Sky Talk

No. 1: American files for Ch. 11 bankruptcy, CEO Arpey retires

While it is no surprise to Sky Talk readers that AMR's bankruptcy filing in November is the top aviation story for 2011, it did come as a surprise to many industry analysts who had not expected it to happen so soon.

This fall, bankruptcy rumors swirled around American Airlines' parent company and its stock price continued to decline as shareholders lost faith in the carrier's ability to avoid it. But Wall Street analysts said bankruptcy was not imminent for American as it still had plenty of cash on hand and wouldn't need to file for bankruptcy protection until the middle of 2012.

On November 28, American's board of directors decided that bankruptcy was the best choice for the Fort Worth-based carrier and the next day, filed for Chapter 11 bankruptcy protection in New York federal court. The airline had $4.1 billion in cash so the company did not need to obtain debtor-in-possession financing to maintain operations in bankruptcy and it gave management a little more control over the bankruptcy process.

On the day of the filing, AMR chief executive Gerard Arpey stepped down and its president, Tom Horton, took the reins. Arpey had often discussed how important it was to avoid bankruptcy and viewed it as a moral failing if the company did not live up to the contracts it had with its employees and customers.

Horton cited the carrier's higher labor costs, a global economic slowdown, high fuel prices and a credit downgrade as factors in the board's decision to declare bankruptcy. American said it had $30 billion in debt when it filed.

"All of those things taken together led us to the conclusion, the board to the conclusion, that this was really the right time to go through a full restructuring of the company," said Horton. "We spent 10 years trying to avoid this."

So far, during the bankruptcy process, American has been given court approval to continue purchasing 32 new planes from Boeing and to terminate leases for its Kansas City maintenance base, Chicago Midway Airport facilities and 20 older aircraft that are currently parked in New Mexico.

There have been no changes so far in the carrier's labor contracts with its pilots, flight attendants, mechanics and ground workers, but some analysts predict that will occur in the spring. And there have been no merger offers made yet, as US Airways made a merger offer to Delta Air Lines when it was in bankruptcy.

It could take American anywhere from 18 months to three years to emerge from bankruptcy. But experts agree, it will be a smaller, leaner, more cost-efficient carrier after it restructures.

-Andrea Ahles

No. 2: F-35's flight path remains turbulent

When the F-35 Joint Strike Fighter contract was awarded to Lockheed Martin in late 2001, the ambitious schedule called for development and testing to be largely done, planes rolling off the assembly line and in the hands of the U.S. and foreign armed forces by the end of 2011.

That schedule went out the window a couple of years later and by the end of 2011 the flight path of the costliest defense weaspons development program in history was still navigating through lots of turbulence.

There were some good signs in 2011. Flight testing finally gained some altitude, with about 900 test flights completed during the year - ahead of the planned schedule. Lockheed Martin and government officials said the testing went well despite and couple of halts due to reliability problems that popped up.

But there were problems too, which ultimately will end up taking times and hundreds of millions more dollars to correct. A recent released internal Pentagon document showed numerous unresolved mechanical, quality and reliability issues and the program's government manager, Navy Vice Admiral David Venlet, publicly expressed doubts about the government's strategy for developing the plane and counseled a slow down in planned production rates.

The year closed with a major step forward for the program when the japanese government announced it had selected the F-35 as the next combat jet for that nation's self defense force and blanned to buy at least 42 planes with the first being delivered in 2016.

- Bob Cox

 

$181 million in Bell-Boeing V-22 contracts

It's the end of the year and the Pentagon has money to spend, $181 million in contracts issued Thursday for work on the V-22 Osprey program to the Bell-Boeing joint venture.

