US Airways retention program partially approved, administrative expenses reduced to $15 million

By Caroline Salls

Pittsburgh, June 16 - US Airways Inc.'s transaction retention program in connection with its merger with America West Holdings Corp. was granted in part and denied in part, reducing highly disputed administrative expenses to $15 million from $55 million, according to a Wednesday filing with the U.S. Bankruptcy Court for the Eastern District of Virginia.

The court approved the portion of the program that implements the amended and restated severance policies for managing directors and covered employees below the level of managing director.

The court also approved the implementation of the retention payment program.

However, the court set conditions on the approved portion, including:

*The total of all administrative expense claims allowed in a liquidation under the amended and restated Management Employee Service Benefit Policy, the amended and restated Severance Benefit Policy for Managing Directors and the US Airways Inc. Transaction Retention Payment Plan all together cannot exceed $15 million paid by US Airways' estates; and

*The company must report to the official committee of unsecured creditors during the Chapter 11 case every time its total expenditures under the Transaction Retention Payment Plan passes a whole multiple of $250,000.

The court said the proposed new employment contracts for 23 officers must be approved through a plan of reorganization, rather that as part of the retention program.

In his memorandum of opinion on the decision, judge Stephen S. Mitchell said, through what has been described as an oversight, the existing severance plan for management employees does not apply to involuntary terminations under a "change of control," such as a merger.

Therefore, management employees who lose their jobs as a result of the merger (estimated to be one-third to one-half of the employees) would receive no severance.

Mitchell said the evidence at the hearing convincingly established that the headquarters organization cannot afford further management loss without effectively eliminating its ability to carry the company through the merger.

"Put another way, once a football team has been reduced to 11 players, every one of them is 'critical,' since you cannot field a team with fewer," Mitchell said in his opinion.

Also, Mitchell said the severance and retention payments for management employees will only be paid if the employee in question actually remains until the day his or her services are no longer needed.

Mitchell said the new employment contracts for officers should wait for plan confirmation so the reasonableness of the contracts can then be judged in light of the actual plan terms, including distributions to the various classes of creditors, and creditors will have had an opportunity to vote.

On May 31, US Airways and its official committee of unsecured creditors agreed to amend the program after four labor unions and several individual employees objected to the proposed program on the basis that they feel it is unfair to spend $55 million in administrative expenses to retain management and salaried employees when employees have made pay and benefit sacrifices throughout the bankruptcy proceedings.

The Arlington, Va.-based carrier filed for bankruptcy on Sept. 12, 2004. Its Chapter 11 case number is 04-13819.

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