ATA Holdings [ATAHQ] will shut down Chicago Express on March 28 unless it can strike a deal to sell the 22-year-old operation. Regional Aviation News has learned that ATAH last week began soliciting offers even as one potential buyer is waiting in the wings. "We are entertaining offers for all assets...
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ATA Holdings [ATAHQ] will shut down Chicago Express on March 28 unless it can strike a deal to sell the 22-year-old operation.
Regional Aviation News has learned that ATAH last week began soliciting offers even as one potential buyer is waiting in the wings.
"We are entertaining offers for all assets utilized in the Chicago Express operation, which is a wholly owned subsidiary of ATAH with a non-union workforce," said Sean Frick, ATAH's co-chief restructuring officer.
ATAH is now negotiating a possible sale of Chicago Express to NatTel, a Stamford, Conn.-based investment company, Regional Aviation News has learned. NatTel made an unsolicited bid for the regional unit last December.
While little has been disclosed on the profitability of Chicago Express' operations, it appears to be a victim of ATAH's struggle to find a viable business plan to exit bankruptcy. Swamped by $722 million in debt payments for its new Boeing [BA] fleet, ATAH last October filed for bankruptcy.
"We no longer need to use Chicago Express to feed our jets to places like Minneapolis, Denver and Detroit," said Roxanne Butler, an ATAH investor relations specialist. "Chicago Express will cease operations on March 28. It will be the end of Chicago Express."
The Impending End?
Since October, ATAH developed a plan to reduce the Chicago Express service to Chicago Midway Airport while creating a federally subsidized intra-Indiana network. In fact, all elements of a new Indianapolis-based hub had not been rolled out before ATAH pulled the plug on the entire Chicago Express operation.
Effective March 28, all 600 employees - from grounds crews to top executives will be out of work - unless the carrier is sold.
Hours before its October 2004 bankruptcy filing, ATAH struck a deal to sell all of its Midway gates to AirTran Airways [AAI] as ATA, its low-fare carrier, would then retreat to a new hub in Indianapolis. "As we go forward and develop Indianapolis and other cities, Chicago Express will fit in. Chicago Express continues to be part of our plan as we reorganize," ATAH vice chairman James Hlavacek said at the time (CRAN, Nov. 1, 2004).
But things did not go according to the script. Because of bankruptcy rules, ATA had to solicit other offers for the Midway gates. In December, Southwest Airlines [LUV] stepped forward with a $117 million offer for six gates at Midway along with a code-share partnership. The deal permitted ATA to retain eight Midway gates. In January, Chicago Express dropped Midway-bound service from three cities, but continued to fly from nine cities to Midway. At the same time, it began new service from five of those cities to Indianapolis. It appeared that Chicago Express would be operating two hubs.
As part of the service expansion, Chicago Express won the rights to a $2 million subsidy to establish intra-Indiana service between Evansville and South Bend via Indianapolis. Evansville and South Bend had won a $1 million grant last fall from the U.S. Department of Transportation's Small Community Air Service Development program. Each city would also be chipping in $500,000 each(CRAN, Sept. 13).
On Jan. 15, Chicago Express shifted the Fort Wayne, Ind., flights from Chicago to Indianapolis. Effect, March 28 it will end those flights. Fort Wayne, Ind., has already sued Chicago Express to recover some of its $1.5 million in incentive cash it paid last year to establish the Chicago service.
Chicago Express was scheduled to start flying from Gary, Ind., to Indianapolis on Feb. 1. The carrier dropped that service before it ever started flying.
ATA is dramatically scaling back its Indianapolis operations thus negating the need for the feeder service, Butler said. Effective April 10, ATA will fly to seven cities from Indianapolis - only three non-stops. A year ago, Butler said ATA was flying to 17 cities from Indianapolis. As part of its effort to build a hub in Indianapolis, ATA had 45 daily mainline jet departures in December.
"The plan was to expand the Indianapolis operation whether we went with AirTran, Southwest or even America West [AWAC]. Chicago Express did not have a future in Chicago. We knew we would have to relocate it. We made plans last year to define those cities and then launch new non-stop service to Indianapolis.
"Just as quickly as we moved in that direction there was a re-grouping and the realization that Indianapolis can't be profitable. Northwest moved in last August adding a flight to everywhere we go with more frequencies and lower prices. Northwest can subsidize these routes from their other higher-priced routes. We cannot withstand their competition," Butler said.
So it is now back to Chicago for ATA.
With ATA enjoying code-share rights to 11 markets with Southwest, Butler said, Southwest is now the feeder. "We have that [feed] at no additional cost to the company. It became a business decision to close Chicago Express," she said.
The agreement with Southwest precluded Chicago Express from also carrying the Southwest code on flights into Midway.
The Suitor
Until late on Jan. 31, ATAH had ignored NatTel's overtures to buy Chicago Express, Jack E. Robinson, its founder and principal owner, told Regional Aviation News.
While ATAH in December was soliciting bids for its Midway gates, NatTel submitted an unsolicited bid to buy Chicago Express for $37,700 - the sum needed to cover the legal work to close the deal (RAN, Jan. 3). Robinson contends that Chicago Express has no value because ATAH has stripped Chicago Express of its assets, loaded it with ATAH corporate debt and failed to funnel $16.7 million in ticket receipts to the regional unit.
ATAH had steadfast refused to talk to NatTel. "We don't understand why they would liquidate when they could sell to us and save 600 jobs," Robinson told Regional Aviation News on the morning of Jan. 31. "ATA management has been stonewalling us the whole time."
