================================================================= US AIRWAYS BANKRUPTCY NEWS Issue Number 7 ----------------------------------------------------------------- Copyright 2002 (ISSN XXXX-XXXX) September 17, 2002 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 609-392-0900 FAX 609-392-0040 ----------------------------------------------------------------- US AIRWAYS BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 24 Perdicaris Place, Trenton, New Jersey 08618, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtor's cases. New issues are prepared by Geoff J. Bailey, Frauline Sinson-Abangan and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of US AIRWAYS GROUP BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00101] DEBTORS' MOTION TO REJECT UNION AGREEMENTS, IF NECESSARY [00102] HANCOCK ET AL'S MOTION TO MODIFY AIRCRAFT REJECTION ORDER [00103] RICHARD SWEET ET AL'S MOTION FOR RESTRAINING ORDER [00104] DEBTORS' MOTION TO PAY PREPETITION EMPLOYEE OBLIGATIONS [00105] BANK OF NEW YORK ET AL'S MOTION FOR ADEQUATE PROTECTION [00106] DEBTORS' MOTION TO SET-UP INTERIM COMPENSATION PROTOCOL [00107] DEBTORS' MOTION TO ESTABLISH JOINT FEE REVIEW COMMITTEE KEY DATE CALENDAR ----------------- 08/11/02 Voluntary Petition Date 08/31/02 Deadline to provide Utilities with adequate assurance 09/25/02 Deadline for filing Schedules of Assets and Liabilities 09/25/02 Deadline for filing Statement of Financial Affairs 09/25/02 Deadline for filing Lists of Leases and Contracts 10/10/02 Deadline to make decisions about lease dispositions 11/04/02 Bar Date for filing Proofs of Claim 11/09/02 Deadline to remove actions pursuant to F.R.B.P. 9027 12/09/02 Expiration of Debtors' Exclusive Plan Proposal Period 02/07/04 Expiration of Debtors' Exclusive Solicitation Period 08/10/04 Deadline for Debtors' Commencement of Avoidance Actions First Meeting of Creditors pursuant to 11 USC Sec. 341 ----------------------------------------------------------------- [00101] DEBTORS' CONDITIONAL MOTION TO REJECT UNION AGREEMENTS ----------------------------------------------------------------- John Wm. Butler, Jr., Esq., at Skadden, Arps, Slate, Meagher & Flom, relates that any restructuring will require a reduction in labor costs. US Airways has been working closely with its unions for several months to voluntarily modify labor agreements. US Airways has already made significant progress in this effort. In June 2002, US Airways began bargaining in earnest with its five unions. At the commencement of these bargaining sessions, US Airways provided each union with a written term sheet that outlined specific proposals by the Company for modifications to the existing collective bargaining agreements that would achieve the cost reduction target. The chart shows the average annual cost savings, calculated over a six and a half-year period from July 1, 2002 through December 31, 2008, produced by the Company's Initial Prepetition Proposals to each union: Valuation of Initial Prepetition Proposals Union Average Annual Cost Savings (millions) -------------------------------------------- ALPA (Pilots) $546.9 IAM (Mechanical and Related) 178.3 AFA (Flight Attendants) 89.2 CWA (Passenger Service Employees) 82.7 IAM (Fleet Service) 77.1 TWU (Dispatchers) 5.9 TWU (Flight Crew Training Instructors) 5.4 TWU (Simulator Engineers) 1.4 IAM (Maintenance Training Specialists) 0.9 ------ TOTAL $987.8 All of the organized employees of US Airways are represented by one of 5 unions: * ALPA represents approximately 4,430 US Airways pilots; * AFA represents approximately 7,625 flight attendants; * IAM represents approximately 6,631 mechanical and related employees, approximately 5,360 fleet service employees, and approximately 48 maintenance training specialists; * CWA represents approximately 6,700 passenger service employees; and * TWU represents approximately 160 dispatchers, approximately 46 simulator engineers, and approximately 113 flight crew training instructors. At the time US Airways began its restructuring effort, all of these groups were subject to collective bargaining agreements. Thus, the labor cost reductions needed under the restructuring plan could be achieved only by modifying existing collective bargaining agreements. Mr. Butler warns that there is no assurance US Airways will achieve its goal of full voluntary participation with the IAM and CWA. Because of the urgency of the Company's financial condition, the Debtors cannot delay exercising their legal rights. In the event that mutually agreeable cost-reduction agreements cannot be reached with each union, the Debtors seek the Court's authority to reject the collective bargaining agreements. US Airways have already executed cost-reduction agreements with two of its largest organized employee groups. Shortly before the Petition Date, US Airways' pilots and flight attendants overwhelmingly ratified restructuring agreements that will produce an aggregate of $552,000,000 