The Atsb Process

[Ukridge]

Warning - There may be polysyllabic constructs in this question so the queasy may wish to skip this post.

It seems that United’s future is boiling down to securing the ATSB loan guarantee. Yet I have seen very little discussion of the specific process.

1. The question must be asked if United has met, or can meet, the criteria established by the granting authority? Was there a published list of such criteria? How did, or does, United know what needs to be done to qualify for the guarantee submission – is this promulgated in a listing of some type? Are the criteria guidelines, laws, suggestions, or advisements? How does United know what to submit to conform to the process?

2. If there are such fixed criteria, is United capable of meeting them to the satisfaction of the board?

3. Is there feedback rendered by the ATSB to guide United with any administrative errors and oversights?

4. If the submission is made correctly and in accordance with the established guidelines (if such exist – see question 1), what then is the determination for granting or refusing the application? From what I see posted on this forum, simply meeting the criteria is in no way an assurance that the board will approve the application. In other words it seems as if the hurdles can be cleared yet a denial rendered. What avoids an arbitrary decision?

5. Although the composition of the board has been so stated on this forum, how much political pressure will be brought to play on the decision? If it is simply a political decision, how, assuming that it can be done, does one align this with market economics? In other words, if the guarantee is granted, aggrieved airlines will have considered this meddling with the market.

6. With the process already so long in the making, how dynamic of process is the board’s consideration? Are they actively working with United to ensure the requirements are met in order that the guarantee can be made, or is it rather a constantly moving target that it merely a delay to ensure that United will never be approved.

7. Ukridge opinion only: It seems the question comes down to change and rate of change. There are those who attack United as being too set in its old ways, while others (Mr. Tilton as an example) chronicle rapid and deep overhauls in the business practice and an alignment with the oft trotted out phrase ‘new market realities.’ I would imagine that the board would have to be forward looking in this respect and forget the past.

Just some questions from this observer’s comfy chair. This is starting be watched closely in Europe as the regulators and EU shuffle around over airline subsidies and blandishments.
Cheers

 

[ual06]

Sorry Ukridge; but, you ask questions many of us ask. There just does not appear to be answers for those questions at this time.

" Who can say where the road goes
Where the day flows, only time "

 

[funguy2]

Well... You can read all about the ATSB on their website:

ATSB Website

There is even a link to the law as written and passed by Congress and the President.

1.-2. The criteria listed on the website and in the law seem open to interpretation (like much of American Law). For example, the guarantees are for "an air carrier for which credit is not reasonably available at the time of the transaction." Exactly how it is determined that credit is not reasonably available is up to the Board, and may be different for different carriers. Thus it would appear that there are no firm guidelines incorporated into the law. However, much of our legal system is based on precedents, and in UAL's case, there are precedents from approved ATSB loan guarantees to America West, US Airways, and other smaller carriers. Also, there is no specific time limit.

Thus, it can be determined that the specific criteria could be different on a case-by-case basis, and could be at the "whim" to the members of the Board. Also, as this legislation was passed at "lightning speed" by Washington standards, there really wasn't time for regulators to establish specific guidelines. I am sure a case could be made that the outcome is completely at the whim of the Board.

3. I believe other airlines, both approved and denied, like America West, US Airways, and the out-of-business Vanguard and National Airlines, all reported "working with" the board to some extent. So it seems like there is some feedback on required information and perhaps some negotiation on terms (i.e. Why did the feds get warrants for 33% of America West stock but only 10% of US Airways stock?).

4. I think your point here is valid. A decision can be rendered arbitrarily based on the "expertise" of the board members. It could be that UAL meets the criteria (whatever that is), but the Board fails to see how UAL's lack of credit was caused by the terrorist attack, thus making an "arbitrary" determination.

5. Is there political pressure on the Board to act one way or another? Definitely. Can we, as beltway outsiders, determine what that pressure is? Not really. I certainly do not know the relationships between the key players and politicians to know what pressures are more likely to be yielded to. There were certainly allegations of politics being played in the high-profile cases for America West and US Airways, however, what factor that might have played in the decision process would only be known by those involved.

I think I have answered your questions as best I can (and as objectionably as possible), but you can look at their website and come up with your own conclusions as well.