From the daily contract announcements release:

    Bell-Boeing Joint Project Office, Amarillo, Texas, is being awarded a $72,928,060 advance acquisition contract for long lead components required for the manufacture and delivery of 17 (fiscal 2013) Lot 17 MV-22 tiltrotor aircraft for the Marine Corps and four (fiscal 2013) Lot 17 CV-22 tiltrotor aircraft for the Air Force.  Work will be performed in Ridley Park, Pa. (50 percent), Forth Worth, Texas (25 percent), and Amarillo, Texas (25 percent), and is expected to be completed in December 2012.  Contract funds will not expire at the end of the current fiscal year.  This contract was not competitively procured pursuant to FAR 6.302-1.  The Naval Air Systems Command, Patuxent River, Md., is the contracting activity (N00019-12-C-2001).

     Bell-Boeing Joint Project Office, Amarillo, Texas, is being awarded a $34,445,395 modification to a cost-plus-fixed-fee delivery order placed previously against basic ordering agreement (N00019-07-G-0008) for engineering and technical support for V-22 flight control system and on-aircraft avionics software for 2012 for the Navy and Air Force.  Support to be provided includes configuration changes to the V-22 avionics and flight control software; flight test planning and coordination of changed avionics and flight control configurations; upgrade planning of avionics and flight controls, including performance of qualification testing; and integration testing on software products.  Work will be performed in Philadelphia, Pa. (90 percent), and Fort Worth, Texas (10 percent), and is expected to be completed in December 2012.  Contract funds in the amount of $6,583,104 will expire at the end of the current fiscal year.  The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

     Bell-Boeing Joint Project Office, Amarillo, Texas, is being awarded a $33,343,681 cost-plus-fixed-fee delivery order against a previously issued basic ordering agreement (N00019-07-G-0008) for non-recurring efforts and flight test aircraft modifications for the Joint and Allied Threat Awareness System and Radar Warning Receiver (APR-39D(V)X) integration in support of the MV-22B Osprey aircraft.  Work will be performed in Philadelphia, Pa. (96 percent); Fort Walton Beach, Fla. (3 percent); and St. Louis, Mo. (1 percent).  Work is expected to be completed in February 2016.  Contract funds in the amount of $6,526,986 will expire at the end of the current fiscal year.  The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

     Bell-Boeing Joint Project Office, Amarillo, Texas, is being awarded a $28,870,525 firm-fixed-price, cost-plus-fixed-fee delivery order against a previously issued basic ordering agreement (N00019-12-G-0006) to support the Naval Rotary Wing Aircraft Test Squadron.  Services to be provided include on-site flight test management, flight test engineering, design engineering, and related efforts to support the MV-22 aircraft.  Work will be performed in the Naval Air Station, Patuxent River, Md. (42 percent); Philadelphia, Pa. (37 percent); Fort Worth, Texas (21 percent), and is expected to be completed in December 2012.  Contract funds will not expire at the end of the current fiscal year.  The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

     Bell-Boeing Joint Project Office, Amarillo, Texas, is being awarded an $11,491,794 firm-fixed-price delivery order against a previously issued basic ordering agreement (N00019-07-G-0008) for the procurement of 12 combined retrofit kits for the suite of Integrated Radio Frequency Countermeasures System modifications for the CV-22 aircraft.  Work will be performed in Philadelphia, Pa. (98 percent), and Fort Worth, Texas (2 percent), and is expected to be completed in May 2014.  Contract funds will not expire at the end of the current fiscal year.  The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

- Bob Cox

AMR retained bankruptcy advisors in October, paid Rothschild $1.6 million in the past six months

As American Airlines intensified contract talks with its pilots union this fall and its stock was dropping below $2, the company’s top executives were quietly preparing for bankruptcy.

According to court filings, AMR Corp. drew up an agreement with investment banking firm Rothschild Inc. in October to retain the firm for bankruptcy services. It also paid Rothschild $1.6 million in fees and expenses, including a $400,000 retainer, over the past six months.

Now AMR is asking U.S. Bankruptcy Judge Sean Lane to retroactively approve its hiring of Rothschild, which AMR says will provide financial analysis and identify restructuring transactions for Fort Worth-based carrier.

A hearing will be held on Jan. 27 to discuss AMR’s request; objections to the proposal must be filed by Jan. 20.