in average annual cost reductions through calendar year 2008. These agreements also provide the pilots and flight attendants with financial participation in the anticipated financial recovery of US Airways through equity or profit-sharing plans. On August 21, 2002, the dispatchers and flight simulator engineers, who are represented by the Transport Workers Union, ratified restructuring agreements. A third group represented by TWU -- flight crew training instructors -- ratified a restructuring agreement on August 23, 2002. These three restructuring agreements will produce an aggregate of $11,000,000 in annual labor cost savings through 2008, and provide financial participation for TWU- represented employees through equity or profit-sharing plans. Mr. Butler relates that of IAM members, only the fleet service employees have executed a tentative agreement. The mechanical and related employees rejected the cost-reduction agreement. The three IAM proposals would deliver an aggregate of $219,000,000 in average annual labor cost savings for IAM-represented employees through 2008. Based on ratifications by ALPA, AFA and TWU, US Airways is hopeful that the three IAM employee groups will ratify agreements, but the outcome cannot be predicted with certainty. If the IAM-represented employee groups ratify the prepetition cost-reduction agreements, this application will be withdrawn for the relevant bargaining units. The remaining union at US Airways, the CWA, represents the Company's approximately 6,700 passenger service employees. From May 2002 until it filed its chapter 11 reorganization cases on August 11, 2002, US Airways met with CWA 16 times in an effort to obtain a prepetition cost-reduction agreement. US Airways also provided CWA with the voluminous financial and operational data that was provided to the other unions -- data that demonstrated to the genuine and urgent need for labor cost reductions by all US Airways employees. Unlike the other unions at US Airways, which agreed either to enter into prepetition cost-reduction agreements or to submit US Airways' final cost-reduction proposal to its membership for a vote, CWA has declined to do either. To meet the Company's goal of spreading the required financial sacrifices fairly among all US Airways employees and to achieve the total amount of labor cost reductions needed to carry out its business plan and obtain DIP financing, US Airways must obtain modifications to the current CWA collective bargaining agreement that will produce approximately $70,000,000 in average annual savings through 2008. US Airways delivered to CWA representatives a formal proposal for modifications of the CWA collective bargaining agreement pursuant to Section 1113 of the Bankruptcy Code. While US Airways will attempt to reach a voluntary agreement with CWA, Debtors will ask the Court to authorize rejection of the CWA labor agreement, if necessary. The modifications to the IAM and CWA agreements as proposed under Section 1113 are necessary to accomplishing four key goals of Debtors' reorganization: 1) completion of the Restructuring Plan and Long-Term Viability; 2) fair and Equitable Treatment of All Employees; 3) accessing the ATSB Loan Guarantee; and 4) accessing DIP Financing. Although US Airways and CWA have been engaged in negotiations since May 2002, US Airways has been unable to obtain CWA's agreement to the modifications the Company believes are necessary to successfully restructure. CWA has also declined the Company's request to put US Airways' last prepetition proposal to an employee ratification vote, as the IAM has done. In the judgment of US Airways management, obtaining CWA-related average annual savings of $70,000,000 a year for six and a half years -- that is, 85% of the $82,700,000 in annual cost reductions under the Company's Initial Prepetition Proposal -- is a necessary component of the plan to successfully restructure the Company. In addition, that level of reductions is necessary for CWA employees to shoulder their fair share of the burden of restructuring. If management were to settle with CWA for less than the 85% contributed by other employees or if this Court were to deny US Airways' Section 1113 application for rejection of CWA agreement, it would have a destabilizing effect on labor relations at US Airways. "It would send a message to the unions that they can advantage their position by not concluding an agreement in a timely manner," Mr. Butler says. Furthermore, the business plan upon which the Company's ATSB application is based assumes that CWA will participate in labor cost reductions. The DIP Facility also requires voluntary modifications or court- ordered rejection of each collective bargaining agreement, including that of CWA. Achieving all key elements of the restructuring plan, including labor agreements with all groups and gaining access to the ATSB loan guarantee, is necessary to access the DIP financing. Without the liquidity provided by