Monday, Jan. 8, 2001 | 11:27 a.m.
Big creditors of the bankrupt National Airlines of Las Vegas are jockeying to protect their financial claims in court as the company tries to reorganize its debt.
At least 13 creditors, which say they are owed payments for services, parts and equipment provided before National filed for Chapter 11 bankruptcy protection on Dec. 6, balked at being forced by a December court order to continue providing goods and services without adequate assurances they will be paid.
The order prohibits 111 airlines, several vendors and National's main fuel supplier from suspending or terminating services that National says are crucial to sustaining its operations and reorganization efforts.
National, which listed assets of $103.5 million and liabilities of $119.5 million as of Dec. 6, filed for Chapter 11 bankruptcy because of dramatic increases in fuel prices, delays in adding new aircraft and its failure to attract enough passengers and more financial support from casinos.
Dik Shimizu, National's spokesman, said the company is in talks with several lenders for a refinancing plan. "But in what form the loans will take hasn't been decided."
Meanwhile, a fight erupted between National's 48 percent owner, Harrah's Entertainment Inc. of Las Vegas, and its primary fuel supplier, Mercury Air Group Inc., over whose claims should take priority should the airline fail to reorganize and go out of business.
Harrah's, which said it is guaranteeing a $16 million letter of credit issued by Bank of America to U.S. Bank, National's credit card processing company, filed an objection on Dec. 22 to a settlement between National and Mercury that allegedly grants Mercury "a senior super-priority claim ... over all administrative expense claims" including Harrah's.
U.S. Bank, which processes Mastercard and Visa payments on National's behalf and remits the money to National, required the $16 million letter of credit to protect U.S. Bank in case National fails to deliver its ticket services to the credit card customers, Harrah's said.
"The fight between Harrah's and Mercury to see who's going to be at the top of the food chain or who gets paid first in the event of the worst-case scenario has been settled," Shimizu said.
"Harrah's and Mercury both have liens on National's receivables and assets but there's no overlap. Harrah's has no lien claim on Mercury's receivables and vice versa," he said.
A U.S. Bankruptcy Court judge ruled Jan. 3 that Harrah's is entitled to be paid interest on the letter of credit guarantee and can "hold back" 25 percent of National's credit card receipts for tickets issued after Dec. 6 for travel after March 31. U.S. Bank pays the receipts to Harrah's and Harrah's then pays National.
"Harrah's is not only a creditor but also an equity holder in National. In the best-case scenario, Harrah's could be made whole as a creditor but it doesn't necessarily mean it will be made whole as an equity shareholder. The likely scenario after National emerges from Chapter 11 is that Harrah's equity position can either be downsized or eliminated," Shimizu predicted.
The Jan. 3 order also authorizes National to pay McCarran and Dallas/Fort Worth International Airports more than $800,000 in airport fees.
National's first meeting of creditors is scheduled for Feb. 23. A hearing will also be held on Jan. 12 on National's request to pay $1.37 million in wages and more than $1.99 million in benefits to National's employees owed prior to the company's bankruptcy. National also seeks to resolve disputes with several vendors in order to continue its operations without disruption.
National settled its debt disputes with Mercury by allowing the company to place additional liens on National's assets for fuel and credit advanced after Dec. 6.
Mercury had objected to being forced by the Dec. 6 order to extend credit to National "at the 'burn-rate' of more than $200,000 a day on a post-petition basis without adequate assurance of payment ... or protection of its cash collateral."
Shimizu declined to reveal the volume of jet fuel National receives from Mercury, but said the airline's overall expenses have dropped since fuel prices fell about 30 cents a gallon from their peak in late November.
"But fuel costs are still 50 percent higher from the first day we started flying," he said. "For every penny increase in fuel costs, it costs National at least $60,000 a month at its current size."
National also settled a dispute with its aircraft maintenance provider, BF Goodrich Aerospace MRO Group Inc. of Everett, Wash., over an unpaid $1.08 million bill for repairs on one of National's 16 Boeing 757 aircraft.
The company, which filed a lawsuit on Dec. 28 to force BF Goodrich to return the aircraft as soon as repairs are completed, said the plane was released on Dec. 31 after the parties agreed that BF Goodrich can file a mechanic's lien on the aircraft -- which is valued at more than $25 million -- to secure its claim for $1.08 million.
But BF Goodrich, which said it is still owed $5 million for maintenance work done on five other airplanes prior to National's bankruptcy, seeks additional protection for the $3.5 to $4 million worth of new work it said it is compelled to provide to National until February.
Another creditor, GE Capital Aviation Services Inc., which agreed on June 5 to lease four new Boeing 757-200 ER aircraft for a 12-year term each to National, is seeking court approval to either terminate the leases because the company defaulted on a $200,000 deposit, or force National to pay $1.6 million for each aircraft as protection for GE's claims.
GE, which said in court papers filed Dec. 18 that the first two airplanes are scheduled to be delivered in January, said it could incur several million dollars worth of damages in doing business with National.
"Since (National's) existing load factor is below that necessary for it to operate profitably, additional aircraft will simply exacerbate its current financial difficulties," GE said. "Even if these aircraft are to be used on new routes, it will be months before they can generate sufficient revenues for the routes to be profitable."
Shimizu said National hasn't decided on whether it will take delivery of the four aircraft.
National is also fighting another creditor, General Electric Capital Corp., which seeks an order to foreclose on $2 million worth of spare parts and supplies, which are security for an outstanding $10.614 million loan.
Raymond Nakano, National's senior vice president, disputed GE's request, saying National's flight schedules will be disrupted if its access to the spare parts is restricted.
Nakano also disputed GE's claim that the value of its collateral is rapidly depreciating, saying the spare parts are used only as a back-up source and will be replaced if used.
Other National creditors seeking protection include:
--Airlines Reporting Corp., which distributes and settles sales and refunds of National's tickets to travel agents and corporate travel departments, requests a cash reserve fund of $1.4 million to be established to protect future funds it advances to travel agents on National's behalf.
--Northwest Airlines Inc., which said it is owed $714,684 as of Dec. 6 for ground handling services to National at three airports, on-call maintenance and de-icing services, seeks an order to terminate or suspend its contract should National default on future payments.
Northwest, which said it is potentially exposed to future losses of at least $440,000, wants National to provide a deposit equal to two weeks' average charges under its ground handling services contract.
--International Aviation Terminal Partnership (IAT), which said it is owed three months' rent for a warehouse at McCarran International Airport leased to National, said it wants to know if National will continue to lease space there. IAT said this will affect its decision to build an additional cargo building.
--PRA Solutions LLC said it is owed $867,745 for services provided since Sep. 11, 2000.
--Signature Flight Support Corp., which said it is owed $20,900 for ground handling services provided as of Dec. 6, seeks protection for daily credit of $1,700-$1,900 it is extending to National since its bankruptcy filing.
--SNE Equipment Services, which said National defaulted on $25,940 in rents on four pieces of ground-handling equipment, seeks an order to repossess its equipment because it says these are depreciating in value and "aren't necessary to National's reorganization."
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