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Southwest won't land big ATA stake, after all: But low-fare airlines plan to broaden partnership allowing passengers on 1 carrier to transfer to other

November 28, 2005

ATA Holdings Corp.'s new business plan includes "an extended and more robust" code-share agreement with Southwest Airlines.

But Dallas-based Southwest doesn't intend to take an ownership stake in the bankrupt Indianapolis carrier, backing off its year-old plan to acquire 27.5 percent of the company when it exits bankruptcy.

Those details are contained in recently filed court documents that provide a partial picture of ATA's reorganization plan. The airline sought Chapter 11 protection in October 2004.

The investment group proposing to commit $100 million to ATA-New York-based MatlinPatterson Global Opportunities Partners-says in court papers that it wants to release Southwest from its pledge to invest $30 million in ATA.

Unsecured creditors initially weren't sold on MatlinPatterson's involvement. The creditors, represented by Wells Fargo Bank, filed an objection Nov. 22 complaining they weren't consulted about the New York firm's plan.

The objection also said ATA should not accept a proposal from Southwest that would give the Dallas carrier four additional ATA gates at Chicago Midway Airport. In return, Southwest would forgive $20 million of a $40 million loan it made to ATA.

It's not uncommon for creditors in bankruptcy to raise objections, especially when the amount allocated for them under a reorganization plan is small. Under ATA's plan, the airline would cancel its existing stock. The plan initially entitled unsecured creditors to just 2 percent of the new shares.

But Nov. 23 in court, ATA and Matlin-Patterson agreed to give unsecured creditors a 7-percent stake, plus rights under certain conditions to buy up to 4 percent in additional equity. The deal received the tentative approval of unsecured creditors.

Southwest in December agreed to lend ATA money and buy an ownership stake. At the time, some industry observers predicted Southwest eventually would buy more of ATA-and perhaps even swallow the whole company. That theory gained credence when former Southwest Chief Financial Officer John Denison came aboard to lead ATA earlier this year.

The two carriers in December also entered into a code-sharing agreement that allowed passengers booking a trip on one airline to transfer to the other. Codeshare agreements are common in the airline industry, but the ATA pact was the first for Southwest.

Southwest spokesman Ed Stewart declined to discuss financial dealings between his company and ATA, saying talks are continuing.

But in court papers, MatlinPatterson said it would relieve Southwest from having to buy the ownership stake, and also would take over half of the $40 million loan from Southwest.

Southwest would forgive the other $20 million in return for ATA's handing over four of its eight gates at Chicago Midway. ATA plans to relinquish three others to the city of Chicago and keep just one gate.

ATA doesn't need the gates because it's been paring service, recently eliminating Midway flights to Boston, Newark and Minneapolis. In contrast, "We're interested in more gates because Chicago is such a great growth area for us," Stewart said.

Just two years ago, ATA was the largest carrier at Midway. It dived into bankruptcy and scaled back operations amid mounting debt, steep lease costs on new aircraft, high fuel prices, and fierce fare competition.

ATA sold Southwest six other Midway gates for $34 million-plus a hangar for $6 million-soon after landing in bankruptcy.

In court filings, ATA said a "critical element" of its plan to return to financial health "is an extended and expanded code-share agreement with Southwest."

ATA executives have previously said the airline would continue to provide scheduled service, in addition to charter flights for the U.S. military and other customers. One of ATA's strongest routes has been to Hawaii.

Both ATA and Southwest have generated millions of dollars flying passengers to destinations outside each other's route network. Southwest collected $19 million from ATA code sharing in the third quarter alone, according to a Securities and Exchange Commission filing.

"We were very pleased," Southwest CEO Gary Kelly said in the filing.

It's not clear how much code sharing has generated for ATA, which has not publicly reported those numbers. The two carriers have been using code-sharing on 204 routes.

"Both ATA and Southwest have expressed satisfaction with the code share and it is our intention to continue this agreement," said ATA spokeswoman Michelle Foley.

According to court documents, Matlin-Patterson was unwilling to provide key financing without the new Southwest code-share agreement.

Now that Southwest has taken over most of ATA's Midway gates and has the code-share agreement, it doesn't need to own a stake in the Indianapolis airline, industry observers said.

"The primary reason Southwest invested in ATA was to get the Midway gates, or perhaps more importantly, to keep the gates out of the hands of other low-cost competitors such as America West or AirTran," said Alan Bender, an associate professor at Embry-Riddle Aeronautical University in Daytona Beach, Fla.

Even if bankruptcy court Judge Basil Lorch III ultimately approves MatlinPatterson's financial backing, ATA might still have a fuzzy future, financial observers said.

MatlinPatterson-founded by former Credit Suisse First Boston distressed-debt specialists-is known as a vulture firm. Such firms typically swoop in on distressed companies and later sell their stake, after they have gained value, noted George Farra, a principal of Woodley Farra Manion Portfolio Management in Indianapolis.

ATA already has slashed costs, paring routes and cutting its work force by half, to under 4,000. It also has returned 40 of 76 aircraft to lessors, sold its Chicago Express subsidiary, and agreed to sell travel club Ambassadair to locally based Grueninger Cruises and Tours.

"It looks like an opportunistic investment on [MatlinPatterson's] part. What's left is an attractive regional airline" with "a cost structure that is as low as a startup airline. All the heavy lifting has been done," Farra said.

He noted the airline industry has been recovering, with help from moderating fuel prices.

ATA might be attractive to others beyond MatlinPatterson, based on the experience of bankrupt Aloha Airlines.

In March, MatlinPatterson said it would provide Honolulu-based Aloha up to $90 million in financing. A month later, its deal was replaced by an offer from a joint venture involving Goldman Sachs.

In September, Aloha agreed to be sold to Los Angeles-based Yucaipa Cos. and Aloha Aviation Investment Group, which is headed by former Chicago Bears and Oakland Raiders football player Willie Gault.

MatlinPatterson's other major holdings include Huntsman Corp., a Salt Lake Citybased chemical maker, and NRG Energy of Princeton, N.J., an electric utility.
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