the DIP Facility or replacement financing, US Airways may not have sufficient liquidity to restructure. The likelihood of liquidation would therefore be much higher. By this application, the Debtors conditionally seek the Court's authority to reject each collective bargaining agreement for a bargaining unit that has not delivered a signed, ratified agreement for voluntary modifications. Achieving modifications, whether voluntary or through Court-approved rejection, is a vital component of the Debtors' reorganization plans. Section 1113(c) of the Bankruptcy Code authorizes the Court to approve rejection of a collective bargaining agreement where the debtor demonstrates compliance with this checklist: 1) The debtor made a proposal to modify the collective bargaining agreement; 2) The proposal was based upon the most complete and reliable information available at the time of the proposal; 3) The proposed modifications are necessary to permit reorganization of the debtor; 4) The modifications assure that all creditors, the debtor, and all other affected parties are treated fairly and equitably; 5) The debtor provided to the union relevant information as is necessary to evaluate the proposal; 6) The debtor met at reasonable times with the union between the time of the proposal and the time of the hearing on the proposal; 7) The debtor conferred with the union in good faith at these meetings; 8) The union refused to accept the debtor's proposal without good cause; and 9) The balance of equities clearly favors rejection of the agreement. Mr. Butler reports that CWA has now reached a tentative agreement with US Airways on consensual modifications to the collective bargaining agreements with the passenger service employees. That tentative agreement remains subject to a ratification vote by the union membership. In addition, IAM has agreed to re-submit a US Air proposal for modifications for a ratification vote by the mechanical and related employees. Although the parties to this Motion hope and expect that the modifications will be ratified, there can be no certainty of that occurring. Accordingly, the parties have agreed to continue the hearing on the Application for a period of time sufficient to complete the ratification process and to prepare for a hearing if: (a) CWA's membership fails to ratify the tentative agreement, and/or (b) IAM's mechanical and related employees fail to approve US Air's final prepetition proposal. ----------------------------------------------------------------- [00102] HANCOCK ET AL'S MOTION TO MODIFY AIRCRAFT REJECTION ORDER ----------------------------------------------------------------- See prior entry at [00087] and related entries at [00074] and [00049] (Debtors' Motion to Reject 57 Aircraft Leases). Kreditanstanstalt fur Wiederaufbau and Credit Suisse First Boston joins John Hancock and ABN AMRO Bank N.V., in asking the Court to modify the Aircraft Rejection Order. Edward J. Efkeman, Esq., tells the Court that the Aircraft and Engines qualify as KfW and CSFB's Section 1110 Collateral. This Collateral is subject to perfected security interests in favor of Wilmington Trust Company, as security trustee, for the benefit of KfW and CSFB under security agreements. Mr. Efkeman asserts that the Debtors cannot simply abandon the Section 1110 Collateral. Instead they must comply with their obligation to surrender and return it in compliance with Section 1110(c)(1) of the Bankruptcy Code. Mr. Efkeman argues that the Order is improper to the extent that it affects KfW and CSFB's rights, or any of the Debtors' obligations, under Section 1110. At a minimum, the Order must be modified so that nothing: 1) will constitute a waiver, forbearance or adjudication of the rights of KfW or CSFB, or the obligations of the Debtors to KfW and CSFB, under Section 1110, 2) will prejudice, limit, impair, or otherwise affect: -- any rights of KfW and CSFB under Section 1110, any agreement entered into between KfW, CSFB and the Debtors under Section 1110, -- any security agreement with respect to any equipment as described in Section 1110(a)(3), or -- any other property that is subject to the rights of KfW and CSFB under Section 1110, all of which rights are expressly preserved. KfW and CSFB complain that the Debtors have removed some of the Engines from the Aircrafts. The Debtors then installed those Engines in other Aircrafts. KfW and CSFB have a perfected security interest in both the Aircrafts and Engines. The Order should require the Debtors, at their own expense, to reinstall these Engines in the Aircrafts in which they were originally installed. Wilmington Trust Company, in its capacity as security trustee, supports KfW's and CSFB's arguments. US Air's Response John Wm. Butler, Jr., Esq., at Skadden, Arps, Slate, Meagher & Flom, points out that none of the Objectors can, in good conscience, assert they were surprised by the Debtors' decision to abandon the aircraft and engines, since they were all