Lessors looking to protect interest in National Airlines

Tuesday, June 26, 2001 | 10:46 a.m.

A U.S. Bankruptcy Court judge in Las Vegas may determine today whether a group of aircraft lessors will have any say in the operation of National Airlines.

As attorneys gather to argue whether Las Vegas-based casino operator Harrah's Entertainment Inc. can divert the airline's cash flow to begin paying back some $17.4 million in loans, other creditors are monitoring the legal maneuverings closely to assess their next moves.

National, which has been resilient through its Chapter 11 reorganization as a debtor-in-possession, could convince Judge Linda Riegle to stop Harrah's from withdrawing cash from the airline, which would give it more time to lock in a buy-out plan that would keep the airline flying.

Virtually every creditor -- including Harrah's -- has said that it is in everybody's best interest if National continues to fly.

But the biggest question that remains is: Who would buy National Airlines? Representatives of all the key players in the drama aren't commenting, citing a confidentiality agreement between them.

Carl Icahn, the billionaire financier with Las Vegas ties, wants an airline so he can sell tickets on his Internet travel site, Lowestfare.com, and has been in talks with National Chairman Mike Conway since March. But Bloomberg News reported his $181.5 million offer to acquire National has been withdrawn.

That leaves a second possible buyer with whom Conway has had negotiations, a syndicate of aircraft lessors that could have more to gain by keeping their jets in the air than they would if they were parked.

Aviation expert Mike Boyd said there's a precedent of similar lessor syndicates bailing out foundering airlines. And, he's not convinced that Icahn, who owns the Stratosphere hotel-casino and the two Arizona Charlie's casinos in Las Vegas, is completely out of the picture.

Boyd, an aviation consultant with The Boyd Group, Evergreen, Colo., said lessors may take less of a hit if their planes aren't mothballed for a few months and that the fleet collectively is more valuable than the individual planes.

"(National operates) a hodge-podge of (Boeing) 757s," Boyd said. "Because they come from different sources, they're not as appealing to an existing airline, which would have to negotiate with several different companies to lease them and the planes all have slightly different configurations -- making the group a little less appealing to one buyer."

Boyd also said smaller planes like the Boeing 737 or the Airbus 320 are more popular with carriers that are in the market for more planes.

"But if a syndicate of lessors acquires the airline, they may want to put a whole new management in place," Boyd said. "And the bottom line is that at some point, National has to get profitable."

Profitability is something that has eluded National, which has lost $22.1 million since the bankruptcy was filed and was losing money at a rate of about $2 million a month.

The company said it was profitable for about two months in March 2000. It has blamed high fuel prices for its financial instability and experts have said the company's below-average passenger loads didn't help.

In recent quarters, most of the nation's airlines have struggled, citing higher fuel costs as a key problem.

But now, fuel prices have eased from historic highs and in May, National reported record ticket sales for upcoming flights.

Boyd isn't convinced that higher fuel prices were the only thing that plagued National.

"They must have been operating with some really thin margins to let higher fuel prices force them into bankruptcy," he said. "I'm sure there are areas other than fuel that contributed."

Boyd also isn't convinced that Icahn, a master at acquiring struggling companies and turning them into profitable ventures, is out of the picture.

"You can bet that Carl Icahn will be circling around anything that is dead or dying," Boyd said. "I wouldn't be surprised if he showed up in court."

Icahn's skill as a tough negotiator might only be matched by his reputation as a businessman who is willing to streamline an operation to get results. Thus, National employees, like companies in similar circumstances that have been on Icahn's wish list, aren't thrilled with the prospect of him taking the reins at National. But some observers have speculated that Conway has used that fear to his advantage in encouraging another buyer to outbid Icahn.

Bloomberg reported that Icahn's $181.5 million bid included $22.5 million in cash, $43 million owed passengers for unused tickets and $100 million in operating funds.

While the chess game of who controls National unfolds, other creditors are waiting to make their moves when whatever happens, happens.

B.F. Goodrich Aerospace, one of the largest creditors with a maintenance contract on National's jets, has placed liens on seven of the 16 757s in the National fleet.

That resulted in one of the lessors, International Lease Finance Corp., Los Angeles, filing suit in U.S. District Court to appeal the Bankruptcy Court order enabling B.F. Goodrich to take possession of one of those seven planes should National fail.

International Lease Finance maintains it was denied due process in the case.

National's fuel supplier, Mercury Air Group, Los Angeles, also has been in court, extending an order that gives Mercury a higher priority for payment for the fuel the planes burn. Mercury is now paid every two or three days, getting a little over a half-million dollars per invoice. Mercury's credit exposure is capped at $250,000.

The fuel agreement has been amended and extended several times since the bankruptcy was filed, but Mercury has taken a heightened interest in proceedings with the apparent resolution of the case nearly in sight.

But the legal proceeding that could have the biggest impact on the resolution of the case is Harrah's maneuvering to divert ticket income to a cash account that would begin paying off loans the casino company made when it invested in the airline. Harrah's holds a 48 percent equity position in National.

The court has authorized a temporary restraining order blocking Harrah's from establishing the fund -- a strategy that was allowed by the court in May.

Creditors and the judge have questioned why Harrah's would embark on that course, since if National lost access to the funds, it would quickly run out of cash and be forced to shut down.

Judge Riegle agreed to the temporary restraining order because National attorneys convinced her that a deal with fresh investors was imminent.

Riegle has alternately been patient and frustrated with the principals in the case. She has granted National extra time to complete its negotiations with new buyers and has shown concern for National's 1,400 employees and the thousands of people who would be inconvenienced by an abrupt shut-down of the airline.

But she has been critical in the courtroom of some of the posturing that has added pressure to the negotiation process.

Harrah's spokesman Gary Thompson has said his company was trying to press toward a resolution of National's Chapter 11 status and that the break-off of negotiations with Icahn was a disappointment.

Today's actions could bring about some of that resolution -- but it also could be just one more stop on National's long bankruptcy trip.

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