U.S. Department of the Treasury

(Archived Content)

The Air Transportation Stabilization Board today announced its conditional approval of the application by America West Airlines for a loan guarantee under the Air Transportation Safety and System Stabilization Act and implementing regulations promulgated by the Office of Management and Budget. The Board's decision was taken by a vote of 2 to 1, with Treasury Under Secretary Fisher dissenting. The Board's approval is subject to several conditions set out in the Board's letter to America West, which is attached.

Also attached is a statement of Under Secretary Fisher.

Attachments:

Board's letter to America West (3 pages)

Statement by Under Secretary Fisher

December 28, 2001

Mr. W. Douglas Parker

Chairman, President, and Chief Executive Officer

America West Airlines

111 W. Rio Salado Parkway

Tempe, Arizona 85281

Dear Mr. Parker:

In accordance with the Air Transportation Safety and System Stabilization Act and implementing regulations promulgated by the Office of Management and Budget (OMB), the Air Transportation Stabilization Board (Board) has carefully considered the revised application of America West Airlines (AWA), dated December 26, 2001, for a federal guarantee of a $445 million financing. The Board is asked to participate on an unsecured basis and provide a Federal government guarantee of $379.55 million, which represents 85.3 percent of the total financing. The Board would receive 3.4 million warrants, which would represent 5.3 percent of AWA common stock on a fully diluted basis. The financing has two tranches and a final maturity on September 30, 2008. Tranche A has Citibank as lead lender for $429 million, but Citibank will incur only $4.45 million of AWA risk. Repayment of $424.55 million of the loan is guaranteed to Citibank as follows: $379.55 million by the Federal government and $45 million by two aircraft leasing companies and one airframe manufacturer. Tranche B is a $16 million bond issue executed by two private sector investors, structured as a subordinated (to Tranche A with respect to repayment rights) convertible debenture. The debt would be convertible into 10.1 percent of AWA common stock on a fully diluted basis at a conversion price substantially lower than the exercise price of the government's warrants. The Board's consideration has included a review and analysis of the application by the Board's acting staff and the Board's financial and industry consultants under the standards set out in OMB regulations.

The Federal Credit Reform Act of 1990 requires that the estimated cost to the Federal government of issuing loan guarantees be calculated on a present value basis. This estimated cost, known as the credit subsidy, reflects the terms of the loan and the guarantee, the estimated likelihood that the borrower will repay the loan, and the estimated recovery for the government, if any, in the event of default. The credit subsidy, in effect, puts a dollar value on the risk borne by the Federal government. The Board believes that the preliminary estimated credit subsidy implicit in AWA's proposal, which takes account of the fees and warrants offered to the government, is excessive . This indicates that the fees and warrants offered by AWA are far less than what would be necessary to compensate the taxpayer for the risk of issuing the guarantee. In this regard, the statute directs the Board, to the extent feasible and practicable, to ensure that the Federal government is compensated for the risk assumed in making loan guarantees under this program.

Based on its review of AWA's application, the Board has determined to extend an offer of guarantee for the proposal, subject to compliance with all the conditions in the OMB regulations and the other conditions set forth in this letter. The Board's approval is conditioned on AWA increasing the amount of compensation the government will receive to reflect the risk of issuing the guarantee, in an amount and structure acceptable to the Board. Based on the conversion rights the private unsecured debt holders will receive for a minor portion of the total loan package, as well as the preliminary credit subsidy estimates , the government needs to receive warrants that represent 33 percent of AWA's common stock on a fully diluted basis, with a strike price, expiry date, anti-dilution provisions, and other provisions protective of the taxpayers' interest, acceptable to the Board. The Board notes that the warrants themselves do not carry voting rights and cannot be converted into voting stock while in the possession of the Federal government. Accordingly, the Federal government would not acquire voting rights in AWA.

The Board's offer also is conditioned on compliance with all of the requirements set out in the OMB regulations (14 CFR 1300.18). In particular, the Board must receive the loan documents and any related instruments, in form and substance satisfactory to the Board, and the guarantee, all properly executed by the lender, borrower, and any other required party other than the Board. The Board's offer of guarantee also is conditioned on: there being no material adverse change in AWA's ability to repay the loan or any of the representations and warranties made in the application between the date of the Board's approval and the date the guarantee is to be issued; and receipt by the Board of executed commitments by AWA's stakeholders regarding the approximately $600 million of concessions described in the application. Finally, the Board notes that AWA's business plan and prospects are heavily dependent on labor costs. Accordingly, the Board's approval is conditioned on receipt from AWA of a commitment, satisfactory to the Board, to control growth in labor costs that could prevent AWA from achieving the goals of the business plan and, thereby, cause AWA to fail to repay the loan to be guaranteed.

Subject to compliance with the above conditions, the Board has determined that the proposal meets the requirements for a Federal guarantee in accordance with the statute and OMB regulations. In reaching this conclusion, the Board recognizes that the proposal presents a significant risk of default. The Board was created, however, to facilitate financing for airlines that cannot obtain credit in private markets on reasonable terms as a result of the September 11 terrorist attacks, where the financing agreement is a necessary part of maintaining a safe, efficient, and viable commercial aviation system in the United States. Balancing these factors and the additional compensation the Board is requesting for the risk assumed, the Board believes that approval of the proposal is consistent with the purpose of the statute.

* * * * *

I cannot support approval of the revised application of America West Airlines for a federal guarantee of 85.3 percent of a planned $445 million financing, even with the additional compensation sought by the Board. As a consequence of the precedent it sets, I fear that the Board's decision is likely to impede, rather than promote, real progress toward a safe, efficient and viable air transportation system for our country.

While I agree with the other members of the Board that this program was created to provide financing for air carriers that cannot obtain credit in private markets on reasonable terms as a result of the September 11 ^th terrorist attacks - and I recognize that the Board's mission necessarily involves exposing taxpayers to some considerable measure of risk - in my opinion this application fails to meet the requirements of the statute and the regulations which must guide our decisions.