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Sun Country Airlines, battling to survive a cash squeeze, filed for bankruptcy protection Monday in a move that separated itself from its majority stockholder, Tom Petters, whose other businesses have been taken over by a court appointee as part of a massive fraud case.
"We're not in bankruptcy because of our business model being broken," Stan Gadek, Sun Country's CEO, said in an interview. "We are in bankruptcy because of the recent events at Petters Group Worldwide."
Gadek had been counting on an operating loan from Petters, who owns all the voting shares of Sun Country, to help the low-fare carrier pay its bills during the months of October and November, traditionally light flying months.
Instead, Petters' home and headquarters were raided by federal agents Sept. 24, and he was jailed Friday.
Gadek said the decision to file for bankruptcy was made over the weekend, because Sun Country did not want to be under the auspices of a court receiver. Attorney Doug Kelley was appointed the Petters' receiver by a federal judge Monday, and he will take control of the assets of Petters' companies. But because of the filing, in U.S. Bankruptcy Court in Minnesota, Sun Country will be exempt from that court action.
"Controlling their own destiny is better than being sucked into the vortex of all of the issues of the Petters organization," said Ralph Strangis, a Minneapolis attorney who has served on airline boards.
Gadek said that Sun Country has been "whipsawed by daily revelations and news stories" about the unfolding legal case against Petters and his associates, who are accused of defrauding investors of more than $3 billion.
The Mendota Heights carrier employs about 850 and operates 30 flights a day. In bankruptcy, the carrier plans to fly its normal schedule. It's the No. 2 carrier in the Twin Cities, where 663,000 people boarded Sun Country flights during the 12 months ending in June. The airline is gearing up for about 40 daily flights during its peak season, when many Minnesotans flee winter to hot spots in Mexico.
Terry Trippler, a Minneapolis-based airline expert, said that Sun Country's bankruptcy "will be no different" than what consumers saw when Northwest was in bankruptcy.
"Your tickets are still good. You can still book with confidence," Trippler said.
The airline has emphasized that when consumers charge tickets on Sun Country, credit card companies keep customer payments until after the flights are operated. So, a consumer will either fly or get a refund.
Sun Country, founded in 1982, has been through bankruptcy before. The airline nearly went under in late 2001 and was forced into bankruptcy by creditors, but emerged months later with new owners.
Petters and Whitebox Advisors, a Twin Cities hedge fund, acquired Sun Country in late 2006. Petters bought out the Whitebox stake a year later.
Andy Redleaf, who leads Whitebox, and his Sun Minnesota holdings were listed as the largest unsecured creditor in the Sun Country bankruptcy at $12.5 million. Redleaf could not be reached Monday for comment.
Sun Country had a slim cash cushion of $2.3 million at the end of June, and its current cash balance wasn't available Monday. By going into bankruptcy court, the carrier will be able to get some relief on making payments to vendors.
Today, Sun Country's employees will get paid, but their checks will be 50 percent smaller. To preserve cash, Gadek recently decided to cut employees' pay in half and pledged to reimburse workers -- with interest -- in 2009.
Joe Battaglia, a Teamsters official, said that he will file a grievance today on behalf of Sun Country flight attendants because management cut pay without negotiations.
Buddy Scroggins, pilots' union chairman, said he hopes the airline uses bankruptcy "to spread the financial burden more equally among all its creditors instead of relying primarily on sacrifices from employees."
In recent years, Sun Country was profitable in the first quarter. But for the four quarters ending in June, Sun Country lost $47 million on operating revenue of $251 million.
During Chapter 11, Gadek said he expects new owners to provide new capital, adding that he wants to give employees shares in the airline. "They've sacrificed for a long time here," Gadek said. "I think it's high time they get a chance" to benefit from future success.
Since his arrival in March, Gadek, a former Northwest and AirTran executive, has slashed costs and found new sources of revenue, including military charters and new fees.
Julius Maldutis, a New York aviation consultant, said: "If it wasn't for Stan Gadek, this thing would be shut down already."
Trippler remains optimistic that Sun Country will survive. He said, "Once they hit Christmas, the cash flow is excellent. They have a great winter ahead of them."
Liz Fedor • 612-673-7709