Bankrupt ATA may sue ex-partner FedEx

June 9, 2008

ATA Airlines Inc. largely blames FedEx Corp. for knocking it out of business this spring. Now, the bankrupt airline is preparing to fight back by suing the Memphis cargo giant, charging it wrongfully canceled a military-charter contract that generated hundreds of millions of dollars in revenue for ATA.

"The single event that really impacted ATA's financial status is the termination by FedEx," ATA's chief restructuring officer, Steven Turoff, said in a May 30 meeting with creditors.

Attorneys for ATA and FedEx declined to comment or did not return calls. But filings in U.S. Bankruptcy Court in Indianapolis show the airline has hired the Dallas law firm Haynes & Boone and the Indianapolis law firm Hoover Hull to launch a legal assault on FedEx.

A recent filing calls the potential recovery from successful litigation "one of [ATA's] primary ... assets." The outlook for creditors looks bleak, otherwise. ATA recently listed liabilities of $705 million--including $365 million owed to JP Morgan Chase--and assets of just $250 million. The assets tally doesn't place a value on the airline's claim against FedEx, calling the amount "unknown."

ATA, a unit of Georgia-based Global Aero Logistics, had employed 2,230 before it abruptly shut down April 3 and filed for bankruptcy protection. It was ATA's second bankruptcy filing in four years.

The company had been struggling for months with losses generated by its scheduled service, a problem exacerbated as fuel prices rocketed higher.

But ATA officials say the loss of the FedEx contract was pivotal, wiping out virtually all the airline's military charter business. Through the first nine months of 2007, military charters accounted for about 45 percent of ATA's $555 million in revenue.

ATA had built itself into the nation's largest provider of military charters, ferrying members of the U.S. Armed Forces and their families to and from overseas deployments. It had been part of a FedEx-managed team providing the service for nearly two decades.

ATA's Turoff said in a bankruptcy court filing that FedEx "abruptly and unexpectedly" notified the airline on Jan. 22 that it would not be part of the FedEx team when the new fiscal year started in October 2008.

He contends the cancellation violated the terms of an agreement ATA struck with FedEx in September 2006 that should have kept ATA on the FedEx team through at least September 2009.

The cancellation came at an inopportune time, just as ATA was trying to line up additional capital. Turoff said losing the business "was an unanticipated blow which, with the scheduled-service business already suffering, made the future viability of ATA suspect in the capital markets."

It's murky why FedEx decided to pull the plug on the ATA partnership. Its officials never have publicly explained the decision. However, according to former ATA employees, the airline had been in the "penalty box" for several months because of unreliable aircraft, particularly aging DC-10s it had acquired from Northwest Airlines.

Observers also have speculated that FedEx wanted ATA to go under because the airline was poised to move further into the air cargo business that FedEx dominates.

It's not clear when ATA might move forward with filing a lawsuit. Judge Basil Lorch last month approved the employment of Hoover Hull to work on the suit. It approved Haynes & Boone's hiring earlier this spring.

Airline bankruptcies rarely yield big payoffs for creditors, in part because airlines usually lease many of their planes and own relatively few assets. That's the case for ATA, which owned only three of its 29 aircraft.

ATA's financial underpinnings appear weaker now than when it filed initial bankruptcy papers. Back then, it estimated liabilities of no more than $500 million. Updated figures submitted in late May show liabilities ballooning to $705 million, 41 percent higher.

Liabilities typically grow as a case unfolds, said Ice Miller partner Henry Efroymson, who is representing several creditors in ATA's case.

"When a bankruptcy is filed, claims tend to come out of the woodwork," he said.

The latest figures show some of the assets may be illusory. Those include $69.9 million in credit-card receivables that ATA says it doesn't expect to collect because they cover "flights that were never flown."

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