taken out of service last year and have since been parked at a storage facility in the Mojave desert. Moreover, the Objectors have had several discussions and negotiations with the Debtors about the disposition of the aircraft and treatment of any resulting claims as early May 2002. Indeed, in one of the more recent discussions, the Debtors' representatives informed the Objectors that the Debtors intended to reject and abandon the aircrafts immediately upon filing of the Chapter 11 cases and had drafted an applicable first day pleading. Thus, the Objectors knew the aircraft would be imminently returned to them for quite some time now. Mr. Butler asserts that the Objectors' arguments are without merit because the Objections are contrary to the basic tenets of the rehabilitative purposes of Chapter 11. The bankruptcy estate must be prudently administered in order to achieve the two main goals of reorganization: (1) providing the debtor with a fresh start, and (2) maximizing and fairly distributing assets for the benefit of creditors and other parties in interest. The underlying purpose of abandonment is to facilitate these goals by protecting assets of the estate from being used to pay for liabilities associated with a piece of property without any resulting net benefit to the estate. Brent Bolea, Bankruptcy Abandonment Power and Environmental Liability, 106 COM. L.J. 83, 86 (2001). Mr. Butler points out that the Objectors do not challenge that there is a proper basis for abandonment. Rather, the Objections primarily go to the Debtors' facilitation of the return of the Abandoned Aircraft and Engines. "Objections on this ground, however, are irrelevant to the issue of whether the Order properly authorizes asset abandonment," Mr. Butler says. Effective abandonment under section 554 does not require that the Debtors comply with prepetition agreements respecting the return of the property or even require that the Debtors consent to lifting of the automatic stay. On August 12, 2002, the Debtors sent the Objectors a copy of the Order entered by this Court. On August 14, 2002, the Debtors sent the Objectors a letter informing them that, as an accommodation, the Debtors had prepaid certain insurance and storage costs for the Abandoned Aircraft and Engines from August 11, 2002 through August 23, 2002 in order to provide the Objectors with time to make necessary arrangements to replace insurance and storage. The Insurance Letter stated that the Debtors had informed Avtel that US Air no longer had any interest in the Abandoned Aircraft and Engines and had instructed Avtel to take direction from the Objectors as to the disposition of their respective Abandoned Aircraft and Engines. By way of an August 26, 2002 letter, as yet another accommodation, the Debtors were prepared to provide the Objectors with a bill of sale to file with the Federal Aviation Administration for each of the Abandoned Aircraft and Engines in order to obviate the formal foreclosure proceedings to obtain title to the Abandoned Aircraft and Engines. Finally, in a letter to Avtel dated August 20, 2002 the Debtors alerted Avtel to the rejections and abandonment's and instructed Avtel that US Air would issue no further directions for the rejected/abandoned aircraft and engines and, accordingly, that Avtel should refer to the Order for more details about the rightful parties-in-interest. Clearly, Mr. Butler contends, the Debtors have made a reasonable attempt to affect as smooth an abandonment process as possible for the Objectors without causing the Debtors' estates to incur burdensome and wasteful costs. "It is now up to the Objectors to complete the abandonment process themselves by retrieving the Abandoned Aircraft and Engines from Avtel," Mr. Butler explains. The Stipulation US Air and the Objecting Parties were able to resolve their dispute. In a Court-approved Stipulation, the parties agree that: 1) Nothing will bar John Hancock Life Insurance Company, ABN AMRO Bank N.V., Credit Suisse First Boston, Kreditanstalt fur Wiederaufbau and Wilmington Trust Company (in its capacity as security trustee), from asserting claims for damages or other relief against the Debtors, whether as a general unsecured claim or a claim entitled to administrative priority treatment including, without limitation, any claims for actions taken by the Debtors that are inconsistent with the outlined terms, claims relating to charges associated with the removal and installation of engines and any postpetition damage to the engines incurred, and legal and equitable claims relating to the nonperformance of surrender and return conditions whether under the aircraft credit documents or under Section 1110(c)(1) of the Bankruptcy Code, subject to any and all defenses, setoffs, counterclaims, and other objections of the Debtors and any other party-in-interest; and 2) The Debtors will prepay storage insurance of the Objectors' Owned Aircraft and Engines, and keep the Objectors' Owned