also be in serious financial
distress.
INVESTMENT AGREEMENT
On Tuesday July 21, 1992, British Airways PLC (BA) and USAir
Group, Inc. announced an investment agreement whereby BA would
acquire 21 percent of the voting stock and a 44 percent equity
in USAir Group Inc., the parent of USAir, Inc., for $750
million. Under the proposal, BA would pay USAir $520 million
for 7 percent Series C Cumulative Preferred Stock, and $230
million for newly issued 7 percent Series E Cumulative
¹We did not do a "most optimistic" estimate under which USAir would, of course, be more viable.
2
Preferred Stock that will be convertible to common voting
stock. BA will be able to convert either stock series at a
price of $20.50 a share. None of the stock is convertible for
four years following final approval of the pact. The airlines
have pledged to complete the agreement by December 24, 1992,
subject to the Department's approval.
USAir's management has said informally that if the sale is
approved, it would use the proceeds of the sale to retire debt
and might use the remaining proceeds to acquire the assets of
another carrier, most likely TWA. Furthermore, USAir wants to
gain "mass" through an international strategic alliance. BA
wants to penetrate the U.S. domestic market and gain feed to
its international flights from the U.S. and become a global
airline.
The Department must consider several aspects of the
transaction, including whether it is in the public interest to
revise the foreign control standard. Moreover, the Department
must take into account the current financial position of USAir
and the effect any decision could have on the continued
financial viability of the airline. The airline's management
says it has the financial resources to continue to operate at
least through the second quarter 1993.
BACKGROUND
USAir (and its parent, USAir Group Inc.), is based in
Arlington, Virginia. It is the sixth largest U.S. airline as
measured by revenue-passenger miles (RPMs). USAir has major
domestic hubs at Pittsburgh, Philadelphia, Charlotte, and
Baltimore, and is also either the dominant carrier or a close
number two at Boston, LaGuardia, and Washington National.
USAir serves many smaller cities through its commuter
affiliate, USAir Express.
USAir operates to destinations in Europe, Canada, the Bahamas,
and Mexico. Its international routes include Pittsburgh-
Frankfurt, Charlotte-Frankfurt, Charlotte-London, and
Philadelphia-Paris. In March 1992 (Order 92-4-49), the
Department approved the sale of TWA's Baltimore-London and
Philadelphia-London routes to USAir for $50 million.
USAir's international traffic grew 27 percent between 1990 and
1991. However, international operations represent only 4
percent of its total RPMs. USAir has approximately 46,500
employees. It operates a fleet of 492 aircraft consisting of
737s, 757s, 767s, MD-80s, F-28s, and Fokker 100s. Its average
fleet age is 9.65 years. USAir owns approximately 239
aircraft, or approximately one half of its total fleet.
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3
USAir, once a local service carrier in the northeast, grew
rapidly in the late 1980s. In 1987 USAir acquired Pacific
Southwest Airlines (PSA) for $460 million and Piedmont Airlines
for $1.6 billion.
On March 27, 1992, USAir entered into an agreement to operate
the Trump Shuttle for ten years, with an option to buy after
four and a half years. USAir began its Shuttle service on
April 12, 1992.
USAIR'S FINANCIAL CONDITION
Prior to 1989, USAir had earned annual operating and net
profits for 13 consecutive years. Between January 1980 and
June 1989, USAir earned $901.8 million. Since that time,
however, the carrier has accumulated operating losses of $1.36
billion and net losses of $979 million. See Table 1, USAir's
Total Operating Revenues, Expenses, and Operating and Net
Profits, 1980-1992.
USAir's losses can be attributed to at least seven interrelated
factors.
1. Impact of Economy: Since early 1989, there has been a
decline in the general economy as reflected by the turndown in
the rate of growth of the Gross Domestic Product (GDP). The
demand for air transportation is notoriously sensitive to
general economic conditions, particularly to Disposable
Personal Income (DPI) which is tied to the growth in GDP. The
GDP rose at an annual rate of only 5 percent in 1990, 2.9
percent in 1991, 2.9 percent first quarter 1992, and 1.4
percent in second quarter 1992. Lawrence Lindsey of the
Federal Reserve Board projected GDP to grow 2 to 2.5 percent
for the second half of 1992 after averaging 2 percent in the
first half.
"
USAir's primary markets are situated in the northeast region of
the country, which has been particularly hard hit by the
prolonged economic recession. Passenger traffic as measured by
the growth in RPMs has been constrained and sporadic. See Chart
2, USAir's System RPMs December 1991 - June 1992, and Chart 3,
Airline Revenue Passenger-Miles For First Six Months of 1991
and 1992. As an emerging international airline, USAir has
realized significant growth in its international traffic.
International operations, however, constitute only 4 percent of
USAir's system RPMs. As consequence, the airline has been
unable to take advantage of cross-subsidy from international
service, where yields have remained relatively high.
