The Debtors Are the Following Entities: US Airways Group, Inc., US Airways
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John Wm. Butler, Jr. John K. Lyons SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive, Suite 2100 Chicago, Illinois 60606-1285 (312) 407-0700 Lawrence E. Rifken (VSB No. 29037) McGUIREWOODS LLP 1750 Tysons Boulevard, Suite 1800 McLean, Virginia 22102-4215 (703) 712-5000 Attorneys for Debtors and Debtors-in-Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION In re: ) ) Case No. 02-83984 (SSM) ) Jointly Administered US AIRWAYS GROUP, INC., et al., ) Chapter 11 ) Hon. Stephen S. Mitchell Debtors. ) MOTION FOR AN ADMINISTRATIVE ORDER PURSUANT TO 11 U.S.C. §§ 105(a) AND 331 ESTABLISHING PROCEDURES FOR INTERIM COMPENSATION AND REIMBURSEMENT OF EXPENSES OF PROFESSIONALS US Airways Group, Inc. (“Group”) and seven of its subsidiaries and affiliates (the “Affiliate Debtors”),1 debtors and debtors-in-possession in the above- captioned cases (collectively, the “Debtors”), hereby move (the “Motion”) this Court for an administrative order, the proposed form of which is attached hereto as Exhibit 1 The Debtors are the following entities: US Airways Group, Inc., US Airways, Inc., Allegheny Airlines, Inc., PSA Airlines, Inc., Piedmont Airlines, Inc., MidAtlantic Airways, Inc., US Airways Leasing and Sales, Inc. and Material Services Company, Inc. A, under 11 U.S.C. §§ 105 and 331 establishing procedures for interim compensation and reimbursement of expenses of professionals. In support of this Motion, the Debtors rely on the Affidavit of David N. Siegel in Support of Chapter 11 Petitions and First Day Orders, sworn to on August 11, 2002. In further support of this Motion, the Debtors respectfully represent as follows: BACKGROUND A. The Chapter 11 Filings. 1. On August 11, 2002 (the “Petition Date”), the Debtors filed voluntary petitions in this Court for reorganization relief under chapter 11 of the Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Debtors have moved this Court for an order for joint administration of these chapter 11 cases. 2. No creditors’ committee has yet been appointed in these cases. No trustee or examiner has been appointed. 3. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). 4. The statutory predicates for the relief requested herein are sections 105(a) and 331 of the Bankruptcy Code and Local Rule 2016-1. 2 B. Background and Current Business Operations.2 5. The largest air carrier east of the Mississippi where more than 60% of the U.S. population resides, US Airways operates the seventh largest airline in the United States and the fourteenth largest airline in the world with approximately 40,000 full-time and part-time employees. During 2001, the Debtors, which provide air transportation, cargo, and other transportation-related services, carried approximately 56 million passengers and generated operating revenues of approximately $8.3 billion for the year ended December 31, 2001. The Debtors' chapter 11 petitions listed assets of approximately $7.81 billion and liabilities of approximately $7.83 billion on a consolidated basis. 6. The Debtors' corporate structure consists of Group's wholly-owned subsidiary US Airways, Inc. ("USAI"), six other wholly-owned debtor subsidiaries and one non-debtor foreign insurance related subsidiary. The Debtors' flight operations encompass the "mainline" operations of USAI, as well as the operations of four wholly-owned subsidiaries of Group (Allegheny, MidAtlantic, Piedmont and PSA) that operate commuter aircraft as US Airways Express carriers. 7. The Debtors' North American operations have a "hub-and-spoke" structure with primary domestic hubs in Charlotte, Philadephia and Pittsburgh. US 2 A thorough discussion of the Debtors' background, events leading up to the filing of the chapter 11 cases, and restructuring goals is included in the Affidavit of David N. Siegel in Support of Chapter 11 Petitions and Proposed First Day Relief filed contemporaneously herewith. 3 Airways also has a significant presence in Boston, New York (LaGuardia) and Washington, D.C. (Reagan National) including its Shuttle operation. As of June 30, 2002, the Debtors provided regularly scheduled airline service to approximately 200 destinations in 38 states across the United States and in Canada, Mexico, the Caribbean and Europe. C. Events Leading Up to the Chapter 11 Cases. 