Aircraft and Engines on the Debtors' FAA-Approved maintenance program, through September 30, 2002. Then the insurance will cease and the Debtors may remove the Objectors' Owned Aircraft and Engines from the maintenance program; provided, that at the request and expense of any Objector, the Debtors will keep the Objector's Owned Aircraft and/or Engines under the maintenance program for additional time, not to exceed 90 days, as is necessary for the Objector's Engines to be installed onto the Objector's Aircraft. ----------------------------------------------------------------- [00103] RICHARD SWEET ET AL'S MOTION FOR RESTRAINING ORDER ----------------------------------------------------------------- See prior entry at [00070]. US Air's Response John Wm. Butler, Jr., Esq., at Skadden Arps, assures Judge Mitchell that US Air has a strict policy against violence in the workplace and takes all allegations of violence seriously. Given the nature of the Debtors' business operations and the amount of trust placed in the Debtors' employees by its customers, the Debtors must treat allegations as seriously as they would treat threats relating to the safety of their aircraft. The Debtors' intolerance of violence, and threats of violence, is evidenced in their Policy Statement on Threat Management contained in the Debtors' Corporate Policy Manual, which is available to all employees. The Debtors also conduct several programs to educate their managers and employees regarding these policies. The Debtors have established a Corporate Threat Management Response Team to evaluate potential threats of violence, assess the risk, and recommend appropriate action. In accordance with these policies and procedures, the Debtors immediately began investigating the allegations made by Richard Sweet, et al that members of the Debtors' management had threatened them with death and bodily harm. Specifically, members of the Corporate Threat Management Response Team were sent to Mr. Sweet's workplace on August 28, 2002 to meet with each of the Movants regarding the alleged threats. None of the Movants reported to work that day. Nonetheless, two investigators returned on August 30, 2002 and interviewed Keith Owens, one of the Movants. During the interview, Mr. Owens admitted that neither he nor his family has ever received threats of death or bodily injury from a member of the Debtors' management. Mr. Owens further admitted that he did not currently feel threatened at work and that he was aware of the Debtors' anti-violence policies. The Movants have provided no evidence to contradict the admissions of Mr. Owens or to otherwise support their allegations. The Debtors have found no such evidence and believe the allegations to be false. Based on this lack of evidence, the Debtors reserve all of their rights to seek relief against the Movants for filing a baseless motion, including their rights under Rule 9011 of the Federal Rules of Bankruptcy Procedure. "It appears that the Movants are basically displeased with management's performance," Mr. Butler observes. Some of the Movants have a long history of complaining dating back to 1994. The complaints have focused on management compensation and inventory control. These complaints have been investigated thoroughly and found to be unsubstantiated. Moreover, none of these complaints has ever resulted in a single report of the Debtors' management threatening or inflicting bodily harm on any of the Movants. Mr. Butler also notes that the motion contains no factual evidence or corroboration to support the extraordinary request. * * * At the hearing, Judge Mitchell notes that it was not clear whether the persons other than Mr. Sweet who signed the motion intended to request relief on their own behalf or simply intended to register their support for Mr. Sweet's position. Two of them did not even supply a mailing address to be served with pleadings or to be given notice of any order that might be entered. With one exception, the remaining signatories gave Mr. Sweet's P.O. Box as mailing address. In addition, it did not appear that the IAM was given notice of the hearing as required by this court's order setting an expedited hearing. Finding no justification to grant the relief requested, Judge Mitchell denies the Motion for a Protective and Restraining Order. ----------------------------------------------------------------- [00104] DEBTORS' MOTION TO PAY PREPETITION EMPLOYEE OBLIGATIONS ----------------------------------------------------------------- See prior entries at [00083], [00040] and [00020]. US Air Responds Contrary to IAM's allegations, John Wm. Butler, Jr., Esq., at Skadden Arps, reminds Judge Mitchell that the Debtors provided notice of the first day hearing to seven different IAM individuals or entities, at six different IAM facsimile numbers, at six different IAM locations, in four different states. Indeed, IAM's own press release issued August 11, 2002, discussed the Debtors' filing