How to Stop Airlines Crashing

by Caroline Daniel (Published December 9, 2004)

John Luth's career in the airline industry began in the middle of a hurricane. Driving to his first day of work at Continental Airlines in Houston at 6.30am in August 1989, he failed to listen to the weather report. But he noticed his "car was being blown around a lot".

After driving through the storm, he was met by its corporate equivalent at the office. After 48 hours he had completed the negotiation of a $4bn purchase of Airbus jets. "Mickey Foret [former president of Continental] said go ahead and sign it. I was speechless. Within 48 hours I had been through a hurricane and a major order for aircraft."

Baptism by hurricane and aircraft financing is an apt beginning for the man who founded Seabury, an airline consultancy, in 1995. Now partner and chief executive, he has carved out a profitable niche for the New York-based business, which grows annually at about 35 per cent, largely by word of mouth. That growth has been fuelled by airline upheavals: the bankruptcy of Air Canada and US Airways (twice) and restructuring at America West; Avianca, a Latin American carrier; and Frontier.

The consultancy took its name from Samuel Seabury, the first Anglican Bishop in the US, an ancestor of Mr Luth's wife. Mr Luth offers his own brand of fiscal salvation. Seabury is a unique hybrid: partly a boutique investment bank, advising on aircraft lease restructuring, mergers and acquisitions and structured finance; and partly a strategic consultancy offering advice in operational areas such as network management. Of its 75 employees, half are former bankers and half former airline executives.

That mix reflects Mr Luth's own background. After a stint in the oil industry, he went into banking before moving to Continental Airlines, where he was finance director during its most turbulent period. It remains one of the only successful airline turnrounds. "The crisis started up my saga of restructuring," says Mr Luth. "The day we filed [for bankruptcy] we essentially had no cash. In a process that lasted more than seven months, we came close to liquidation nine times. The lesson I learned is how a major corporation, with $6bn-$7bn (£3.1bn-£3.6bn) of revenues and 38,000 employees, can keep alive with essentially no cash."

That experience is now being applied to other airlines. "He has been through it so many times," says Doug Parker, chief executive of America West, which Mr Luth advised on restructuring $710m of debt and lease payments. "Normally it is not something you get to do more than once or twice as it means you failed. Now he is doing it as a business."

Mr Luth's time at Continental also provided cash. The stock price, which had fallen to about $6 in 1994, rebounded to the mid-$30s the following year. Having commuted weekly for six years from Houston to New York, where his wife lives, he cashed in his equity stake to fund Seabury.

While Seabury's skills in consulting draw mixed reviews - one airline executive said "on re-engineering, he is no better than other people" - it is in aircraft lease restructuring, a critical area of airline economics, that Mr Luth is seen as a craftsman. "Aircraft financing and restructuring expertise are skill sets that rarely intersect. That's what sets Luth apart," says Ron Wainshal, executive vice-president of asset management at Gecas, the aircraft finance arm of General Electric.

One private equity executive says: "John has an absolute wealth of information and minutiae in how aircraft are financed and structured. It is very complex and specific as you have assets that are unique, with different aircraft economics and values, strengths and weaknesses, and John can put that together, and [show] how it ties into the operation of a business."

Mr Luth has a reputation as aruthless negotiator. Even over breakfast at a Manhattan hotel, he has a watchful intensity. He can also talk without interruption on topics ranging from architectural preservation to presidential biographies - a trait perhaps prompted by the need to find his voice growing up with 10 siblings. This verbosity has prompted friends to talk of being "Luthenised", or of his "chronic speech reflux".

Some who have negotiated with him joke that his soliloquies are part of his negotiating tactics: wearing people down by conversational assaults until they concede. Yet he is widely respected for keeping lease negotiations transparent, quick and well-organised.

Many aircraft lessors make the contrast between Seabury and Babcock & Brown, the boutique investment bank that is advising United on its aircraft deals. "I would take John Luth every day of the week," says one person who has dealt with him. "[At United] there is less transparency, and you still don't understand the rationale. [With Luth] it is very process-driven, there is a roadmap to help the airline, and he shares information about how things are going."

Mr Parker says: "He knows how to approach people and what he needs, and he always talks about the programme, non-stop. If someone tried to negotiate he would say: 'Here's our programme and we are not going to deviate from it.' It drove me crazy, but it was perfect."

Seabury has had successes. Mr Luth advised Frontier in late 1997 when it "got into a dogfight with Western Pacific Airlines" and arranged $15m in financ ing. "We got a seven-figure fee for the equity placement, and equity warrants. The shares went from $3 to $18 in the first 12 months, and we made a sizeable amount of money from that. The equity investor, DDJ Capital, made more than $125m profit off their $11m investment."

Yet given the volatility in airlines, the jury is out on some of the larger restructurings Seabury has been most closely involved with, such as Air Canada and US Airways, where it has earned fees of about $15m. After US Airways exited bankruptcy for the first time, he was given a spoof cereal box saying: "Inside: a smaller, reorganised US Airways," and a cartoon. "They gave me some hair but kept the cleft chin," he says.

Earlier this year, however, US Airways filed for bankruptcy again and has warned it could face liquidation by January without job cuts. So, could this dent Seabury's reputation? Mr Luth marshals a long, well-structured defence. "Anyone who is a student of this industry will recognise it was the most broken of all legacy carriers and was the biggest challenge. It had the largest loss margins and the most vulnerable network and was projecting a negative 20 per cent margin for 2004, with a cash loss of $1.4bn. The cash loss is now less than $400m which, with higher fuel prices, was a substantial improvement given the hand we were dealt. We think it will successfully reorganise as long as it can achieve its stated labour cost goals."

He adds: "We have a long track record and the only significant track record on airline turnarounds. I was one of the principal architects of Continental's restructuring, and the out-of-court restructuring for the airline in 1995, and the out-of-court for America West after 9/11 . . .The failure of US Airways to reorganise, I don't think will have any material affect on our reputation."

While restructuring should continue to provide opportunities for Seabury, the consultancy could run into conflicts of interest from having advised so many airlines. "We can't advise everyone," concedes Mr Luth, and he is already looking to Europe and Asia for new business. "Seabury is far bigger than my ambitions. Growth has been by necessity. We would like people to recognise us as providing a total solution for airlines, large and small."

LUTH'S FIVE-STEP PLAN TO RELAUNCH A GROUNDED AIRLINE

John Luth, chief executive and president of Seabury, offers five thoughts for successfully restructuring an airline.

1. Recognise the problem, whether it is your business model, leverage, liquidity, fleet or cost structure
2. Craft a plan to deal with all the elements that are problematic
3. Communicate the details of the plan, explaining how the problem arose and how the restructuring plan will solve it, going back five years and forward five years
4. To the extent that stake-holders need to be part of the solution, devise a fair and equitable plan
5. Communicate the restructuring plan to all stakeholders and the travelling public in a transparent manner

"Nearly 95 per cent of all carriers who file for Chapter 11 fail to reorganise. Very few around the world go through a restructuring and succeed. If you look at the failures they fail on at least one of those, and usually on three or four of them," Mr Luth concludes.