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Monday, November 14, 2005

Unable To Find Investors, FlyI Will Auction Itself

The experiment to transform a regional airline into a low-fare carrier has failed.

As it filed for bankruptcy last week, FlyI [FLYI], the parent of Independence Air, took steps to either sell the company or liquidate its assets.

With just $24 million in unrestricted cash, the question in many minds is will the low-fare carrier have enough cash to continue to fly until it completes its auction? When Independence Air took to the skies in June 2004, the former regional airline had $345.4 million in cash that had been accumulated during its 15-year code-share relationship with United Airlines [UALAQ] and its five-year pact with Delta Air Lines [DALQ].

Operating solo since last November, Independence Air never made money. In materials the company circulated in the fall of 2003, FlyI had predicted a $10.2 million profit for 2005. The carrier has not released its third quarter numbers, but it posted a loss of $202.2 million in the first six months of 2005. At the time of its bankruptcy filing, FlyI said it had assets of $378.5 million and liabilities of $455.4 million.

Based on the premise that it could fly its fleet of 50-seat Bombardier [BBD] CRJ 200s frequently to East Coast and Midwest business centers from Washington Dulles International Airport at low-fares, Independence Air believed it would lure enough customers away from the established legacy operations. It also supplemented its RJ operations with new Airbus 319s, which would be flown to tourist spots in Florida and eventually to the West Coast.

Once the transition from the United and Delta accounts was completed, Independence Air had 87 CRJ 200s to fly. Although it never took delivery of all its Airbus 319s, the carrier has 12 narrow-body planes in its fleet. At its peak, the carrier boasted that it was flying over 300 flights a day.

Independence Air is now adjusting its route network so that the Airbus fleet is flying to Florida, New York and Boston. It is now flying only 30 CRJs and those flights are mostly to business centers along the East Coast. The only remnant of its West Coast network is a twice-daily Airbus flight to Las Vegas.

The Auction

Since July, FlyI has marketed itself to about 60 prospective strategic and financial investors and 21 went so far as to sign non-disclosure agreements to examine confidential information. While some of these potential investors continue to talk with Miller Buckfire, FlyI's investment banker, none has stepped forward with an offer, according to court documents.

"After careful consideration, we have concluded that a court-supervised restructuring will allow us to complete our cost-savings initiatives while seeking outside investors," said Kerry Skeen, FlyI's CEO.

The company filed a plan to create a bidding system for the carrier with the goal of selecting the best offer by Jan. 5, 2006.

Setting up an auction to sell the company within 60 days of filing bankruptcy is an unusual move, said Aaron Hammer, an airline bankruptcy attorney with Chicago's Freeborn & Peters. While the auction is not necessarily an asset liquidation, Hammer said the process does give the company greater control than if it had filed for a Chapter 7 liquidation bankruptcy. "It is harder to conduct an uncontrolled sale process in a Chapter 7. It is very hard to attract investments into a business if it is a Chapter 7 process.

"They are giving themselves the flexibility so they can adapt the process depending on who wants the assets."

In the court filing setting up the auction process, the carrier said the multi-track strategy will allow FlyI to obtain an investor willing to reorganize the carrier, or to sell its assets as an operating company to another carrier or, if need be, to sell select assets to maximize the value for the creditors. It is the company's preference that the carrier be preserved either with new equity or in a sale to another carrier. The filing said that offers that would preserve the company would be favored over those seeking to buy it piecemeal.

As FlyI prepares for the auction, Hammer noted the company does not have a "stalking horse," an investor who may want to buy the firm, but at a low price. The stalking horse's offer would serve as the minimum bid.

"When you have low cash reserves and you don't have someone lined up to take over the company, it does not give you too many alternatives," Hammer said. "It may be that FlyI is not a viable business. The routes aren't there. The environment does not make it possible to continue to operate.

"The fact that this has been delayed seems most likely driven by the fact of its inability to attract an investor."

In the filing proposing the auction process, the company seeks permission to find a stalking horse.

The Prospects

"It is unlikely they will find a White Knight to come in," said Dan Kasper, of LECG, a Boston-based consulting firm. "This auction process they are setting up will probably be a piecemeal liquidation of the assets.

"The problem is most of the people that follow this industry know that Independence Air can't make money. It is a flawed concept. Why would anybody want to put money into something that most people said would not work and it has not worked? Frankly, I thought it was a hair-brained scheme that had very little likelihood of success. It struck me as a very low probability venture," Kasper told Regional Aviation News.

"In a nutshell, I don't think their prospects are particularly good. It paints a pretty bleak picture."

Kevin Schorr, research director at Campbell-Hill Aviation Group, sees FlyI returning to its roots as a code-share partner.

"I think it is a signal to some of the majors. 'We have 30 RJs. Come give us a contract,'" Schorr said. "I don't know anyone out there that needs 30 RJs. Northwest [NWACQ] will need some RJ lift, who knows? They could fly 50-seaters for Northwest now and pick up contracts to fly 70-seat or 90-seat aircraft later."