A court hearing had been scheduled for Feb. 1 for the Indianapolis-based bankruptcy judge to consider a request from NatTel to appoint an independent examiner to review the Chicago Express books and operations. "It is our contention they want to keep Chicago Express asset-poor," said Aaron L. Hammer, with the Chicago law firm of Freeborn & Peters, who is representing NatTel. The hearing has been postponed until Feb. 14 to give the two sides time to strike a deal.
Robinson said his offer remains at $37,700 "which is more than it is worth. Actually the company is worth negative $500 million. The stock is worthless."
One of the items NatTel wanted to sort out is just what role Southwest is playing in directing Chicago Express.
"In its request to the court that the Southwest deal be approved, ATA proffered that the deal would add substantial value to Chicago Express and that Southwest would not do the transaction for ATA without Chicago Express. It now appears to be untrue at this point," Hammer said.
"We told the court that ATA would shut down Chicago Express and there were no facts to support their statement that the Southwest transaction would add value to Chicago Express. The bankruptcy judge overruled our objections and now a month later ATA is shutting down the airline," Hammer said.
Butler noted that the Southwest code-share agreement does not include the cities served by Chicago Express.
Now that the two side are talking, Robinson said they have until the Feb. 14 court date to reach an agreement. However, an agreement will not seal the sale. Instead, because of bankruptcy court rules, ATAH would then conduct an auction among any interested parties using any NatTel deal as the base price. The judge must approve whatever deal ATAH reaches after the auction.
NatTel enjoys special rights in the process since it made the earlier offer and because it is now an ATAH creditor, Robinson said. NatTel recently purchased a vendor's claim against ATAH to give it creditor's status.
It is important that any sale be concluded by March 28. Once Chicago Express stops flying its operating certificate becomes worthless.
"One of the most valuable parts of this regional airline is the operating certificate, enabling a buyer to begin air service immediately. Application for a new certificate could take up to two years to be granted approval by the federal government. We believe there is value for someone to begin air transportation service with this turnkey operation," said ATAH's Frick.
DOT spokesman Bill Mosely confirmed that even if a carrier temporarily suspends service for even a "short break" it needs to undergo a fitness review before it could again fly. The process would be the same as if the carrier was seeking an operating certificate for the first time, he noted.
It is Robinson's contention that the only real asset that Chicago Express possesses is the Part 121 operating certificate. If the sale cannot be wrapped up before March 28, he said, he has no interest in the remains of the carrier.
Chicago Express' current fleet includes 16 Saab 340s. Butler said 14 of the planes are leased and two are owned by the company. While it had made plans to return five of the leased planes, only one has been returned at this time. A new owner of Chicago Express could assume these operating leases, she said. After March 28, the remaining planes will be returned if a sale is not completed, she said.
The Business Plan
NatTel has not been counting on the Chicago Express fleet. Instead, Robinson said, NatTel has a stand-by agreement to fly a fleet of 30 Saabs. It would be a mixture of the 32- passenger Saab 340 and the 50-passenger Saab 2000. While the fleet will initially be leased, he said the carrier would be buying some of its own planes.
Not a novice in the airline industry, Robinson was the president of Eastern Express at the time when the wholly owned unit of Eastern Airlines was shut down as that legacy carrier went out of business. NatTel was a wireless telecommunications company that Robinson founded. He sold off the working assets early in 2004 and it now functions as an investment vehicle. Robinson anticipates investing about $3.5 million in Chicago Express and turning a profit within six months.
Robinson plans to fly Chicago Express from 10 or 12 nearby Midwestern states into Midway without the benefit of a code-share agreement. "We don't want to have anything to do with ATA," Robinson said. Chicago Express can be profitable by simply delivering Chicago-bound traffic due to the large size of the market, he noted. The ticket prices will remain in the $100-a-seat range for one-way travel.
"We believe we understand the market. A commuter airline owned by a big airlines never does well. They have a big airline focus instead of a commuter airline focus. The operators of Chicago Express are excellent. Unfortunately, they have to take orders from ATA, who do not know what they are doing. We would retain all the management and employees," Robinson told Regional Aviation News.
Under Robinson, Chicago Express would remain committed to turboprops. "We will stay with the proven turboprops. We don't need jets. The economics of the turboprop are far better under 500 miles. There is no comparison. I think the effective range will be 90 minutes. No one can touch a turboprop from a financial standpoint," he said.
While the Saab fleet may be the most economical, that doesn't necessary mean it will capture the traffic.
Chicago Express may find itself competing with a number of regional jets flying to Chicago from these same Midwestern cities, said Clinton V. Oster Jr., an airline expert and a professor of law and public policy at the University of Indiana. "Ninety minutes is a long time to sit in an airplane with propellers. Any RJ flying on top of you would blow your doors off. Putting aside the fact that an RJ is a whole lot faster, it is also a lot more comfortable."
However, Chicago Express will not be competing with just other carriers for Chicago-bound traffic, but instead with the private auto. For pure Chicago traffic, driving can be just as fast - considering two-hour security lines - and offer greater flexibility once in Chicago, he said.
Oster said Chicago Express may not need a code-share arrangement to survive. However, he told Regional Aviation News, Chicago Express should schedule its flights to maximize the connections with Southwest's Midway departures. "I am not sure a code-share is that critical. People are not expecting a code-share with Southwest. I don't think they can make it on a O&D [origins and destination] traffic. A feed into Southwest has to be a substantial part of the business."
Southwest does not code-share with regional carriers and it has historically drawn passengers willing to drive two hours to catch one of its low-fare flights.
>>Contact: Sean Frick, ATAH, (317) 282-4551; Roxanne Butler, ATAH, (317) 282-2659; Jack Robinson, NaTel, (203) 425-4500; Aaron Hammer, Freeborn & Peters, (312) 360- 6558; Bill Mosely, DOT, (202) 366-5582; Clinton Oster, University of Indiana, (812) 855-7671.<<
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