National plan moves forward after deal with lessor

Tuesday, Jan. 29, 2002 | 11:08 a.m.

A late-night settlement between National Airlines and one of its aircraft lessors Sunday paves the way for a Bankruptcy Court judge to consider the airline's reorganization plan today.

Pembroke Ltd. of Ireland, which leases four of National's 15 twin-engine Boeing 757 jets, reached agreement on a settlement with the airline that was one of the last hurdles to be cleared before Judge Linda Riegle could consider National's reorganization plan.

Riegle was scheduled to hear testimony on two more objections to the National plan this morning and conduct a hearing on the reorganization this afternoon. National attorneys said they did not expect those objections to hold up the reorganization, particularly since the deal with Pembroke was hammered out over the weekend.

"It's really not unusual to come to an agreement at the last minute in cases like this," said Laurence Frazen, one of National's attorneys.

Like the agreements with seven other aircraft lessors, terms of the deal with Pembroke were not disclosed.

Frazen had said that Pembroke and National had been about $13 million apart in determining fair rental value of the four aircraft, about a quarter of National's fleet. As part of its reorganization plan, National renegotiated leases on all its planes after the dramatic change in the market over the past year.

Because all aircraft demand was wavering through the economic hard times of early 2001, then fell abruptly after the Sept. 11 terrorist attacks, National had an advantage in renegotiating new leases as well as terms of paying back those creditors.

In the end, the lessors acknowledged that they would rather keep their planes flying than watch them sit idle.

Pembroke was the only lessor that objected to the reorganization plan and attorneys for both sides said through most of January that it appeared likely that Riegle would have to rule on issues associated with the lessor's claim. National had said that if the airline couldn't reach an agreement with Pembroke, it would seek planes elsewhere.

When the settlement was announced Monday, Riegle said she was glad it had been reached because she didn't want to have to rule on the matter.

The two other companies with objections to the National reorganization plan, scheduled to be heard this morning, are GE Capital, one of the airline's financiers, and Certified Airline Passenger Services, a Las Vegas-based off-airport passenger check-in company.

GE Capital holds a lien on National's aircraft parts inventory and has a dispute with National over the value of that collateral. Airlines routinely borrow money against their spare parts inventories.

The CAPS claim may be the more intriguing matter.

CAPS, which has been shut down since Sept. 11 after the Federal Aviation Administration's new security measures prohibited the company from operating, has aligned itself with Old Mission Assessment Corp., Miami, which filed an alternate reorganization plan for National Jan. 14.

Old Mission executive Ian Herman is the former chairman of British World Airlines, a company that held a Federal Express contract to transport freight in Europe in addition to transporting passengers.

Old Mission's plan is similar to National's reorganization plan except that it proposes in injection of $60 million in cash with publicly traded stock. Old Mission, a holding company for a business that works as a bankruptcy consultant, has traded over the counter and this month was approved to trade on the Nasdaq exchange.

Mark Brennan, chief operating officer of CAPS, said his company and Old Mission are partners in a venture to take control of National, with Herman overseeing the airline and CAPS managing ground operations.

Brennan said Old Mission has not acquired CAPS' claim in the bankruptcy proceeding.

But the CAPS-Old Mission plan may not even be heard.

Riegle must consider whether the filing of the plan conformed with an exclusivity agreement. Under bankruptcy code, a debtor has the exclusive right to file its own reorganization plan for the first two months after the bankruptcy filing. After that, the debtor can ask the court for an extension. National has filed for continuous extensions of the agreement.

Herman and Brennan were expected to be in court today and Herman said Monday he would issue a statement after the hearing.

Once a reorganization plan has been approved by the court, National has said that it plans to seek a $70 million federally guaranteed loan through the Air Transportation Safety and System Stabilization Act, in which Congress authorized a $15 billion government bailout plan for the aviation industry following the terrorist attacks.

America West Holding Corp., which operates America West Airlines, the No. 2 carrier at McCarran International Airport, already has received a similar loan, for $429 million.

National attorney Craig Hansen said Monday National Airlines officials had their first meeting with board members who will consider their loan application.

National officials said last month that two unnamed banks, one on the East Coast and one on the West Coast, would be co-participants in the loan that would be secured by the government.

Like America West's loan agreement, National is expected to issue warrants to give the government the option to purchase shares of the company's common stock to secure the loan.

The names of the lenders and two new equity partners have not been disclosed. Hansen said in court Monday that one of the equity partners is "one of the most significant players in the airline industry." He said the company does not want its name disclosed.