and further indicated that it had retained counsel to represent "our members interests" and would "be active participants in the bankruptcy proceedings." Leaving aside the procedural flaws in bringing this motion, Mr. Butler says, it comes with ill grace that IAM, whose members received payments on account of prepetition claims totaling nearly $16,000,000 under the Order, now challenges the payment of $6,000,000 in ordinary course Bonus Payments to 500 executive and management level employees pursuant to that same order. Contrary to IAM's misgivings, the Bonus, which is paid in 12 monthly installments, requires each employee to remain employed at the time each installment is due, making it a basic component of each employee's total compensation. In addition, unlike the nearly $16,000,000 in prepetition obligations authorized to be paid to IAM's members under the Order, none of the Bonus constitute prepetition obligations since no unpaid installments were vested at the time of filing, but are rather more properly viewed as postpetition ordinary course compensation for which no Court approval is required. The Bonus payments authorized under the Order constitute a component of each employee's basic compensation. The payments total $6,000,000 in the aggregate, averaging $8,600 per month for executive level employees and $1,060 for management level employees. "This is a far cry from the comprehensive key employee retention programs to which IAM apparently refers in other large Chapter 11 cases pursuant to which key employees may be entitled to earn retention payments totaling in the tens of millions of dollars," Mr. Butler notes. Moreover, Mr. Butler contends, it is axiomatic that the members of any company's management team are critical to a company's success. The Debtors' leaders are an absolutely necessary component to a successful restructuring. To identify the necessity of each employee to the restructuring efforts would be a tremendous waste of resources during this critical launch stage of the Chapter 11 cases given that management and executive employees clearly play a crucial and necessary role in the Debtors' future success. Unlike amounts typically paid under a key employee retention program, the Bonus Payments will not be paid to the Company's Chairman, President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer as well as 12 other executive level employees. In fact, less than 20% of executive level individuals will be receive Bonus Payments. Most importantly, Mr. Butler says, failure to pay the Bonus Payments to management and executives would be patently unfair and would demoralize the Debtors' key managers. Unlike the machinists represented by IAM that refused to ratify a modified collective bargaining agreement containing proportionate and necessary cost concessions, the Debtors' management has already implemented cost concessions under the Debtors' restructuring plan. In particular, management (other than officers) is reaching 85% of the target cost reduction calculated for their work group while officers are reaching 100% of their proportionate reductions for a total annual savings of approximately $32,000,000. Some executives, like the Debtors' president and chief executive officer, have given up more than 60% of total compensation for the next several years. If the Debtors are unable to make the Bonus Payments, the Debtors' management, who has already agreed to take salary reductions that, in some instances, are in greater proportions than any other employee group, will be forced to take even deeper cuts. This will obviously have a negative impact on employee morale and likely will result in the departure of certain of the Debtors' management and executive leaders. "The Debtors simply cannot afford to take this risk at this critical juncture in their reorganization," Mr. Butler asserts. ----------------------------------------------------------------- [00105] BANK OF NEW YORK ET AL'S MOTION FOR ADEQUATE PROTECTION ----------------------------------------------------------------- The Bank of New York, as Trustee for the EPIC 1996-1 Trust, and Wilmington Trust Company, as the Indenture Trustee, ask the Court to force the Debtors to provide adequate protection of their liens and security interests pursuant to Sections 361 and 363(e) of the Bankruptcy Code. A Trust Agreement dated June 27, 1996, between the Trustee, Citicorp Epic Finance, Inc. and Credit Lyonnais New York Branch, created a Trust that holds three Notes issued by US Airways Inc.: Designation Dated Secured by ----------- ----- ---------- N622 Note March 14, 1994 A Boeing 757-2B7 Aircraft bearing registration no. N622AU and manufacturer's serial number 27201, including two Rolls Royce RB211-535E4 aircraft engines bearing manufacturer's serial numbers 31217 and 31218 N623 Note March 24, 1994 A Boeing 757-2B7 Aircraft bearing registration no. N623AU and manufacturer's serial number 27244, including two Rolls Royce