Fancy Flying By A Bankrupt Airline

Bankruptcy. The shame of it. One might well expect companies in Chapter 11 to slink away quietly while they reorganize. But MarkAir in Anchorage, Alaska, is using the courts' protection to spread its wings. Since entering Chapter 11 last June, it has almost doubled its jet fleet to 13 and flies to 10 major cities across the country, up from just one outside Alaska. "No airline, to my knowledge, ever shrank its way into profitability," says Neil Bergt, MarkAir's combative owner and CEO. "Pan Am tried it. Eastern tried. Midway tried. It doesn't work."

MarkAir's strategy is just the sort of thing that makes critics of the bankruptcy code see red. As one camp sees it, when an ailing carrier uses Chapter 11 to prop itself up, the entire industry suffers. American Airlines Chairman Robert L. Crandall and others argue that stronger airlines are forced to match the low fares of a competitor that is shielded from many of its costs. Darryl Jenkins, managing partner of Aviation Forecasting & Economics, says that of more than 100 airline bankruptcies he studied, no carrier has reorganized successfully long term.

Bankrupt airlines claim solvent carriers have inflicted more harm by adding capacity and launching fare wars of their own. While the debate rages on, MarkAir is astounding many with the audacity of its moves. "We find it incredible," says American spokesman Al Becker, adding that the concept of expansion under Chapter 11 "turns the world upside down."

MarkAir, which in the 1970s flew oil-drilling equipment by propeller planes to Alaskan bush country, took its name in 1984, when it became a jet passenger carrier. Initially, it stuck to routes in Alaska. But in late 1991, after rival Alaska Airlines Inc. rejected an offer to buy him out, Bergt added service from Anchorage to Seattle. Fare wars ensued. Strapped for cash, MarkAir sought to tap public markets--but never pulled it off. By June, 1992, it sought protection.

STALL TACTICS. Bergt makes no apologies for his sojourn in court. "There are no advantages," he says. "People are afraid to buy tickets, and my legal expenses run about $500,000 a month." But Bergt has proven a survivor, and he's not likely to go down easily. In late 1991, as he launched his expansion, he persuaded a state lending agency to come up with $6 million to buy MarkAir's hangars, which the airline then leased. And once in Chapter 11, the depth of the recession worked to Bergt's advantage, enabling him to hang on to leased jets that creditors had little hope of placing elsewhere. MarkAir also used the leverage of bankruptcy to get a new labor agreement from its pilots.

When a $7 million loan fell through last fall, it looked like the airline might shut down. But Bergt still had a trick up his sleeve. Alaska residents get dividend checks every year from the state's oil wealth. So Bergt unveiled a stunning sales promotion: All those willing to part with their $916 checks would get vouchers for four round-trips anywhere MarkAir flew. Alaskans jumped on it. "We raised 20 million bucks, interest-free, that we got to live on through the winter," boasts Bergt. The carrier has yet to show a quarterly profit. But Bergt says a turnaround is in progress, and he still has his sights set on June for getting a reorganization plan confirmed.

But not without pain. Most of MarkAir's lenders have been dragged through the expansion kicking and screaming. Seafirst Bank lent MarkAir more than $13 million and sought to reclaim much of that through bankruptcy court, arguing that the expansion posed a "significant and unacceptable risk." The bank was overruled. Now, creditors leery of accepting debentures with 10-year balloon payments are being offered ticket vouchers that they could either use or sell in bulk. Creditors fret they could only get rid of the tickets at an unattractive discount.

Some Alaskans who turned over their $916 checks are already grumbling.

MarkAir flies most of its long-haul routes only once a day and has strictly controlled the number of cheap seats available. Voucher holders are often offered standby. And that doesn't always go over well. Curt Josaitis, an Anchorage businessman, says he was unable to get seated on a flight to Seattle last March. "This is ridiculous," he says. "These weren't sold as standby tickets, but that's the way I'm having to use them." MarkAir says that vouchers were marked as subject to restrictions and that most holders have been able to travel with confirmed reservations.

Bergt continues to focus his efforts on "getting capital in here," exploring options that include going public, merging, or being acquired. He's right about one thing: No airline ever shrank its way out of bankruptcy. It's up to him to show that the opposite strategy can fly.

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