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Monday, October 24, 2005

FlyI Too Sick To File Chapter 11?

Ailing Carrier Doesn't Enter Bankruptcy Before Law Changes

Independence Air [FLYI] burned through more than $280 million in cash since it took to the air last summer, prompting talk of FlyI filing for bankruptcy. Analysts fully expected the Virginia-based carrier to file for Chapter 11 protection in the hours before Oct. 17, when a new, more restrictive bankruptcy code became effective.

FlyI did not file and Independence Air is still flying.

The carrier is the midst of downsizing its routes by shifting its Airbus fleet from transcontinental to East Coast routes and it is reducing the number of cities served by its Bombardier [BBD] CRJ 200 fleet (RAN, Oct. 3). FlyI will be laying off 600 employees due to the route changes.

The carrier may not have filed for Chapter 11 because it is too sick to reorganize. Several analysts have speculated that the carrier cannot attract any new investors - even those willing to extend it a loan to operate within bankruptcy, frequently termed debtor-in-possession or DIP financing.

"We have said all along that we are considering all available options," said FlyI spokesman Rick DeLisi. "We continue to operate on an active ongoing basis and we continue to invite discussions with potential partners."

However, DeLisi refused to say if the company felt pressured to act before Oct. 17.

FlyI has not released its third quarter financial report. DeLisi said that a release date has not been set.

While the new bankruptcy law contains new restrictions on businesses, these restrictions would probably have had little effect on its decision-making process.

Under the old law, the creditor had the right to control the case for as long as it wanted to and no one else could propose an alternate business plan, said Aaron Hammer, a bankruptcy attorney with the Chicago firm of Freeborn & Peters. "Under the new law, it limits the exclusivity to a maximum of 18 months. In the United [UALAQ] situation, the exclusivity could not have been extended beyond June 2004. Anyone could have proposed a business plan. This is a real big issue because it shifts the balance of power and it opens up control to other parties."

Hammer currently represents creditors in the United and Delta Air Lines [DALQ] bankruptcies.

If FlyI believes it could enter and exit Chapter 11 in 18 months or less, then the law change would not have an impact on its decision, Hammer said. In both the US Airways [LCC] bankruptcies, the carrier enjoyed court protection for its restructuring for about a year. United, however, will mark its third anniversary in Chapter 11 in December. It hopes to exit bankruptcy in February.

Both Delta and Northwest Airlines [NWACQ] were motivated to file Chapter 11 in September because control of the company was a big issue. "In huge cases like these, the right to control the outcome of the proceedings 18 months down the line will be an issue. Exclusivity is very important to the big airlines," he said.

When it comes to making the decision to file Chapter 11, Hammer said it is the "ability to finance the bankruptcy case that is the primary issue and not whether some changes in the law could possibly affect the balance of power down the road. Financing is the priority issue.

"If you cannot fund the bankruptcy filing, then you are not going to risk the bankruptcy. It opens the question, 'Is FlyI financiable?' If it is not financiable, then it is a liquidation - a Chapter 7, which did not change much in the new law."

"My guess, it is do or die," said Calyon Securities analyst Ray Neidl. "I can't see anybody putting money in that model with the RJs still there. It is hard to raise money for start-up airlines right now. If they were to abandon all the RJs and keep the Airbus, I think it would still be hard to raise the money."

Sticking with the RJs and shrinking its operations is not the way to go, said Kevin Schorr, research director at Campbell-Hill, an aviation-consulting group.

"I think they believe they can shrink their way to profitability. I don't think there has ever been a case in our history that that has worked. Using the Airbus 319 on East Coast routes and using their RJs where they really work, FlyI seems to think that this model will evolve into something that will really work. I think it is obvious in their current form they are not going to survive in the long term."

Neither FlyI as a whole nor its fleet would be an attractive target for an investor or a suitor, Schorr told Regional Aviation News. "I would not be surprised if they are not shopping themselves around to other carriers as a regional feed partner or maybe some kind of merger." With the industry trending away from the 50-seat RJ, Schorr said FlyI is poorly positioned to provide lift to a network carrier. Both Delta and Northwest likely will be shedding 50-seat RJs in their bankruptcy proceedings, creating a glut on the market.

While FlyI's 12 Airbus 319s are new, Schorr said other airlines can easily obtain that plane on the open market, so there is no reason to buy the company. Besides, the suitor would still be responsible for 58 CRJ 200 leases. "If they were to go Chapter 7, I think someone would pick up the Airbuses in a heartbeat. Someone would like to pick them up cheap."

In a cash-flow crisis in February, FlyI was able to work out a deal to return 24 CRJ 200s to the leaseholders. General Electric Commercial Aviation Services (GECAS) agreed to defer $70 million in lease payments in exchange for 8.1 million FlyI shares (RAN, Feb. 28).

GECAS has had a hand in either DIP or permanent financing with US Airways and Delta, among other carriers. With GE's engines on both the latest Bombardier and Embraer [ERJ] models, GECAS frequently provides the financing for many of the regional carriers to purchase new aircraft.

"I would be surprised if anyone would pony up to the table with financing for FlyI," Schorr said. Perhaps it is in the best interest for some, such as GECAS, not to provide any more funding, he added. "Getting rid of them may help strengthen their other customers."

>>Contacts: Rick DeLisi, FlyI, (703) 650-6019; Aaron Hammer, Freeborn & Peters, (312) 360-6558; Ray Neidl, Calyon, (212) 261-4057; Kevin Schorr, Campbell-Hill, (703) 836-1283.<<

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