If the agreement is approved, Rothschild would receive a $200,000 monthly advisory fee, and $15 million if American’s reorganization plan is accepted by the court, or if another restructuring transaction occurs such as a merger or acquisition. Rothschild would also receive part of any new debt or equity raised as part of American’s restructuring.

The bankruptcy court filings show that Rothschild, which has been a financial adviser to AMR since 2006, sent a letter on Oct. 17 to Thomas Horton, then AMR’s president and now CEO, confirming the retention agreement. It was signed by Horton on Nov. 26.

Prior to its bankruptcy filing on Nov. 29, American paid Rothschild the $400,000 retainer and $290,000 in fees for November. An additional $900,000 in advisory fees and $34,233.56 in expense reimbursements were paid in the previous six months.

Bankruptcy rumors had swirled around American for months but on Oct. 3, shares of AMR stock plunged 33 percent as shareholders feared a filing was imminent. At the time, American said that bankruptcy was “not our goal or our preference.”

Two weeks later, American and its pilots union, the Allied Pilots Association, stepped up negotiations in hopes of forging a new contract before the airline posted its third-quarter earnings on Oct. 17. But no agreement was reached as the two sides were far apart on wages and work rules. AMR posted a $162 million loss for the quarter as higher airfares were unable to offset higher fuel costs.

-Andrea Ahles

 

NYSE to delist AMR stock on Jan. 5

The New York Stock Exchange announced Thursday that it will delist AMR Corp.'s stock [ticker: AMR] on January 5.

"NYSE advised AMR that it is taking these steps because the average closing price of AMR's common stock fell below the NYSE's continued listing minimum share price standard of $1 over a consecutive 30-trading-day period," the Fort Worth-based company said.

The company said it expects that prices for its common stock and publicly traded debt securities will be available on the OTC Bulletin Board and Pink Sheets Electronic Quotation Service as early as next Thursday.

On Nov. 29, AMR, parent company of American Airlines, filed for Chapter 11 bankruptcy protection. In most Ch. 11 cases, shareholders of common stock often receive little or no value on those shares after the company reorganizes.

-Andrea Ahles

U.S., Boeing seal F-15 order from Saudia Arabia

Wrapping up important business before the year ends, the U.S. government wrapped a 10-year, $60 billion arms sale to Saudi Arabia on Thursday that includes 84 new F-15 fighter jets from Boeing in St. Louis.

Completion of the sale, which the Obama Administration revealed it was planning in late October, comes as tensions have once again heated up in the Persian Gulf region over Iran's threats to close the Strait of Hormuz to il shipping if the U.S. and allies impose further sanctions on it.

Time magazine's Battleland blog finds the announcement timing curious since the Saudis just yesterday agreed to make up for any loss of oil production if there is an embargo imposed on Iranian oil exports.

The deal calls for Boeing to provide the Saudis with 84 F-15SA, an upgraded version of the F-15S bought more than decade ago, and upgrade the remaining 70 F-15S to the SA configuration. The F-15SA has more modern AESA radars, some fly-by-wire capability and other digital upgrades over the earlier model F-15s and is similar to the F-15Ks sold and being delivered to South Korea.

Boeing spokesman Dan Beck said Boeing has "a very hot" F-15 production line in St. Louis building planes for South Korea and Singapore. Boeing intends to compete the F-15SE (Silent Eagle), a version with stealth modifications, in the upcoming competition South Korea plans to hold for new fighter/attack jets, a competition that Lockheed Martin ios pointing towards with the F-35.

- Bob Cox

 

 

 

American: The airline exec incubator in the `80s

Good read from the Associated Press on how in the late 1980s, in the relatively early days of the deregulated airline industry, how American Airlines became the training and proving ground for bright young executives.

From an office at the end of a Dallas runway in the 1980s, the modern airline business was born.

There in cubicles with thin, gray carpet and shared computers, young graduates of the top business schools were tasked with making sense of deregulation — a new era when the government no longer dictated routes or prices.