8. From 1996 through 1999, the Debtors generated over $2 billion in net profits but 1999 was the Company's last profitable fiscal year based on recurring earnings. In recent years, the Debtors' profitability was significantly eroded by competitive pressures (including the incursion of both regional jets and low-cost carriers into the Debtors' operating territories), unfavorable economic trends, and rising fuel and labor costs. The May, 2000 proposed merger of United Airlines and the Company was designed to address this profitability erosion by adding the Company into a global network. During the merger period, which ended in the termination of the agreement after failing to receive approval from the United States Department of Justice in late July, 2001, the Company was precluded from restructuring its operations as a stand-alone carrier. Following the merger termination, the Company embarked on a staged, stand-alone restructuring plan to fix the airline which was preempted by the September 11th terrorists attacks. 9. US Airways was the airline most significantly affected by the events of September 11. Not only were the Debtors' operations shut down entirely for three 4 days in September, but Ronald Reagan Washington National Airport, at which the Debtors are the largest carrier, was closed until October 4, 2001. Service was not fully restored until May 2002. In addition, the East Coast in general has been the part of the country most affected in the aftermath of the attacks. The Debtors compete heavily with trains and automobiles as a result of their short-haul network and have been more affected than other airlines. The increased airport security charges and procedures have also had a disproportionate impact on short-haul travel. Excluding unusual items, the Debtors lost $552 million in the fourth quarter of 2001 and $269 million in the first quarter of 2002, significantly worse results than would have been experienced absent the attacks. 10. In response to these adverse events, the Company, led by a new management team headed by David N. Siegel, who joined the Company in March 2002, implemented a plan to stabilize the airline and return it to profitability. The plan first required significant cost savings, approximately $1.3 billion, from key constituent groups including employees, vendors, aircraft lessors and other groups. Second, the plan sought to boost revenues and enhance competitiveness by the increased use of regional jets to service markets in an efficient manner. Finally, the Debtors sought to enhance revenues by entering into a strategic alliance for code sharing with domestic and international airlines. To obtain sufficient liquidity to implement the restructuring plan, the Debtors sought and obtained conditional approval for a $1 billion, seven-year term loan, $900 million of which will be 5 guaranteed by the federal government, from the Air Transportation Stabilization Board (the "ATSB") which the Debtors will seek to utilize under applicable law as part of a chapter 11 emergence financing facility. 11. While the Debtors were able to successfully negotiate cost-savings from many of its employee groups, the Company determined that it was unlikely to conclude consensual negotiations with all of the remaining labor groups, various vendors, aircraft lessors and financiers in a timeframe necessary to complete an out-of-court restructuring. Factors contributing to this conclusion include the large number of lessors and financiers, the inability of trustees to modify payment terms of public equipment financings without the unanimous consent of holders of widely held trust certificates, and the Company's inability to reject surplus aircraft leases and return excess aircraft outside of chapter 11. Faced with declining seasonal revenues, the Debtors decided to commence the chapter 11 cases to maximize their liquidity position and their prospects for a successful reorganization. D. Restructuring Goals. 12. Through commencement of the chapter 11 cases, the Debtors intend to use the chapter 11 process on a "fast-track" basis as a means to negotiate with key stakeholders over their respective contributions to the restructuring plan or, absent consensual participation, to utilize the chapter 11 process to achieve the necessary cost savings envisioned in the restructuring plan as required. The Debtors believe that once the remaining planned cost savings are achieved, they will be able to implement 6 the restructuring plan under a confirmed plan of reorganization, financed in part by the exit financing facility supported by the federal loan guarantee and a proposed $200 million new equity investment by Texas Pacific Group. Once the restructuring plan is fully implemented, the Debtors expect to emerge from chapter 11 in the first quarter in 2003 as a stronger, financially sound airline. 13. In the meantime, US Airways will marshal all of its resources to continue its exceptional