RB211-535E4 aircraft engines bearing manufacturer's serial numbers 31222 and 31223 N624 Note July 29, 1994 A Boeing 757-2B7 Aircraft bearing registration no. N624AU and manufacturer's serial number 27245, including two Rolls Royce RB211-535E4 aircraft engines bearing manufacturer's serial numbers 31270 and 31271. The N622 Aircraft, the N623 Aircraft and the N624 Aircraft comprise Bank of New York and Wilmington Trust's Collateral. The security and other interests are perfected in the Collateral by the filing of the Indentures with the FAA under the Federal Aviation Act. The Debtors are currently using the Collateral. Bank of New York and Wilmington Trust's interest in the Collateral is exposed to the risk of diminution in value because the Debtors are presently using the planes and engines in revenue-producing service. This diminishes its value because each hour and cycle of operation brings the components of the Collateral closer to their next maintenance events, and the value of a commercial jet aircraft depends in material part on where in the maintenance cycle the airframe, landing gears, APUs and engines are. Even if the Debtors are performing all required maintenance as it comes due, the accrual of hours and cycles by itself diminishes value. Leo T. Crowley, Esq., at Pillsbury & Winthrop, tells Judge Mitchell that Bank of New York and Wilmington Trust are secured creditors of US Air. Pursuant to Sections 361 and 363(e) of the Bankruptcy Code, Bank of New York and Wilmington Trust are entitled to adequate protection of their interests in the Collateral. Adequate protection is intended to ensure that a secured party's interest in its collateral is not impaired during the course of the bankruptcy, when the automatic stay prevents the secured party from otherwise acting to protect its interests. The basic purpose of adequate protection is to preserve the status quo and to assure the secured party that its position will not be impaired during the bankruptcy case. Mr. Crowley insists that Bank of New York and Wilmington Trust be provided with adequate protection of their Collateral. This would be achieved by requiring the Debtors to: (a) comply with the requirements of the regulations issued under the Federal Aviation Act and any other laws protecting the Collateral; (b) comply with all provisions of the Indentures concerning the operation, maintenance and use of the Collateral; (c) continue to carry and maintain, at their own expense, valid and collectible insurance on the Collateral in amounts not less than the principal amounts of the Notes; (d) be enjoined from removing or replacing any parts except in accordance with the Indentures; (e) pay postpetition interest on the Notes; and (f) pay, on a monthly basis, cash maintenance reserves to Movants in respect of the operation of the Collateral from the Petition Date: (1) airframe reserves toward the next C Check and D Check based on the US Airways maintenance program at a rate to be determined at the hearing of this motion; (2) engine reserves on each engine toward their next shop visit for their performance restoration based on industry averages at a rate to be determined at the hearing of this motion; (3) landing gear reserves on each landing gear based on time between overhaul in the US Airways maintenance program at a rate to be determined at the hearing of this motion; and (4) APU reserves based on US Airways' typical shop visit interval for performance restoration for similar APUs in its fleet at a rate to be determined at the hearing of this motion. In addition, Bank of New York and Wilmington Trust ask the Court to grant them a "super-priority" administrative claim pursuant to Section 507(b) of the Bankruptcy Code, higher in priority than any and all administrative claims to the Debtors' assets, to the fullest extent necessary to protect them from postpetition use of the Collateral and the continuance of the automatic stay imposed by Section 362(a). ----------------------------------------------------------------- [00106] DEBTORS' MOTION TO SET-UP INTERIM COMPENSATION PROTOCOL ----------------------------------------------------------------- See prior entry at [00085]. Motion granted. ----------------------------------------------------------------- [00107] DEBTORS' MOTION TO ESTABLISH JOINT FEE REVIEW COMMITTEE ----------------------------------------------------------------- See prior entry at [00086]. Motion granted. *** End of Issue No. 7 *** ------------------------------------------------------------------------- Peter A. Chapman peter@bankrupt.com http://bankrupt.com ------------------------------------------------------------------------- Recommended Reading: Professor Stuart Gilson's newest title, "Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups." List Price: $79.95 -- Discounted to $55.96 at http://amazon.com/exec/obidos/ASIN/0471405590/internetbankrupt -------------------------------------------------------------------------