Concession Distribution

In 2003, the pilots of Air Wisconsin gave the Company concessions worth  approximately 13-15% of pilot payroll through wage reductions and work rule modifications. During the negotiations that led to these concessions, Air Wisconsin repeatedly stated that 100% of the savings would be passed on to United Airlines. Air Wisconsin publicly took the position that it had to reduce its costs in order to be able to submit a lower bid to retain its code-share agreement with United.

It became evident during the course of the proceedings in the Restructuring Arbitration  that Air Wisconsin did NOT pass on all of the labor cost savings to United. Instead, Air Wisconsin “estimated” its total savings amounted to about 10% of  its total costs, and therefore offered to fly for UAL for 10% less. This means that the pilot group gave more than its fair share (since our concessions exceeded 10% of our payroll), and Air Wisconsin retained the excess amount – or about 3-5% of payroll.

This issue is separate from the “Additional Payments” provision that Air Wisconsin secured to entice United Airlines to assume a contract with Air Wisconsin. In the end Air Wisconsin ended up with 100% of the concessionary savings. Had United Airlines assumed a contract with Air Wisconsin, United Airlines still would only have realized two-thirds of the savings that the pilots had intended to be passed on to United Airlines.

Additional Payments

Air Wisconsin, upon obtaining concessions from most of its labor groups, presented United Airlines with a proposal for a lower cost code-share agreement. Essentially, Air Wisconsin estimated that it was lowering its overall costs by about 10%, and offered to fly for United for 10% less. Because United was under the protection of the Bankruptcy Code at the time, the United Airlines’ Creditors Committee had to approve the new contract with Air Wisconsin. The Creditors’ Committee refused to agree to “assume” (i.e. take it on as a contract that would survive the bankruptcy) the code share because they believed that they might be able to find a lower-cost operator to fulfill their regional capacity requirements. In order to entice United Airlines to assume the code share agreement, Air Wisconsin proposed that it would retain an amount equal to the 10% cost reduction until such time as United was willing to assume the code share agreement. This provision became known as the “Additional Payments” provision.

United Airlines never assumed the code share agreement with Air Wisconsin and thus, through the Additional Payments provision, Air Wisconsin retained the 10% cost reductions that would have otherwise been passed on to United. Stated another way, all of the money Air Wisconsin promised ALPA would go to United actually NEVER went to United, and remained at Air Wisconsin. After litigation and other costs associated with winding down the contractual relationship with United, Air Wisconsin estimated that it netted about  $70 million.

This is the money we are fighting about in the Restructuring Case. Our position is that given that this money was never transferred to UAL, it should be returned to the pilot group to make us whole for our concessions.

US Airways Debtor-in-Possession (DIP) Financing

The owners of Air Wisconsin decided to loan US Airways $125M so that US Airways would have sufficient cash to continue operating while in bankruptcy. A loan of this type is  called a Debtor-in-Possession, or DIP loan. $125M was transferred from Air Wisconsin to Eastshore Aviation, a subsidiary of Air Wisconsin which was created for the purpose of making this loan. In exchange for the loan, US Airways granted Air Wisconsin the right to operate up to 70 CRJ-200s as US Airways Express. The 16 BAe-146s that Air Wisconsin was operating for United Airlines were not included.

When US Airways emerged from bankruptcy, the $125M loan was converted to equity, and Eastshore was granted  8.333M shares of the new US Airways stock, with each share having an initial value of approximately $15.00.