Under American Airlines' then CEO Robert L. Crandall, they issued the first frequent flier miles, developed the hub system and found a way to fill empty seats with deeply discounted fares. Standards were high. Perfection was demanded. Those who excelled were quickly promoted, regardless of how young or new to the company they were. At the time, being a financial analyst on the second floor of American's headquarters was unlike any other job in the industry.

Today, four of them are running airlines — including American — themselves.

"It was a magical time," says Virgin America CEO David Cush, 51. "You didn't know where these guys were going to end up, but you knew you were hanging around with a bunch of smart guys."

Now one of those four, Tom Horton, has the task of restructuring American and restoring it to leadership. Three of his "classmates" are running competitors.

- Bob Cox

 

No. 3: American and Southwest order new planes

Out with the old and in with the new.

In 2011, both American Airlines and Southwest Airlines announced massive new plane orders to update the aging planes in their fleets.

American said in July it would order 460 new aircraft from Boeing and Airbus over the next decade as it attempts to transform its fleet from one of the oldest to one of the youngest during that time. Deliveries of the aircraft begin in 2013 and continue through 2022.

"When you factor it all in, including the lease cost for these airplanes, you're producing a [return on investment] immediately," then American chief executive Gerard Arpey said about the order. "The volatility of fuel certainly weighed on us in terms of the structure of this deal and the size of the deal."

American said it plans to buy 260 Airbus jets - half A320s and the other half A320neos (new engine option) and also will order 200 Boeing 737 series aircraft, with half existing next-generation models and 100 Boeing 737 MAX, or re-engined, aircraft. With the list price of the aircraft costing about $80 million apiece, the deal could be worth more than $36.8 billion but American likely received a discount from the list price and has already announced it has financing in place for the first 230 aircraft in the deal.

The order was called the largest in aviation history and was the first time Boeing announced that it would manufacture a re-engined version of the 737 instead of trying to design a whole new narrow-body aircraft.

While American was the first to announce its order of the Boeing 737 MAX, Southwest will be the first to get it.

In December, Southwest said it ordered 208 planes from Boeing over the next decade and will be the launch airline for the Boeing 737 MAX, getting the first one in 2017 when it rolls off the Boeing production line. The deal includes 150 Boeing 737 MAX and 58 more Boeing 737 next-generation models.

"One of the main challenges we face are high fuel costs, and we are very much in need of new technology to reduce the fuel burn," said chief executive Gary Kelly said, adding that the new aircraft will allow Southwest to speed up retirement of its older 737 "classic" planes. "We're certainly positioning Southwest Airlines with today's announcement so we will have flexibility in the future."

The deal was valued at $19 billion but Southwest, like American, received a discount for its large order.

With firm orders for 350 new aircraft over the next decade, Southwest said it will spend an average of $1.2 billion in capital expenditures each year through 2022, to pay for the aircraft.

-Andrea Ahles

No. 4: DFW Airport adds new service, starts $1.9 billion terminal renovation project

Want to hop on a flight to Australia from Dallas/Fort Worth Airport? How about a quick trip to Dubai?

DFW Airport landed several new carriers in 2011, including Qantas Airways, Emirates Airline and the popular low-cost carrier JetBlue Airways. Qantas started service with a 16-hour flight to Sydney in May while Emirates and JetBlue will initiate service next year.

The airport also launched its $1.9 billion terminal renovation project which will take seven years to redo its four original terminals, A, B, C, and E. The first one-third of Terminal A was shut down in May and will reopen in 16 months after the airport updates its heating and cooling systems and concessions in that area. Additional terminal sections will be redone through 2018.

But it's the new carriers that North Texas travelers are excited about. Spirit Airlines, which began service in April, has added several new cities to its DFW service. Virgin America has also increased its flights to San Francisco and Los Angeles in its first year of operations at DFW.

For its fiscal year that ended on October 1, the airport added nine international and 10 domestic destinations.