Schorr suggests that as Northwest pulls planes from Mesaba Aviation [MAIR] and Pinnacle [PNCL], Northwest may consider a bid from FlyI in order to get "cheaper regional lift" than what Mesaba and Pinnacle currently provide. Northwest, he said, does not promote competition between its regional partners as United and Delta have done in the past.

Enough Cash?

"My first hunch is that the $24 million was determined to be enough when the filing was planned," Schorr said. "I would assume they have planned the date of the filing and the auction. Once they get to that day, if they have not found someone to float them along - then boom - they're done."

FlyI has not provided its shareholders with up-to-date operating numbers. Based on its second quarter operations, FlyI was burning about $1 million a day to keep Independence in the air. Its $24 million cash balance would only support a $400,000-a-day operation. Out of that cash, FlyI would also have to pay the expenses of its bankruptcy team as well as the expenses of the creditors' committee.

"You can't take it down to zero," Kasper noted, "It doesn't work that way."

FlyI anticipates it has sufficient financial resources to stay in the air during the auction process, according to its public statements.

The company has substantially reduced its operations since June 30 and is asking the court for permission to hand back parked aircraft. The company has cut the wages of its non-unionized employees, its managers and executives to conserve cash. Since the bankruptcy filing, it has obtained new wage and work rule concessions from the flight attendants and mechanics. The carrier is still negotiating with the pilots.

A hearing has been scheduled at FlyI's request to return 22 CRJ 200s, two Dornier 328Jets and eight Jetstream 41s.

"They have made many changes, but they are also going into a weaker revenue period. They have cut down on the outflow, but the inflow will be reduced. Even if they cut operations to $500,000-a-day, that's $30 million in two months," Kasper said.

"Based on published data, it doesn't sound like their prospects are good," he said. "If you read between the lines, this is pretty much what Skeen was saying when they sought expedited treatment."

The language is even stronger in its latest filing. FlyI "sees little benefit to an extended stay in Chapter 11. The sooner an investor or purchaser can be located, the sooner the debtors can undertake operational or other changes in Chapter 11 to implement a transition. Additionally, given the costs of remaining in Chapter 11, [FlyI] believes that it would be in the best interest of their stakeholders to quickly conclude the process."

Should FlyI be forced to sell its assets - either in the auction process or in Chapter 7 liquidation - its hard assets will include very few planes. The aircraft will be returned to the lease or mortgage holders. However, its gates at Dulles will be a value asset that a number of carriers would covet, Hammer said.

At that same 60-day mark, FlyI will be required to begin making lease payments on any of the aircraft that it intends to keep, Hammer said. "If they don't cure any defaults, they will start to get picked apart."

One asset listed in the bankruptcy estate is a $1 billion claim against United Airlines for services provided prior to its December 2002 bankruptcy. The Chicago judge in the United bankruptcy case last week continued a hearing on the claim until Nov. 29.

"This is not a very liquid asset. It is probably not very bankable. They would need someone with a very high level of sophistication to get in there and value this claim if someone will lend against it," Hammer said.

United is hoping to exit its bankruptcy proceedings in February. Hammer said that if FlyI prevails in the court fight over the claim, it would not be paid until the estate is distributed, whenever the Chicago court closes the United case. FlyI would be paid pennies on the dollar - most likely in new United stock - just as all the other non-secured creditors will be paid.

FlyI's cash flow will also most likely be curtailed by declining ticket sales. All the analysts agreed that future passengers on Independence Air face an increasing risk as the year ticks away that the carrier will run short of cash and stop flying. While nearly half of the commercial airline capacity is now in Chapter 11, Schorr noted that there has been little fear that United, Delta or Northwest will go away. The same, he said, cannot be said for Independence Air.

"If it were me, I would not be buying a ticket on Independence Air right now," Hammer added.

>>Source: Case 05-20011, Delaware Bankruptcy Court. Contacts: Aaron Hammer, Freeborn & Peters, (312) 360-6558; Dan Kasper, LECG, (617) 252-9994; Kevin Schorr, Campbell-Hill, (703) 836-1283.<<

FlyI's Proposed Auction

In a court filing last week, FlyI [FLYI] proposed an auction process to sell the company or its assets by Jan. 5, 2006.

The proposed timeline:

  • Nov. 17 - Objections to the process must be filed.
  • Nov. 22 - Court reviews process.
  • Dec. 1 - Potential bidders are qualified.

Potential investors must state their intention to either invest, purchase the company or buy specific assets.

  • Dec. 9 - Sales agreement deadline.
  • Dec. 16 - Bids are due.
  • Jan. 3 - Conduct auction, if necessary.
  • Jan. 5 - Court hearing to confirm winning bid.

The company has the right to find a firm willing to make a pre-determined minimum investment ? the so-called stalking horse ? who would be entitled to breakup fees if another company agreed to pay a higher price in the auction. There isn't a proposed deadline to find a stalking horse, and no stalking horse has yet emerged.

Source: Case 05-20011, Delaware Bankruptcy Court

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