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Monday, September 8, 2008

RJET Invests in Midwest, Contract Angers Pilots

In its second investment in a financially troubled carrier, Republic Airways Holdings (RJET) cut a new 10-year contract with Midwest Airlines fly 12 76-seat Embraer ERJ 170s as a Midwest Connect starting October 1. The deal, part of a $60 million Midwest refinancing, has raised the ire of Midwest’s pilots who said the new service would replace all but nine of Midwest’s Boeing 717s.
Midwest Airlines said it was making significant progress in its voluntary restructuring plan and $60 million in additional financing, including commitments from TPG Capital and Republic Airways Holdings.
The investment is the second Republic has made in client or former client airlines after it joined with Credit Suisse and AQR Capital last month, putting up $12.5 million in a $75 million debtor-in-position. financing deal for Frontier. Related Story
In the new deal, Republic made a one year term loan to Midwest in the amount of $15.0 million, with an additional loan commitment of $10.0 million, based on the achievement of certain milestones. The loans are collateralized by all of Midwest's unencumbered assets and generally are senior to other lender's security positions.
The last of the 12 aircraft is scheduled for deployment by November 15. With the cancellation of Republic’s contract to fly as a Frontier Jet Express, the aircraft were set to be sold or placed with other airlines. Related Story
Under the Airline Service Agreement, Midwest will purchase all capacity at predetermined rates and will directly pay or reimburse Republic for industry standard pass-through costs.
The contract could change owing to an option Midwest has to convert the agreement into a long-term aircraft lease any time prior to June 1, 2010. The 12 ERJ 170's would be leased from Republic for the remaining duration of the agreement and operated on the Midwest Airlines operating certificate. Fuel will be purchased by Midwest but will not be charged back to Republic.
The move raises the number of Midwest pilots who are out of work to approximately 300 of some 400 pilots who were employed before Midwest was bought by TPG Capital and Northwest Airlines for $452 million, said the pilot’s union. Chair and CEO Timothy Hoeksema said under the agreement, Northwest Airlines will continue its code share and frequent flyer programs with Midwest.
Midwest said that it had reached an agreement in principle with Boeing Capital Corporation on renegotiated leases for its fleet of Boeing 717s. Under the terms of the agreement, Midwest will continue to fly nine of the original 25 Boeing 717s it had under lease for its mainline fleet, returning 16 to Boeing this fall.
"Operating a more fuel-efficient, flexible mix of aircraft makes good economic sense in this new energy environment for the airline industry," said Hoeksema. "We have had to make difficult decisions as part this restructuring that resulted in change for our airline."
Revenue enhancement actions that are part of the restructuring include the introduction of Midwest Class seating on the airline's Boeing 717 fleet, which was announced last week, as well as a $15 fee for first checked bag and an increase in the second checked bag fee from $20 to $25.
"Midwest pilots are outraged that management is using such underhanded tactics and further decimating this airline,” said Captain Jay Schnedorf, chair of the Midwest Airlines unit of the Air Line Pilots Association (ALPA). “We are putting management on notice that they cannot hold a gun to our heads and deal with our pilot group in this manner. We strongly believe that management's actions are a repudiation of its contract with us, and we are exploring all of our options to protect our pilots and hold management accountable for the deal it made with us in 2000 and the concessions we made during our company's restructuring in 2003.”
"We recognize the difficulty this presents to our flight crews and maintenance staff, who will experience additional temporary furloughs," Hoeksema said. "We informed union leadership of our plan and advised them that this was the best option to keep our airline viable and that in the best interests of our employees, customers and communities, we need them to come to the table on cost reductions so we can obtain certification and bring the jobs back to Midwest."
The airline said it plans to continue negotiating with the unions representing its pilots and flight attendants on concessions necessary to align its labor costs to the marketplace, in order to meet one of the final goals of its restructuring plan. It also said that the airline services agreement with Republic would result in additional furloughs for Midwest pilots, flight attendants and maintenance staff until Midwest can operate the ERJ 170s on its own FAA operating certificate. The airline said it expected this process, which includes training for its flight crews and maintenance staff, would take eight months to a year.
Hoeksema said $40 million of the additional financing has already been funded, with an additional $20 million committed to be funded upon completion of certain milestones in the airline's voluntary restructuring plan. Midwest's restructuring has focused on a strategy to serve its core business markets, cost reductions necessary to address high jet fuel prices and a soft economy, and revenue enhancement actions.
Seabury Group LLC is advising Midwest Airlines on its restructuring plan and advised the airline on securing and structuring these financial commitments, as well as on restructuring the Boeing Capital Corporation agreement.
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