A Checklist of Underlying Economic, Structural and Competitive Issues

Discussion of the force majeure issue and its applicability must consider not
only legal principles, but economic, structural and competitive factors influencing
the operating environment and the performance of the operating company.

A number of these are presented below, along with industry-level data illustrating
pre-existing conditions versus claims of force majeure, hereinafter “fm”.
 

Macro Economics:

Impacts of business cycle-related variations; late stage trends and known, foreseeable risks

Overlaid on and influencing business cycle trends:  unsustainability of corporate earnings
due to burst dot.com and NASDAQ bubbles, reliance on derivatives (versus fundamental earnings)
and aggressive accounting to prop up earnings growth
 

Airline Industry Economics:

  Structural costs:  Network carrier business model and need for continuing revenue premiums

  Rapid growth of carriers with low structural cost business models (Southwest included), due
to spilled traffic from network carriers

  Rise of industry-supported distressed price distribution outlets (priceline, hotwire, orbitz et al)

  Protracted high energy costs/refining margins and risk management/containment

  Unit revenue trends; stagnation from late year 2000 and decline following economy’s move
into recession.     (see sample ATA passenger airline data, following)
 

9-11-2001 effects:

  ATC system shut-down and unique costs/impacts; continuing impacts of security environment

  Consumer and business loss of confidence: due to events and perception of aviation security

  Loss of confidence due to CEO/ATA “sky is falling” claims in public markets and on Capitol Hill

  [Contrast:  “no material adverse consequence”; comparative insensitivity of long-term capital
markets to large airline financings completed in days following 9-11-2001]
 

Follow-on effects (unknown/unanticipatable as of fm claim date):

  Anthrax incidents, “white powder” hysteria, “the Atlanta guy”, AA63:  reaction to demonstrably
inadequate airport, passenger, baggage and cargo screening capabilities and techniques
 

Coincidental bargaining opportunities:

  “Second bite at the apple” on numerous nagging issues:  scope limits, UAL pilot contract
and pattern bargaining, continuing move towards judicial reinterpretation of prior practice
and bargaining history
 

Operating opportunities:

  “Parallel thought” and simultaneous reduction of ~20% flying to combat creeping excess capacity
problem, followed by CEOs publicly complaining of certain competitors not toeing the line
 

Operating philosophies in an fm environment: “self-inflicted wounds”?

  Typical of network management approach, eliminating first/last flights in business markets eliminates
business traveler productivity, altering or eliminating the value proposition that once justified high fares,
or shifting demand to other modes (including fractional) and technologies

  Pricing, revenue management and flight firming philosophies remain “business as usual”, despite fm,
despite network management faux pas

  Decision support tools are not “tuned” for an fm environment, do not provide relevant guidance

  Carriers have not actively stimulated the return of business spending.  Reliance on promotions to
discretionary travelers drew business travel management deeper into the discount pricing structure,
about which airlines now complain

Steps taken to mitigate the impact of fm on vendors and investors often differed widely from those taken
(or not) to mitigate impact on employees  (voluntary versus imposed programs, accelerated outsourcing)
 

“fm”-specific:

  Timing of an fm determination:  following 9-11 ATA coordinating meetings or AIRCON discussions
re: capacity reduction, cost control or when?

  Crisis claims, then and now:  no fm declaration during Desert Shield, Desert Storm or 1992/93 period following
 

Contractual issues:

  CBA-specific definitions and applicability of force majeure

  Justifications for breach of specific contractual provisions?

  Requirement for active mitigation in advance of breach of contractual commitments?

  Conditions and metrics under which fm would cease to be applicable?  Self-extinguishing, or
affirmatively terminated?  Projectable or determined in arrears?  Retro-considerations?

  Plans to “unwind” contra-contractual actions taken, ostensibly due to fm?
 
 

                                                                                                                                                                                                  R.W. MANN & COMPANY, INC.
                                                                                                                                                                                                                10 February 2002