James Feltman
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UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY PATRICK BRADY, et al., Plaintiff, v. Civil Action No. 02-2917 (JEI) AIR LINE PILOTS ASSOCIATION INTERNATIONAL, Defendant. EXPERT REPORT OF JAMES S. FELTMAN, CPA SENIOR MANAGING DIRECTOR, MESIROW FINANCIAL CONSULTING, LLC March 15, 2013 James S. Feltman Senior Managing Director Mesirow Financial Consulting, LLC 666 Third Avenue, 21st Floor New York, New York 10017 [email protected] TABLE OF CONTENTS I. Introduction ............................................................................................................................ 1 A. Retention and Scope ........................................................................................................ 1 B. Qualifications ................................................................................................................... 1 C. Fees .................................................................................................................................. 2 D. Documents Considered .................................................................................................... 2 E. Principal Opinions and Conclusions ................................................................................ 3 F. History of TWA’s Financial Difficulties ......................................................................... 5 II. Financial Condition of TWA ................................................................................................. 7 A. Insufficient Revenue Generating Capabilities ................................................................. 8 1. Traffic ........................................................................................................................ 8 2. Yield ........................................................................................................................... 9 B. High Operating Cost Structure....................................................................................... 11 1. Fuel .......................................................................................................................... 11 2. Aircraft Rent ............................................................................................................ 12 3. Labor ........................................................................................................................ 13 C. Poor Financial Performance ........................................................................................... 14 D. Inadequate Capital Resources and Liquidity ................................................................. 18 E. Other Observable Market Evidence ............................................................................... 23 F. Solvency ......................................................................................................................... 25 1. Market Approach ..................................................................................................... 26 2. Income Approach ..................................................................................................... 27 3. Fair Market Valuation Conclusion........................................................................... 29 III. TWA’s Inability to Operate as a Stand Alone Airline ......................................................... 30 A. Industry Consolidation ................................................................................................... 31 B. Network Structure .......................................................................................................... 34 C. Regional Affiliates ......................................................................................................... 37 D. Pricing Pressure ............................................................................................................. 40 IV. Conclusion ........................................................................................................................... 44 LIST OF FIGURES Figure 1 : TWA’s Comparative Market Share (RPMs) .............................................................. 8 Figure 2 : TWA’s Relative Market Share ................................................................................... 9 Figure 3 : TWA’s Comparative Yield ...................................................................................... 10 Figure 4 : TWA’s RASM and CASM ...................................................................................... 16 Figure 5 : TWA’s Operating and EBITDA Margin ................................................................. 17 Figure 6 : TWA’s Unsecured and Secured Public Debt Pricing .............................................. 24 Figure 7 : TWA’s Credit Ratings ............................................................................................. 24 Figure 8 : TWA’s Share Pricing vs. Airline Index ................................................................... 25 Figure 9 : Non-Stop and Connecting Traffic at Hub Airports .................................................. 35 Figure 10 : Overview of Major Carriers’ RJ Operations ........................................................... 39 Figure 11 : Pricing Impact of Southwest Airlines ..................................................................... 42 Figure 12 : Cumulative Discount Received by Karabu ............................................................. 43 LIST OF TABLES Table 1 : Fuel Expense Summary ........................................................................................... 12 Table 2 : Rent Expense Summary ........................................................................................... 13 Table 3 : Labor Expense Summary ......................................................................................... 14 Table 4 : Key Income Statement Metrics ................................................................................ 18 Table 5 : TWA’s Capitalization .............................................................................................. 20 Table 6 : Key Liquidity Metrics .............................................................................................. 21 Table 7 : Guideline Publicly Traded Company Method Conclusions .................................... 27 Table 8 : WACC Overview ..................................................................................................... 28 Table 9 : Income Approach Conclusions ................................................................................ 29 Table 10 : Hub Airports of TWA and Other Major Carriers .................................................... 36 Table 11 : Overview of RJ-Related Scope Clause Provisions .................................................. 38 EXHIBITS Exhibit 1 - Curriculum Vitae of James S. Feltman Exhibit 2 - Documents Considered Exhibit 3 - Summary of Solvency Analysis Exhibit 4 - Market Approach: Guideline Publicly Traded Company Method Exhibit 5 - Income Approach: Capitalized Cash Flow Method Exhibit 6 - Weighted Average Cost of Capital Analysis Exhibit 7 - Description of Guideline Companies Exhibit 8 - Timeline of M&A Activity in Airline Industry Exhibit 9 - Timeline of Bankruptcy Activity in Airline Industry ii I. INTRODUCTION A. RETENTION AND SCOPE I have been retained by Paul, Weiss, Rifkind, Wharton & Garrison, LLP to analyze the financial condition of Trans World Airlines, Inc. (“TWA” or the “Company”) at the time of its third bankruptcy filing and acquisition by AMR Corporation (or its designee, “American”), and to assess the viability of TWA as a stand-alone, going-concern airline. My analysis responds to Plaintiffs’ experts’ assumptions and opinions regarding TWA’s financial viability and the pre- merger career expectations and long-term job security of its pilots. My findings are included herein (the “Report”). I reserve the right to supplement, modify, or amend this Report and my testimony as necessary to address any relevant information that may become available to me after the date of this Report. B. QUALIFICATIONS I am a Senior Managing Director at Mesirow Financial Consulting, LLC (“MFC”), a leading provider of financial advisory services and a wholly owned subsidiary of Mesirow Financial Holdings, Inc. (“Mesirow Financial”). On September 16, 2004, Mesirow Financial acquired the U.S. Corporate Recovery practice of KPMG LLP (“KPMG”) and renamed the practice Mesirow Financial Consulting, LLC. At the time of the acquisition, I was a Partner at KPMG, one of the world’s largest accounting and consulting firms. Prior to joining KPMG, I was a Partner at Arthur Andersen LLP, for approximately ten years. Since 1988, I have served continuously as a Bankruptcy Examiner, a Chapter 11 Trustee or a Liquidating Trustee. As a court appointed examiner, I carried out duties prescribed to me by the Bankruptcy Court, including conducting examinations into failed companies on more than a dozen occasions. From approximately 1992 to 2004, I served as a Chapter 7 Panel Trustee in the Southern District of Florida in over 15,000 cases. In this government appointed role (by the United States Department of Justice), my work included examining business failures. I am a Certified Public Accountant (CPA) and a Certified Fraud Examiner (CFE), and I am certified in financial forensics (CFF). I have over 30 years of experience in, among other things, financial analysis, valuations and damages analysis, corporate restructuring matters, accounting, auditing,