2. Acquisitions: Recent mergers and international route
and slot acquisitions have contributed to USAir's financial
losses in two ways: (1) expanded debt has increased debt
service expenses, and (2) increased debt has a negative lever
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4
effect on losses during unprofitable periods. In 1987 USAir's
debt increased by $460 million with the acquisition of Pacific
Southwest Airlines and by $1.6 billion with the acquisition of
Piedmont Airlines. In 1991 it purchased 114 Continental slots
at LaGuardia and Washington National for $61 million.
See Chart 4, USAir's Long-Term Debt and New Stockholders Equity
1980-1992, and Chart 5, USAir's Interest on Long-Term Debt and
Capital Leases 1980-1992. The rise in reported debt since
third quarter 1989 and the rapid rise in net stockholders
equity resulted from the acquisition of Piedmont and its
reporting of the combined financial statements in DOT Form 41.
As a consequence of added debt burden, USAir's times interest
earned declined drastically in 1989, but has since steadily
improved and is now positive. See Chart 6, USAir's Times
Interest Earned 1985-1991. The times interest earned ratio
measures the extent to which a firm's earnings can decline
before it is potentially unable to meet annual interest
expenses.
3. Operating Costs: USAir incurs high operating costs
stemming from a number of factors: it has a short-haul route
structure situated in the congested northeast, a greater
percentage of its fleet operating time is required for takeoffs
and landings, its fleet spends greater block time on the
ground, and its fleet experiences more aircraft cycles.
Its diverse aircraft fleet mix (6 different types) adds to
training and maintenance costs. The low seat configuration of
USAir's aircraft -- an average of 126 seats per aircraft
compared to the average of 168 for the other majors -- inflates
seat-mile costs and limits revenues the airline can derive.
While USAir's 1991 cost per available seat-mile (ASM) was 10.4
cents, the industry average was 9.2 cents. On average, USAir's
costs are 13 percent higher than the industry average. See
Chart 7, USAir Yield/RPM and Operating Cost/ASM 1985-1993 2nd
Quarter.
USAir's ability to cover its daily operating expenses, as
measured by days cash coverage, has declined slightly since the
fourth quarter of 1990. This indicates that the company is
consistently able to maintain its liquidity and is meeting its
short term obligations. See Chart 8, USAir's Days Cash
Coverage 1Q85 - 1092.
4. Expansion/Contractions: USAir's attempts to expand
into several new markets outside the northeast have not been
successful. In May 1991, USAir ceased operations in eight of
the West Coast markets it had operated since acquiring PSA,
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5
eliminated its Dayton hub, and closed four crew bases, two
heavy maintenance bases, and one ticket reservation office. As
part of the pending transaction with British Airways, USAir
would sell the Philadelphia-London and Baltimore-London routes
that it just bought from TWA for $50 million.
5. Fare War: The continuing pace of airline competition
(as demonstrated by the recent fare war in which fares were
reduced by 50 percent for tickets good through September 13)
will substantially dilute USAir's third quarter yields even
though RPMs will be higher. Thus, USAir's chances for earnings
improvements in the third quarter 1992 are nil. In Chart 9,
USAir's Actual and Projected Yield/RPM and Operating Cost/ASM
1Q 85 to 2Q 93, we project a rise in ASMs and RPMs resulting
from the 1992 summer fare war and will continue to grow through
the fourth quarter.
6. Load Factors: The cumulative effect of the previously
cited factors has been to raise USAir's breakeven load factor,
which has increased its need for high yields and raised the
threshold of profitability. USAir's breakeven load factor,
which has traditionally been high, remains so. In 1991 its
breakeven load factor was 60.8 percent, while its actual load
factor was 58.7 percent, the lowest in the industry and below
the industry average of 62.9 percent. See Chart 10, USAir's
Load Factors, 1985-1993.
7. Yields: USAir's yield averaged 16.7 cents per RPM in
1991 compared with the industry average of 12.8 cents per RPM.
USAir's high costs require that it achieve high yields to be
profitable. However, the prolonged recession, heightened airline
competition, and fare wars have eroded yields and hindered
USAir's efforts to achieve profitability. See Chart 9.
Consequently, taking the seven cited factors into account,
USAir's sustained operations at below-breakeven load factors
and the industry's inability to maintain adequate yields
arising from a declining economy have produced mounting
quarterly operating and net losses. These losses are
exacerbated by the increased debt burden undertaken in 1987
with the acquisition of PSA and Piedmont. Long-term debt rose
from $311 million in 1988 to $1.9 billion by second quarter
1992. The associated debt service costs have risen 320 percent
from $55 million in 1988 to $178 million in 1991.
