Harrah’s blocked from withdrawing cash from National

Friday, June 1, 2001 | 3:57 a.m.

A federal bankruptcy judge Friday approved a temporary restraining order blocking Harrah's Entertainment Inc. from establishing a cash reserve fund from National Airlines' ticket receipts, a move that could have permanently grounded the Las Vegas airline.

Had this fund been established, cash from ticket sales would have gone to help pay off $39.4 million in debt National owes to Harrah's, rather than capitalizing the airline. That could have caused the airline to run out of cash in days, forcing a complete shutdown.

"I get the feeling that I'm watching a TV newscast of a runaway train full of nuclear waste, with Harrah's in the deadman's seat refusing to put on the brake," said Judge Linda Riegel.

The temporary restraining order will be in effect until the next hearing, scheduled for June 11. Between now and then, National's management will meet with lessors of the airline's 16 Boeing 757 jets to iron out details of a proposal that would give financier Carl Icahn an undisclosed stake in the airline.

Icahn had said previously that the deadline for his offer was the end of the day Friday. National Chief Executive Mike Conway said Friday afternoon he didn't know what the status of that deadline was, but noted that Icahn has extended deadlines before to get a deal done.

Conway said it could take as long as a month to strike a final deal with Icahn.

Harrah's Entertainment, one of the airline's founding partners, wanted to establish a cash reserve account that would begin paying back some $17.4 million in loans it has negotiated with the two-year-old airline.

Under terms of an order approved by U.S. Bankruptcy Court Judge Linda Riegle last month, Harrah's on Monday could have begun collecting 100 percent of the receipts of ticket sales purchased by credit card for any bookings for travel on National occurring after June 30.

Harrah's has a $16 million letter of credit on file with U.S. Bank that enables National to use money collected for tickets for travel that hasn't yet occurred.

National was trying to delay Harrah's collection of ticket receipts by 10 to 15 days while it completes negotiations with Icahn, who has an offer on the table that would, among other things, replace the Harrah's letter of credit in exchange for a stake in the airline. If ticket receipts go to Harrah's instead of National, the airline won't have the cash flow to continue operations and could be forced to shut down.

Conway said before Friday's hearing that shutting down isn't a likely scenario because creditors are more likely to be paid if the airline continues to fly.

Harrah's, operator of two hotel-casinos in Las Vegas, first issued a letter of credit on behalf of National in March 2000.

Harrah's holds a 48 percent equity position in National and issued the $16 million letter of credit on its behalf that has been extended several times. In the fourth quarter of 2000, the company recorded write-offs and reserves totaling $39.4 million for its investment in and loans to National, according to a Securities and Exchange Commission filing last month.

National, which observed its second anniversary Sunday, filed for Chapter 11 bankruptcy protection in December. It operates a fleet of 16 twin-engine Boeing 757 jets leased from nine different companies, and flies to 11 U.S. cities, including Las Vegas where it has its hub at McCarran International Airport.

Every National flight either leaves from or arrives at Las Vegas, making it McCarran's fifth largest carrier by number of passengers served. In March, the company flew 200,673 people to Las Vegas, according to McCarran statistics. This increased in April to 207,128 passengers, up 35 percent from April 2000.

National posted losses of $23.2 million on revenues of $68.8 million in the fourth quarter of 2000, the most recent period that has been publicly disclosed. In the third quarter of that year, National lost $2.6 million on revenues of $75 million.

As a privately held company, National is not compelled to report its profits and losses publicly, but the company reports its finances to the U.S. Department of Transportation, which delays releasing statistics until four months after the end of the quarter for proprietary reasons.

When the company filed for bankruptcy protection, it cited soaring fuel prices as the primary reason for its financial woes. The airline also had passenger loads below industry averages -- meaning it didn't sell enough tickets to fill its planes.

Fuel prices peaked at $1.20 a gallon late last year, with the price easing since the bankruptcy filing. When the airline began flying in May 1999, fuel cost about 65 cents a gallon. Every penny of fuel increase translates into an additional $65,000 per month in expenses for the airline.

Bob Mitchell, who identified himself as a New York attorney for Icahn Associates, did not disclose any further details about the Icahn proposal, other than that it is "the best and final offer" and it expires at the close of business today.

Mitchell had no comment about plans for National if Icahn were to get a controlling interest in the airline.

Aviation experts had been speculating since mid-March that Icahn would make a play for National after his failed bid to acquire TWA. Icahn, a former chairman for TWA, was attempting to buy that airline out of bankruptcy because he had a deal with it for discounted tickets that he would sell through another of his businesses, Las Vegas-based Lowestfare.com. Icahn eventually was outbid for TWA by AMR Corp., parent company of American Airlines.

Lowestfare.com is an Internet ticket sales and travel reservation company. Icahn also owns three Las Vegas hotel-casinos, the Stratosphere on the Las Vegas Strip, and two Arizona Charlie's properties.

Most of the creditors, including Harrah's, support the Icahn offer, which is under wraps because of confidentiality agreements.

Also under wraps is the status of National's 1,400 employees, all of whom are nonunion. Two National pilots attended Thursday's hearing, talked briefly to Conway but had no comment, citing company policy about talking to the media.

Conway acknowledged the current offer for the first time Thursday after denying he was in negotiations with Icahn for the past few months. He said he was bound by a confidentiality agreement from discussing the proposal. He also had no comment on any other potential offers besides the Icahn plan.

Conway said he is confident that a deal would be struck that would enable National to continue to fly. He said Icahn already has extended deadlines to facilitate the negotiation process and he expects that would occur again today.

But National's lead attorney in the bankruptcy, Craig Hansen of Squire Sanders, Phoenix, came prepared with the motion for the restraining order Thursday to "remove the hammer" of the Harrah's plan to alter the cash flow.

"I do not believe the parties are that far apart," Conway said at the conclusion of the bankruptcy status hearing Thursday.

As for Harrah's decision not to extend the terms of the letter of credit, Conway said the process "doesn't need a third party forcing resolution" of the matter.

He said the airline continues to enjoy record ticket sales. After back-to-back record sales weeks in April, Conway said those marks were broken again last week. And, the airline sold more tickets on Wednesday than on any day in its history. Conway said about 510,000 people would fly to Las Vegas on National in June and July.

Gregory Garman of the Las Vegas law firm of Gordon & Silver, representing Harrah's, said the company is not relenting on its stance on the letter of credit, stating that the hotel-casino "is in the worst position of anyone" in terms of recovering from the consequences of National's bankruptcy filing.

He said Harrah's has a responsibility to its shareholders to do what it can to prevent the company from subsidizing its competitors by financing National. Harrah's presented a similar argument to other casino executives following National's bankruptcy filing. At that time, Harrah's officials tried to convince other companies to join it in investing in the airline.

Harrah's executives say because they have only two Las Vegas properties, their company shoulders a disproportionate burden of keeping the airline running compared with the benefits the entire city derives from the presence of National.

But none of the other casino companies came forward to invest.

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