And with the additions to the airport, its board decided in December to give airport chief executive Jeff Fegan a 5.75 percent raise, making his annual salary $400,000.

Not bad for a year's work of bringing planes with new liveries to DFW.

-Andrea Ahles

 

Defense contracts for F-35 and V-22 work

From Tuesday's Pentagon announcement of contract awards:

Lockheed Martin Corp., Lockheed Martin Aeronautics Co., Fort Worth, Texas, is being awarded a $485,000,000 not-to-exceed cost-plus-fixed-fee undefinitized modification to a previously awarded advance acquisition contract (N00019-10-C-0002).  A total of $131,500,000 is being obligated at time of award.  This modification provides the F-35 Lightning II, Joint Strike Fighter Low Rate Initial Production Lot V production non-recurring requirements inclusive of special tooling/special test equipment and subcontractor technical assistance for the  Air Force, Navy, and the Cooperative Partner participants.  Work will be performed in Fort Worth, Texas (30 percent); El Segundo, Calif. (20 percent); Wharton, United Kingdom (20 percent); Turin, Italy (15 percent); Nashua, N.H. (8 percent); and Baltimore, Md. (7 percent).  Work is expected to be completed in December 2013.  Contract funds will not expire at the end of the current fiscal year.  This contract combines purchases for the Air Force ($186,725,000; 38.5 percent); the U.S. Navy ($186,725,000; 38.5 percent); and the Cooperative Partner participants ($111,550,000; 23 percent).  The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

Lockheed Martin Corp., Lockheed Martin Aeronautics Co., Fort Worth, Texas, is being awarded a $253,000,000 modification to definitize the previously awarded F-35 Lightning II Joint Strike Fighter Low Rate Initial Production IV sustainment undefinitized contract action (N00019-09-C-0010).  This contract has both cost-plus-incentive-fee and cost-plus-fixed-fee contract line items.  This modification provides for recurring and non-recurring sustainment for the Navy, the Air Force, and the Cooperative Program participants.  Work will be performed in Fort Worth, Texas (35 percent); El Segundo, Calif. (25 percent); Warton, United Kingdom (20 percent); Orlando, Fla. (10 percent); Nashua, N.H. (5 percent); and Baltimore, Md. (5 percent).  Work is expected to be completed in May 2014.  Contract funds in the amount of $169,686,815 will expire at the end of the current fiscal year.  This contract combines purchases for the Navy ($140,300,000; 55.5 percent); the Air Force ($89,100,000; 35.2 percent); and the Cooperative Program participants ($23,600,000; 9.3 percent).  The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

 Raytheon Co., McKinney, Texas, is being awarded $49,900,000 for ceiling priced repair delivery order 7000 under previously awarded basic ordering agreement (N00383-10-G-003D) for the repair of 40 weapons replaceable assembly/shop replaceable assembly for the Advanced Targeting Forward Looking Infrared System used in support of the F/A-18 aircraft.  Work will be performed in McKinney, Texas (70 percent); Jacksonville, Fla. (25 percent); and El Segundo, Calif. (5 percent). Work is expected to be completed by Dec. 31, 2012.  The applicable 2012 Navy Working Capital Funds will not expire at the end of the current fiscal year.  This was a sole-source soliciation.  The Naval Supply Weapon Systems Support, Philadelphia, Pa., is the contracting activity.

Bell-Boeing Joint Project Office, Amarillo, Texas, is being awarded a $30,221,470 fixed-price-incentive, cost-plus-fixed-fee order against a previously issued basic ordering agreement (N00019-07-G-0008) for non-recurring engineering and testing efforts for the redesigned mid-wing avionic units in support of the CV-22 and MV-22 aircraft.  The mid-wing avionic units include the vibration structural life and engine diagnostics airborne unit, the fuel management unit, and the drive system interface unit.  Work will be performed in Fort Worth, Texas (99 percent), and Philadelphia, Pa. (1 percent), and is expected to be completed in June 2014.  Contract funds in the amount of $30,221,470 will e