Sustained losses have also weakened USAir's working capital and
cash flow position. Working capital (current assets minus
current liabilities) has been negative since late 1987. See
Chart 11, USAir's Total Current Assets and Liabilities, 1080-
1092, and Chart 12, USAir's Working Capital 1980 - 1 Quarter
1992. Current liabilities have grown more rapidly than current
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6
assets. The level of working capital indicates the extent to
which claims of short-term creditors are covered by assets that
are expected to be converted to cash in a period corresponding
to the maturity of claims.
As of the first quarter 1992, USAir had cash and cash
equivalents of $312 million, down from $415 million at the end
of 1991, a decline of $103 million. By the beginning of the
second quarter, USAir's Statement of Cash Flows listed cash and
cash equivalents at $209 million and is now estimated by USAir
to be $211 million, a decline of $204 million in six months.
BASES FOR ASSESSMENT AND PROGNOSIS
The assumptions upon which the Public Proceedings Division's
projections are based are listed in Table 13, List of Forecast
Assumptions.
USAir's long-term viability is dependent upon a resurgence in
the economy, which will lead to increased revenues through
traffic growth, higher yields, or both, and continued
management attention to cost reduction.
A number of factors may contribute to USAir's efforts to
improve its profitability in the next 12 months.
First, the economy remains sluggish. The Air Transport
Association, in late May 1992, projected domestic airline
traffic to grow about 6 percent in 1992, assuming a growth in
U.S. gross domestic product of 1.4 percent. Forecasters cited
in the July 4, 1992, Economist (p. 51) are expecting an
annualized GDP growth rate between 2.5 and 3 percent in the
second half of 1992, while the Federal Reserve Board projects
between 2 and 2.5 percent.
The Federal Reserve Board's Current Economic Conditions report
released August 5, 1992, indicates that economic activity, in
recent weeks, has been uneven across the nation. Manufacturing
increased moderately in most Reserve districts, but showed no
discernable direction in others. Retail sales rose modestly
overall. Lower interest rates have provided little impetus to
residential and commercial real estate activity. Tourist
activity has been flat. Conditions in agriculture were
slightly improved. In general, reports on trends in economic
activity in the Boston, New York, Philadelphia and Atlanta
Federal Reserve Districts remained mixed and uneven. The
Federal Reserve anticipates weak and uneven improvement in
economic growth across regions of the country in the next six
months.
In a rising economy domestic airline traffic grows between two
and three times the rate of general economic expansion. If the
GDP grows at a faster rate, between 3 and 4 percent, airline
traffic will increase more rapidly, reflecting the close
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7
relationship between economic health and the demand for air
transportation. IATA has projected North American traffic to
grow 4 percent in 1992 and 5.8 percent in 1993. (AW&ST, June 8,
1992, p. 34.)
A low projected inflation rate of 3.2 percent for 1992 and 1993
will assist USAir's management in containing costs. Fuel
prices have been the exception. American and Delta have
experienced 11 and 16 percent increases, respectively, in the
price of fuel per gallon between the end of the first quarter
and late June (Aviation Daily, June 25, 1992, p. 538)
Northwest, Continental, America West, and USAir have not
reported the extent of their recent cost increases. Several
carriers, including USAir, have proposed a domestic fare
increase of 4 percent and referred to the increase as a "fuel
cost adjustment".
Second, USAir's new four-year labor contract, ratified by its
pilots' union in May 1992, will save the carrier $70 million
the first year and as much as $100 million in subsequent years.
The airline estimates that the contract will yield a $55
million reduction in pay-outs to its pilot group alone. The
airline will also realize a $15 million annual benefit from new
work rules that will increase pilot productivity. The labor
agreement also allows USAir to reduce non-contract workers'
pay, saving the company an additional $21 million annually.
Third, the company has instituted a pension freeze on non-
contract workers, which it estimated will save $56 million, and
a managed care program for non-contract employees, which will
further reduce costs by $20 million. Labor costs constituted
42 percent of USAir's total costs in the first quarter 1992
compared to 35.8 percent for the industry. USAir planned to
reduce the management and clerical staff by 10 percent of 1991
levels through layoffs and attritions by the end of 1992.
These reductions have now been implemented.
Fourth, USAir is simultaneously attempting to improve service
quality in an increasingly competitive airline business. The
company already has one of the industry's best records in
overall consumer complaints, and has an improving record in
lost baggage.
Fifth, reduced fares sparked increased demand in the
Washington-New York-Boston shuttle markets. USAir has added
flights as demand continues to grow. With the acquisition of
Continental's slots and terminal facilities at LaGuardia, USAir
can institute new service in September 1992 using the East
Terminal built next to the shuttle operation.
Sixth, USAir will further improve service in October 1992 with
the opening of Pittsburgh's new Midfield Terminal. The
terminal will have an advanced automated baggage handling
system. The terminal's placement between the two main runways
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8
will reduce aircraft taxi time and fuel consumption, while
providing faster service for travellers. It is expected that
the new terminal will enhance the airline's service image and
make travel through Pittsburgh more convenient.
