Bankrupt National Airlines trying to operate normally

National Airlines is steering clear of most of the turbulence associated with an air carrier operating under Chapter 11 bankruptcy protection.

But the Las Vegas-based company has hit a few legal air pockets, according to documents filed in U.S. Bankruptcy Court in Las Vegas.

National won't take delivery of four planes early this year as planned, which will slow the carrier's growth. The company also has been criticized in court filings for holding back financial information from its biggest investor, casino giant Harrah's Entertainment Corp. of Las Vegas.

Still, the airline has done what executives said it would do -- continue to run normally -- and it has operated about 97 percent of its flights since filing for bankruptcy protection Dec. 6.

Although the company has no target date, officials say they hope to come out of bankruptcy later this year. It plans to maintain operations -- and even grow -- through the proceeding.

In the month of the filing, National flew 97.5 percent of its flights, which would have ranked it third behind Aloha and Southwest airlines if it were stacked up against the major operators in a comparison of scheduled flights that were operated. National spokesman Dik Shimizu said flights that were canceled were the result of bad weather and mechanical precautions.

Aloha, Southwest and National operate a majority of their flights from airports that normally have favorable weather. That's why carriers like United and American, which have a considerable presence at cities like Chicago, Denver and New York, did not fare as well.

Another major carrier that had a high percentage of cancellations in December, Delta Air Lines, struggled with labor negotiations with its pilots that month.

But National also announced that in the second week of January, it had record bookings for a seven-day period. And, on Feb. 6, it had record reservations for a day, with 17,000 tickets sold.

The airline acknowledges that the main reason for the big boost is that it has more seats than ever to sell because it has more flights than it had a year ago.

In January, the airline had 29 daily flights compared with 24 a year ago. That translates to 5,075 seats it can sell daily compared with 4,200 in January 2000. National now has 6.6 percent of the passenger flights flown to and from McCarran International Airport and sells 7.9 percent of the available seats.

Mike Conway, co-founder of National, said employees have stood behind the "business-as-usual" attitude.

"Another thing that takes away the stigma of bankruptcy is what the product looks like," Conway said. "We've always ranked high in customer perception and we don't look like a carrier going through reorganization. That's due, a lot, to our employees. Things always look sharp and snappy and our customers don't notice any difference."

About 70 percent of National's business is generated outside Las Vegas, Conway said, and the only place where the bankruptcy has been an ongoing news story is in the Las Vegas media.

"When you tell them (customers) it's business as usual and you deliver on business as usual, the reorganization process then, in effect, becomes a non-event," Conway said. "There then is little or no stigma effect."

National officials frequently remind reporters that operating in reorganization is something most of them have done before. Conway led America West Airlines through what many experts consider to be the most successful Chapter 11 turnaround in aviation history.

Earlier this month, National announced that it had signed agreements with several key lessors and suppliers to keep its operations running smoothly.

A series of payments were negotiated this month with Aries Aircraft Leasing Ltd., Boullion Portfolio Finance III Inc., Sunrock Aircraft Corp. Ltd., and Ansett Worldwide Aviation USA on aircraft leases. National currently operates 15 twin-engine Boeing 757 jets that can each hold 175 passengers.

The airline also reached agreements with Signature Flight Support Corp., which at one time sought the termination of a ground handling agreement in Newark, N.J.

The company also has solidified its fuel source, thanks to a new agreement with Mercury Air Group Inc., its primary supplier.

But the company confirmed that it would not go forward with the planned delivery of four planes from GE Capital Aviation Services.

Shimizu said the new Boeing 757s, which the airline originally planned to bring on in the first half of 2001, would have been used to add a new city to the route and add frequency to other cities.

Although those planes won't be added, Shimizu said that doesn't mean National wouldn't continue to try to add to the fleet if the right deal comes along.

"We're not going to sit and do nothing," Shimizu said. "We may take advantage of any opportunity that comes up for new planes."

The financial condition of the company is another issue that has been raised in court documents and a hearing last week apparently resolved a concern of Harrah's, which invested more than $57 million in the airline since it took flight in 1999. Harrah's now has a 48 percent ownership role in the company.

In late January, Harrah's complained that National had quit delivering critical financial information to it.

"Prior to November 2000, National had routinely provided Harrah's the financial information required," a court filing by attorney Gregory Garman said. "However, since that time, the information provided by National has slowed to a small trickle. Specifically, National failed to provide Harrah's with monthly operating statements for November and December, weekly reports of advanced bookings, schedules of flights that have been booked, but not flown, and forward operating projections on a rolling basis."

In last week's hearing, National agreed to provide the information Harrah's sought. But it also required Harrah's to sign a confidentiality agreement on the numbers.

Because National is privately held, its financial statements are not widely distributed. The airline is required to file statistics with the U.S. Department of Transportation, but, for competitive reasons, they lag three months behind the calendar year.

National's fourth-quarter financial statement isn't due with the Department of Transportation until mid-March. The most recent figures available are from September, about a month after the cost of fuel started becoming a serious problem for the airline.

For the third quarter, National reported total operating revenue of $79.7 million of which $75 million was ticket sales. That compares with $66.9 million and $64.3 million, respectively, for the second quarter of 2000.

The company reported total operating expenses of $81 million, compared with $64.5 million in the second quarter. A net loss of $2.6 million was reported for the quarter, compared with net income of $1.5 million for the second quarter.

But that was five months ago. Since then, fuel costs have continued to stay at higher-than-normal levels. In December, the airline said that abnormally high fuel costs were what led to the Chapter 11 filing.

In addition to higher expenses, Shimizu said the airline's sales were down in December -- a holiday lull that occurs industrywide.

Analysts watching National said they wouldn't be surprised if the company's financial condition is worse than it is intimating.

Mike Boyd of The Boyd Group, an Evergreen, Colo., aviation consultant, was enthusiastic about National when it began operations because he felt it offered a successful business plan. Now, he's concerned that the company isn't telling the whole story.

Boyd said record sales don't mean a thing if the airline is selling seats under cost.

"You have to be a little skeptical when a bankruptcy hits out of the blue like that," Boyd said.

Sam Buttrick, an aviation analyst with UBS Warburg, said the key to National's successful emergence from Chapter 11 is to secure new capital.

"Their traffic and booking levels are generally good now and they've clearly been able to continue to operate reliably," Buttrick said. "They've made some claims about being close to fresh capital."

National alluded to those negotiations earlier this month, but also made it clear that there would be no comments on speculation until a deal is done.

"National ... stated that substantial progress has been made toward an agreement for financing from a group of investors with aerospace interests," said a company press release. " ... The airline would not make any further statements about the identities of potential investors or proposed terms until definitive agreements are reached."

Despite the speculation on finances, the Department of Transportation, which monitors airlines' financial records to ensure that they are capable of operating, says National has lived up to its "business-as-usual" pledge.

Janet Davis, a transportation industry analyst for the Department of Transportation in Washington, said she is reviewing every bankruptcy court filing to be sure that National maintains standards of its certification.

"If an ownership change occurs, we would have to look at the company again and make sure they comply with regulations," Davis said.

Under current regulations, majority owners of U.S. air carriers must be American citizens. If a company were to make a sizable investment in National, Davis said her office would scrutinize the investor to make sure the airline remains in compliance.

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