Insolvent airline summons hired gun; Seabury Group 'tough as nails' Renegotiating aircraft leases

by Rick Westhead (Toronto Star)

Air Canada could very well expand its service, as opposed to reducing it, once it emerges from bankruptcy protection because of the increased use of regional jets, says the U.S. investment banker and restructuring expert hired to advise the insolvent carrier.

In the fall of 2001, nothing was working for America West Airlines. Teetering on the verge of insolvency even before the Sept. 11 terrorist attacks, the Phoenix-based regional airline slashed 2,000 jobs, 20 per cent of its routes and even stopped serving in-flight meals - a move that saved $4 (U.S.) a passenger - yet the airline was still losing $2 million a day. Then America West hired investment bank Seabury Group LLC.

A specialist at renegotiating aircraft leases and raising capital in the aviation industry, Seabury acted as lead negotiator with creditors to whom America West returned five of its 140-plane fleet. It also helped the airline cut monthly lease rates on 65 ageing Boeing 737s to an average $100,000 - from as much as $250,000.

"They're tough as nails to negotiate against," said Bill Rochelle, a partner with New York law firm Fulbright & Jaworski, which specializes in airline bankruptcies. "I can't say our clients have enjoyed the experience." Crippled with $12 billion in debt and lease obligations, Air Canada, which hired the New York-based firm last week, is counting on a repeat performance. Over the next seven weeks, Seabury will renegotiate leases worth $7 billion (Canadian) on the vast majority of its fleet - including 14 Airbus and eight Boeing jets worth a combined $724 million that Air Canada leases from GE Capital Aviation Services Inc., a unit of General Electric Co.

Of the 228 operating aircraft in Air Canada's fleet, it owns 25, and has either capital or operating leases on the balance, according to court documents. Seabury's talks with Air Canada's lessors are hard to handicap, analysts say. While the airline has the right to return to creditors planes that are as old as 22 years, it also wants to maintain good relations to avoid higher lease rates when its business improves and it tries to lease more aircraft. "Right now companies that lease planes are being squeezed and they don't like it," said Dan Kasper, a former member of the U.S. National Airline Commission who's now an aviation consultant.

Since the September, 2001, terrorist attacks, airlines have lost a combined $30 billion (U.S.), according to a recent J.P. Morgan Chase & Co. report. "There's no question everyone in the consulting business is busy," said Barbara Beyer, president of Avmark Inc., a Virginia airline consultancy that advised Pan American and Eastern airlines through restructurings.

"The best you can do if you're a lessor is to try to get kickbacks built into the renegotiated agreements so the steep discounts now being negotiated aren't stuck there when times pick up," Beyer said.

Despite the run of business lately, John Luth, Seabury's 50-year-old managing partner, advises airlines not to be overly aggressive with creditors - even if they have the upper hand. "Every airline that expects to be in business in five to 10 years is going to have to access the capital markets again and finance aircraft," he said. "Memories can be very long."

Born in Detroit and raised in St. Louis, Luth, whose father ran a trucking company, worked for Continental Airlines in early 1990s, eventually becoming its chief financial officer.

In 1995, shortly after the failure of Continental's low-fare operation Continental Lite, Luth opened Seabury's midtown Manhattan offices and weeks later had his first engagement: advising Continental through a restructuring. The investment bank's calling card, however, may be its recent work for US Airways Group Inc.

In August, the Number 7 U.S. airline filed for protection from creditors, listing $7.83 billion in debt, making it the first major North American airline to go to bankruptcy court since the World Trade Center attacks. In eight months, US Airways emerged from protection having cut annual costs by nearly $2 billion.It slashed 36,000 jobs, pared the number of its international routes and reduced its fleet to 276 planes from 311.

"Their mandate was to do it in less than nine months and that's what they did. From that perspective, it was a great job," said one airline consultant. To be sure, not everyone is enamoured of Seabury. Negotiating for US Airways, Seabury brought the average lease rate for its Boeing 737s - an airline staple - down to an average $90,000. But UAL Corp.'s United Airlines, which is also under court-ordered protection from creditors, is finalizing lease rates for similar aircraft down to about $70,000 with the help of investment bank Babcock & Brown, said people familiar with both airlines' finances.

In 1997, low-fare airline Western Pacific Inc. hired Seabury to help raise capital and prepare for a possible merger with rival regional airline Frontier Inc., said former Western Pacific chief executive Bob Peiser. Not long after its engagement by Western Pacific, Peiser said, Seabury advised John Adams, a partner in the New York investment firm Smith Management, against investing in the Colorado-based airline. Adams subsequently stopped a pending $7 million loan to the struggling airline, Peiser said.

"I can't imagine a banker working for a company and then turning around and trying to destroy a merger agreement that company had with its competitor," Peiser said. "If a lawyer was doing that, he'd get disbarred." Luth said he had nothing to do with Adams's decision to abandon Western Pacific. "We did have Western Pacific as a client for a brief period," Luth said. "Later that year, after resigning the engagement and after the announcing of a merger between Western Pacific and Frontier and a dissolution of that agreement, we were hired by Frontier."

Even though Luth says the investment bank plans to dedicate as many as 20 bankers to working on Air Canada's aircraft leases, some airline consultants question whether Seabury has lost some of its bargaining power with the absence of Ellen Artist and Tom Mahr, two senior partners who quit in August to start a rival firm.

Still, Great Lakes Airlines chief executive Charles Howell said Air Canada is in good hands. Five months after being removed from the Nasdaq SmallCap market stock index, the Wyoming-based regional airline hired Seabury to help re-negotiate aircraft leases with Raytheon Aircraft Credit Corp. In an unconventional agreement to reduce debt, Seabury arranged for the lessor to accept a 36 per cent stake in the struggling airline valued at $70 million.

"For us, they were pivotal because they know how far they can push and what the marketplace is like," Howell said. "Dealing with the lessors can be tricky. It's hard to ask your friend to take one in the shorts and still love you in the morning."