Seventh, some Wall Street analysts believe that USAir
represents an attractive turnaround story, if it can continue
lowering costs, improving service, and enhancing its critical
mass, perhaps through a long-term strategic alliance with a
healthy domestic or foreign air carrier.
CONCLUSIONS
O USAir is not on the verge of insolvency, nor is it a
candidate for bankruptcy in the immediace future, given
information available today.
o Although operating at a loss, USAir can continue to
operate over the next twelve months without the significant
level of capital infusion proposed by British Airways. This
presumes, however, that the economy will turn around and that
USAir can achieve positive net earnings by the second or third
quarter of 1993. Should the economy worsen and yields decline
along with demand, USAir could face a critical cash flow
problem by the third quarter of 1993.
o USAir's prospects for near-term profits remain dim. The
cost-cutting measures it has implemented, although positive,
are not nearly enough to offset the negative effects of slow
growth in the economy, lack of domestic traffic growth, and the
recent fare war. Its costs are still high, making USAir more
vulnerable to competition and future fare wars that may erupt
again in the fall and winter off-peak season, when demand
declines.
O USAir's second quarter 1992 operating loss was $54
million and its net loss $78 million. We estimate that USAir
will incur a third quarter operating loss of $69 million with
a net loss of $116 million, due primarily to the lingering
effects of the fare war. For the fourth quarter 1992, we
estimate a net loss of $79 million because of the traditional
seasonal traffic decline, lower consumer confidence (the
Conference Board's June Consumer Confidence Index declined 9.2
percent), and various promotional fare programs. On July 31,
1992, American, United Delta, TWA and Continental reduced the
14-day advanced purchase fares by 30 percent for travel from
September 14 through December 14 for anywhere in the U.S.,
except Alaska and Hawaii.
- Projections for the fourth quarter 1992 and for the
first two quarters of 1993 are more speculative because of
unforeseen circumstances involving the economy, discount
fare programs, acquisitions and mergers, airline failures,
and changes in the capital markets. See Chart 14, USAir's
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9
Operating Revenues and Expenses 1080 TO 2093, Chart 15,
USAir's Operating Profit (Loss) and Net Income (Loss) 1Q80
- 2Q93 and Table 16, USAir's Total Operating Revenues,
Expenses, and Operating and Net Profits (Losses) 1992-
1993.
- We project USAir's accumulated net losses for the four
quarters ending June 1993 at approximately $294 million.
USAir's Projected Profit and Loss
($ Millions)
Actual
Projected
92 10
92 20
92 30 92 40 93 10 93 20
Operating profit (loss)
($33)
($54)
($69)
($48)
($51)
$73
Net profit (loss)
($54) ($78)
($116)
($79)
($120)
$21
QTR End Cash Balance
$209
$211
$165
$156
$105
$197
o As of June 30, 1992, USAir had total cash and cash
equivalents of $211 million available. Assuming no additional
cash is raised from bank loans, assets sales, equipment sale
and lease-backs over the next four quarters, we estimate that
the carrier's cash balance at June 30, 1993, would be $197
million after (1) deducting net losses for the year ended June
1993, and (2) adding back depreciation and amortization
expense.2
O USAir has a $900 million bank line of credit with a
"step down" provision, established in 1987, against which it
has drawn down $261 million.
- In the third quarter of 1992, the credit line will drop
to $600 million. The credit is scheduled to step down
again to $300 million in the second quarter of 1993.
- USAir is seeking waivers on required coverage and net
worth ratio tests which would require repayment of funds
outstanding under the credit agreement. USAir has
received waivers of these provisions twice in the past.
o If the economy does not show significant growth
improvement, at least 3 percent, and a return of consumer
confidence leading to increased travel demand, then USAir's
total net loss for the 12 months ending June 1993 could
Depreciation and amortization are expense items appearing on the income statement that do not represent
actual cash outlays. These are reserve accounts that provide for the replacement of depreciated assets. Funds
accumulated in these reserve accounts can be used as a source of working capital to help improve the
company's cash flow during periods of negative earnings.
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10
approach $466.8 million. See Table 17, USAir's Total Operating
Revenues, Expenses, and Operating and Net Profits (Losses)
1992-1993, Pessimistic Scenario.
O This would increase USAir's capital deficit to $255.8
million (or cash of $24 million after depreciation and
amortization are added back to net income).
o USAir's balance sheet is reasonably strong. USAir's
debt-to-total assets ratio has increased to 57 percent as a
result of some added long-term debt, but mainly an increase in
current liabilities. See Chart 18, USAir's Debt Ratio. The
long-term debt component of USAir's total debt has remained
between 11 and 28 percent of total assets, consistently lower
than current liabilities. The debt ratio indicates the
percentage of total capital provided by the creditors. A debt
ratio comprised of relatively low level of long-term debt
suggests that a company, that is profitable, might support
increased debt and thereby take advantage of positive leverage.
- Increased debt amplifies losses during unprofitable
periods.
o There are a number of sources of additional capital that
USAir could draw on to sustain its operations.
- For example, the sale and lease-back of older aircraft
(USAir owns approximately one half of its fleet of which
87 percent were used as collateral for loans as of
December 31, 1991) and computer, reservation, and training
facilities could provide USAir with additional operating
capital.
-In June 1992 Standard & Poor's Corp. lowered USAir Group,
Inc. 's bond rating, citing a weak economic recovery and
intensified fare wars.
- USAir filed with the SEC in 1991 a shelf registration
for $500 million in debt securities to be guaranteed by
USAir Group. These securities may be sold from time to
time as determined by market conditions. As a consequence
of a lower bond rating, USAir would have to sell its
corporate bonds at a higher discount rate thereby
increasing its yield. As a result of declining interest
rates, USAir's weighted cost of capital declined to 10.2
percent in 1991 from 10.4 percent in 1990. Long-term
interest rates have declined further during 1992.
Recently, corporate bonds have been paying 6 to 7 percent:
these yields rival the Treasury bonds at 7 percent. USAir
might sell bonds with higher yields that are acceptable to
management given USAir's weighted cost of capital.
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11
- USAir could raise capital through a gradual sale of
assets to U.S. or foreign-based investors and thereby
avoid foreign ownership and/or control.
- USAir's reliance on the equity markets as source of
capital may not be desirable as a result of lower stock
prices brought on by accumulated losses. Although the BA
proposal utilizes 7 percent cumulative convertible
preferred stock as financing means for USAir, this
proposed preferred issue is not convertible for four
years.
o Forecasts of USAir's operating and net profit and losses
by DOT, Shearson Lehman Brothers, Salomon Brothers, and USAir
are compared for the second half of 1992 and the first half of
1993 or CY1993. See Table 19, Comparison of Forecasts for
USAir's Operating and Net Profit (Loss).
O British Airways is, in essence, proposing the purchase
of 44 percent of USAir's assets for $750 million. This implies
a total value of the airline of $1.705 billion. USAir's
history of profitability, route structure, terminals, young
fleet, and other assets, together with its restructured labor
costs and balance sheet, suggest to us that BA's offer may be
underpriced.
Accordingly, we conclude that USAir could raise interim capital
based on its value from sources other than outright sale to a
foreign entity. On the other hand, a strategic alliance with a
large international carrier might benefit USAir's employees and
stockholders in the long term.
Our analysis of USAir reveals a company that has been
conservatively managed and has remained profitable during
periods when other carriers have failed. The company is not
over burdened with long-term debt. Its cost are high, but
management is attempting to contain costs and reconfigure the
company to be more competitive. The company's current ratio
has declined reflecting increased current liabilities resulting
from the increases in accounts payable, accrued salaries and
wages, accrued vacation pay and air transport liabilities. A
firm that has incurred net losses can be expected to increase
and slow its payables. The air transport liabilities account
has grown expectedly because of increased ticket sales. Wages
and salaries can be further reduced through planned reductions
in employment.
Recent losses have strained the company's capital resources.
The company has cash to operate and is not facing an imminent
liquidity or solvency crisis. USAir, like most U.S. airlines,
must return to profitability.
The BA proposal is really more a long-term strategic marketing
opportunity for USAir than a source of "bailout" capital. In
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12
private discussions with USAir concerning the company's
finances, emphasis on the dire straits of the airline has been
muted. USAir's management has, for some time, sought access to
international markets.
Ultimately, the BA/USAir transaction would provide a $750
million capital infusion to USAir that would replenish about 75
percent of its recent losses and provide USAir with immediate
market access to a global network of international routes. In
turn, the transaction would provide BA with a strategic partner
that has a strong foothold in the world's premier air transport
market.
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TABLE 1
USAIR'S TOTAL OPERATING REVENUES, EXPENSES, AND OPERATING AND NET PROFITS (LOSSES) 1980-1992
(000)
TOTAL OP
TOTAL OP
OPERATING
NET
YEAR
REVENUES
EXPENSES
PROFIT (LOSS) PROFIT (LOSS)
1980
$971,825
$880,438
$91,387
$60,386
1981
$1,110,491
$1,052,022
$58,469
$51,084
1982
$1,273,012
$1,193,676
$79,336
$59,104
1983
$1,432,264
$1,303,393
$128,871
$78,382
1984
$1,629,696
$1,436,972
$192,724
$118,331
1985
$1,749,126
$1,582,204
$166,922
$109,850
1986
$1,786,958
$1,622,825
$164,133
$89,162
1987
$2,070,312
$1,806,855
$263,457
$164,113
1988
$2,802,994
$2,659,266
$143,728
$76,169
1989
$4,204,661
$4,432,755
($228,094)
($137,652)
1990
$6,084,704
$6,627,939
($543,235)
($410,748)
1991
$6,049,170
$6,251,271
($202,101)
($259,998)
1991 1Q
$1,465,493
$1,632,078
($166,585)
($153,234)
1991 2Q
$1,539,068
$1,579,262
($40,194)
($45,627)
1992 1Q
$1,488,178
$1,521,366
($33,188)
($53,478)
1992 2Q
$1,579,639
$1,633,170
($53,531)
($77,573)
6 MOS 1992
$3,067,817
$3,154,536
($86,719)
($131,051)
SOURCE: DOT FORM 41 REPORTS
SOURCE: DOT FORM 41 REPORTS
JUNE
XVW
APR
MAR
PER
NVC
DEC
0
500,000
000'000'T
1,500,000
2,000,000
2,418,945
2,437,515
2,500,000
EVE'LTL'S
2,846,632
2,842,260
2,980,850
3,000,000
3,500,000
CHART 2 USAIR'S SYSTEM RPMS DEC 1991 - JUN 1992
CHART 3 COMPARISON OF AIRLINE REVENUE PASSENGER-MILES FOR THE FIRST
SIX MONTHS OF 1991 AND 1992
45,000,000
40,000,000
35,000,000
30,000,000
25,000,000
(000)
20,000,000
15,000,000
10,000,000
5,000,000
0
AA
CO
DL
HP
NW
TW
UA
US
WN
1991
1992
CONTINENTAL DATA FIVE MONTHS
SOURCE: DOT FORM 41 REPORTS
SOURCE: DOT FORM 41 REPORTS
USAIR + PIEDMONT COMBINED FORM 41 REPORTING 3Q 89
92 1
91 91 3 3
1 16
£ 06
90 1
89 3
89 1
88 3 3
881 1
87 3
87 1
86 3
86 1
85 3
85 1
84 3
84 1
83 3
83 1
82 3
82 1
81 3
81 1
£ 08
80 1
0
500,000
LONG-TERM DEBT
000'000'T
1,500,000 (000)$
2,000,000
NET STOCKHOLDERS EQUITY
2,500,000
3,000,000
1292
CHART 4 USAIR'S LONG-TERM DEBT AND NET STOCKHOLDERS EQUITY 1Q80 TO
SOURCE: DOT FORM 41 REPORTS
92 1
£ 16
91 1
E 06
90 1
89 3
89 1
88 3
88 1
87 3
87 1
86 3
86 1
85 3
85 1
84 3
84 1
83 3
83 1
82 3
82 1
81 3
1 18
80 3
80 1
0
100000
20,000
000'0E $(000)
000'07
000'09
000'09
2992
CHART 5 USAIR'S INTEREST ON LONG-TERM DEBT & CAPITAL LEASES 1Q80 TO
CHART 6
USAIR'S TIMES INTEREST EARNED 1985 - 1991
25
20
15
10
5
o
-5
-10
-15
85
85
85
85
86
86
86
86
87
87
87
87
88
88
88
88
89
89
89
89
90
90
90
90
91
91
91
91
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
SOURCE: DOT FORM 41 REPORTS
SOURCE: DOT FORM 41 REPORTS
93 2
93 1
92 4
92 3
92 2
92 1
91 4
{ 16
91 2
91 1
90 4
90 3
90 2
90 1
89 4
89 3
89 2
89 1
88 4
88 3
88 2
88 1
87 4
87 3
87 2
87 1
86 4
86 3
86 2
86 1
85 4
85 3
85 2
85 1
0
:
20.0
70.0
90'0
80'0
COST/ASM
0.1
CENTS
O1.2
O
0.16
YIELD/RPM
0.18
0.2
PROJECTED
ACTUAL
COST/ASM 1Q 85 TO 2Q 93
USAIR'S ACTUAL AND PROJECTED YIELD/RPM AND OPERATING
L CHART
CHART 8 USAIR'S DAYS CASH COVERAGE 1Q85 - 1Q92
80
70
60
50
DAYS
40
30
20
10
0
85 1
85 2
85 3
85 4
86 1
86 2
86 3
86 4
87 1
87 2
87 3
87 4
88 1
88 2
88 3
88 4
89 1
89 2
89 3
89 4
90 1
90 2
90 3
90 4
91 1
91 2
91 3
91 4
92 1
SOURCE: DOT FORM 41 REPORTS
SOURCE: DOT FORM 41 REPORTS
93 2 2
93 1
92 4
92 3
92 2
92 1
91 4
91 3
91 2 91 2
1 16
t 06
90 3
90 2
90 1
89 4
89 3
89 2
89 1
88 4
88 3
88 2
88 1
87 4
87 3
87 2
87 1
86 4
86 3
86 2 86 2
I 98
85 4
85 3 85 3
85 2
85 1
0
2,000,000
0000000's
6,000,000
RPMO
000'000'8
(000)
10,000,000
12,000,000
14,000,000
SWSV
16,000,000
18,000,000
PROJECTED
ACTUAL
SEAT-MILES 1Q85 TO 2093
CHART 9 USAIR'S ACTUAL & PROJECTED PASSENGER-REVENUE AND AVAILABLE
SOURCE: DOT FORM 41 REPORTS
93 2
93 1
92 4
92 3
92 2
92 1
91 4
{ 16
Z 16
1 16
t 06
£ 06
Z 06
1 06
89 4
89 3
89 2
89 1
88 4
88 3
88 2
88 1
87 4
87 3
87 2
87 -
86 4
£ 98
7 98
1 98
85 4
85 3
85 2
85 1
0
I'O
0.2.
E'O
1.0
PERCENT
5'0
9'0
4.0
PROJECTED
ACTUAL
8'0
CHART 10 USAIR'S LOAD FACTOR 1Q 85 TO 2Q 93
CHART 11 USAIR'S TOTAL CURRENT ASSETS AND LIABILITIES 1Q80 TO 1Q92
2,500,000
2,000,000
TOTAL CURRENT LIAB.
1,500,000
$(000)
1,000,000
TOTAL CURRENT ASSETS
500,000
0
1
80 1
80 3
81 1
81 3
82 1
82 3
83 1
83 3
84 1
84 3
85 1
85 3
86 1
86 3
87 1
87 3
88 1
88 3
89 1
89 3
90
90 3
91 1
91 3
92 1
SOURCE: DOT FORM 41 REPORTS
SOURCE: DOT FORM 41 REPORTS
92 -
91 3
91 1
€ 06
1 06
89 3
- 89
88 3
1 88
87 3
87 1
88 3
- 86
85 3
1 85
84 3
- 84
83 3
1 83
82 3
82 1
81 3
81 1
80 3
80 1
(1,200,000)
:
(000'000'T)
(000'008)
(000'009)
(000)$
(000'009)
)200'0000
0
2000000
CHART 12 USAIR'S WORKING CAPITAL 1980 - 1 QUARTER 1992
TABLE 13
LIST OF FORECAST ASSUMPTIONS
1992
1993
Inflation Rate
3.20%
3.20%
U.S. GDP Growth Rate
2.00%
3.00%
Traffic Growth Rate-Domestic
6.50%
7.00%
Traffic Growth Rate-Intlernational
27%
30%
Load Factors
58.50%
60%
Fare Increases
5%
5%
Cost Increases (fuel, materials)
4.25%
5%
SOURCE: DOT FORM 41 REPORTS
931
92 3
92 1
91 3
1 16
90 3
90 1
89 3
89 1
88 3
88 1
87 3
87 1
86 3
86 1
85 3
85 1
84 3
84 1
83 3
83 1
82 3
82 -
81 3
81 1
80 3
80 1
0
2000,000
000'00'4
000'009
000'008
1,000,000
$(000)
1,200,000
TOTAL OPERATING REV.
1,600,000
TOTAL OPERATING EXP.
1,800,000
2,000,000
PROJECTED
ACTUAL
CHART 14 USAIR'S OPERATING REVENUES AND EXPENSES 1Q80 TO 2Q93
SOURCE: DOT FORM 41 REPORTS
93 1
92 3
92 1
91 3
1 16
£ 06
1 06
89 3
1 68
88 3
88 1
87 3
871 1
86 3 3
1 98
85 3
85 1
84 3
84 1
83 3 3
831 1
82 3
82 1
£ 18
81 -
80 3
80 1
000'00E-
:
-2550,00
-200,000
-150,000
000'00T-
(000)$
000'09-
NET INCOME OR LOSS
0
000'09
100,000
PROJECTED
ACTUAL
OPERATING PROFIT OR LOSS
2093
CHART 15 USAIR'S OPERATING PROFIT (LOSS) AND NET INCOME (LOSS) 1Q80 -
TABLE 16
USAIR'S TOTAL OPERATING REVENUES, EXPENSES, AND OPERATING AND NET PROFITS (LOSSES) 1992-1993
$(000)
BEST ESTIMATE
TOTAL OP
TOTAL OP
OPERATING
NET
YEAR
REVENUES
EXPENSES
PROFIT (LOSS)
PROFIT (LOSS)
1992 1Q
$1,488,178
$1,521,366
($33,188)
($53,478)
1992 2Q
$1,579,639
$1,633,170
($53,531)
($77,573) ACTUAL
1992 3Q
$1,709,696
$1,778,796
($69,100)
($115,526) PROJECTED
1992 4Q
$1,709,300
$1,757,265
($47,965)
($79,333)
TOTAL
$6,486,813
$6,690,597
($203,784)
($325,910)
1993 1Q
$1,732,437
$1,783,811
($51,375)
($120,871)
1993 2Q
$1,868,413
$1,794,780
$73,633
$21,374
FORECAST JUNE 92 TO
JUNE 93
$7,019,846
$7,114,652
($94,806)
($294,356)
CASH AVAILABLE 6/30/92
$211,000
CASH DEFICIT
($83,356)
ACCUM. DEP + AMORT.
$280,000
CASH + DEP + AMORT
$196,644
SOURCE: DOT FORM 41 REPORTS
TABLE 17
USAIR'S TOTAL OPERATING REVENUES, EXPENSES,' AND OPERATING AND NET PROFITS (LOSSES) 1992-1993
$(000)
PESSIMISTIC CASE SENARIO
TOTAL OP
TOTAL OP
OPERATING
NET
YEAR
REVENUES
EXPENSES
PROFIT (LOSS) PROFIT (LOSS)
1992 1Q
$1,488,178
$1,521,366
($33,188)
($53,478)
1992 2Q
$1,579,639
$1,633,170
($53,531)
($77,573) ACTUAL
1992 3Q
$1,621,846
$1,704,049
($82,203)
($128,629) PROJECTED
1992 4Q
$1,495,166
$1,575,855
($80,689)
($112,057)
TOTAL
$6,184,829
$6,434,440
($249,611)
($371,737)
1993 1Q
$1,502,642
$1,593,207
($90,565)
($160,061)
1993 2Q
$1,517,668
$1,619,010
($101,342)
($66,114)
FORECAST JUNE 92 TO
JUNE 93
$6,137,322
$6,492,122
($354,799)
($466,861)
CASH AVAILABLE 6/30/92
$211,000
CASH DEFICIT
($255,861)
ACCUM. DEP + AMORT.
$280,000
CASH + DEP + AMORT
$24,139
SOURCE: DOT FORM 41 REPORTS
SOURCE: DOT FORM 41 REPORTS
92 1
t 16
£ 16
91 2 91 2
91 1 91 1
90 4
90 3
90 2
1 06
89 4
89 3
89 2
89 1
88 4
88 3
88 2
88 1
87 4
87 3
87 2
87 1
86 4
86 3
86 2
86 1
85 4
85 3
85 2
85 1
84 4
84 3
84 2
84 1
83 4
83 3
83 2
83 -
82 4
82 3
82 2
82 1
81 4
81 3
81 2
81 1
80 4
80 3
80 2
80 1
%00'0
10000T
20.00%
40.00%
%00'09
$00'09
CHART 18 USAIR'S DEBT TO TOTAL ASSETS RATIO 1Q80 TO 1Q92
Table 19
Comparison of Forecasts for USAir's Operating and Net Profit (Loss)
($000)
DOT Policy
Shearson
Salomon
USAir Gp.
3Q 92
Operating Profit (Loss)
($69,100)
($69,946)
$21,792
-
Net Profit (Loss)
($115,526)
($88,757)
($24,634)
($93,700)
DOT Policy
Shearson
Salomon
USAir Gp.
40 92
Operating Profit (Loss)
($47,965)
($2,450)
$105,998
-
Net Profit (Loss)
($79,333)
($64,400)
$29,701
($66,600)
DOT Policy
Shearson
Salomon
USAir Gp.
CY1992
Operating Profit (Loss)
($203,784)
($155,652)
$43,289
-
Net Profit (Loss)
($325,910)
($285,960)
($125,714)
($308,300)
DOT Policy
Shearson
Salomon
USAir Gp.
10 93
Operating Profit (Loss)
($51,375)
($2,450)
-
-
Net Profit (Loss)
($120,871)
($64,400)
-
-
DOT Policy
Shearson
Salomon
USAir Gp.
2Q 93
Operating Profit (Loss)
$73,633
($10,750)
-
-
Net Profit (Loss)
$21,374
($70,600)
-
-
DOT Policy
Shearson
Salomon
USAir Gp.
CY1993
Operating Profit (Loss)
-
-
$150,342
-
Net Profit (Loss)
-
-
($59,813)
($47,600)
SOURCES: Public Proceedings Division, Office of Aviaition A
Shearson Lehman Brothers, August 5, 1992
Salomon Brothers Inc. July 22, 1992
USAir Group Inc. (Consolidated)
risect
strained. Some airlines could be forced out altogether, and
USAir could be forced to further curtail its operations.
However, should this pessimistic scenario prevail, causing
some carriers to fail, the remaining carriers would benefit.
We note that USAir has a very dominant position in the
northeast, which puts it in a better position than perhaps
any other carrier to successfully "shrink" to a relatively
solid core system, should that be necessitated by a
continuing sluggish economy. When the economy does recover
and traffic growth resumes, USAir's position in the
northeast should allow it to return to profitability, albeit
as a smaller airline.