 

[HGIEFOswitch]

:unsure:

By Caroline Daniel in Chicago
Published: May 23 2004 17:34 | Last Updated: May 23 2004 17:34

United Airlines has warned that its fuel costs this year will be $750m higher than it had first estimated and has downgraded an earnings forecast made only five months ago, casting doubt on the airline's chances of securing a critical US government loan guarantee.


The deteriorating financial situation, which includes reducing its operating earnings for 2004 by $776m, was disclosed in a filing with the bankruptcy court late on Friday. The revisions contrast with the upbeat impression executives at the world's second-largest airline have sought to convey in recent weeks of steady restructuring progress.

The filing instead suggests that higher fuel prices have eroded the limited financial cushions United had built into its plan, and that it is failing critical coverage ratio tests that providers of exit financing usually demand as a condition of providing funds.

The fuel crisis comes as the Air Transportation Stabilisation Board, the federal body set up after September 11 to aid the airline industry, is preparing to decide on whether to grant United a $1.6bn loan guarantee.

If the ATSB says no, United faces an uncertain future as it has few other sources of financing available to help it come out of bankruptcy.

The ATSB is expected to make a decision by the end of June.

According to the filing, United updated its business plan at the end of April to include higher fuel costs and pension relief.

Although the airline has hit revenue forecasts, the new plan, dubbed Gershwin 4.1, forecasts United will generate $606m less in net cashflow and $776m less in operating earnings in 2004 than it had forecast in December.

United also said it was failing to meet important coverage ratios - the ratio of its free cashflow divided by fixed cash obligations, mainly pension funding and servicing debt.

It said lenders typically want a ratio of 1.3 before they provide financing. "Skyrocketing fuel costs have reduced United's projected coverage ratio in 2004 from 1.29 to just 0.68. United now satisfies the 1.3 coverage ratio requirement in 2005, 2006 and 2007 by only the thinnest of margins," the filing said.

Moreover, it added that a 1.3 ratio is usually acceptable to lenders only at the start of a loan.

"The steadily increasing coverage ratio that lenders expect to see, as was the case in Gershwin 4.0 (albeit minimally), does not surface in Gershwin 4.1 at all until 2008."

United said its financial situation underlined the need for cuts to its retiree welfare benefits, which remain the highest in the airline industry.

It asked the court to agree to impose retiree cuts to help it save $57m of cash a year

 

[mweiss]

...much of our legal system is based on precedents...

In fact, common law is pretty much entirely based on precedents. Fortunately for Ukridge, the legal system of the United Kingdom is essentially the progenitor of the legal system of the United States. Thus, the legal system familiar to him has much more in common with this nation than with the other parties of the European Union, which are based on civil law.

 

[Ukridge]

That is correct mweiss – one (though certainly not the only) reason why so many are having difficulty with the idea of relinquishing power to the EU.

Thank you for the explanation funguy2. Observing from the outside it just seemed as if these were the pertinent questions. I will perhaps never know, but I keep returning to my sentiment that apart from all the clamouring in the press about new market realities, there really is not a new mousetrap being invented and the ATSB should not make a decision based on the hope of such, but rather the criteria initially put forth. Yes, in the ‘new’ marketplace customers have better pricing power with the Internet, but I am not yet convinced that a firm’s ability to simply control costs over a much more limited route network (in other words the LCCs) is the revelatory heralding of an astonishing business plan. Yes, I exaggerate, but it does not seem to be the better mousetrap quite yet.

It is because of this that I always ask why the so vocal calls for elimination of United? If the better mousetrap were making an appearance – then yes, do away with all legacy carriers and let the market prevail, but I am also though not quite convinced just how level the pitch is on the “marketâ€￾ and therefore my questions about the political decision making behind the loan.

I must say though that your LCCs have done a masterful job at manipulating the perception of their inevitability and superiority. As a case in point, the last time I was on a flight to the FCs (a number of months past) I was reading the highest encomium in one of your business newspapers about the leader of one the American LCCs. The writer was all a twitter about how this CEO worked late into the evening. Shocking! A top manager of a corporation working late into the evening! Unheard of! This demands fawning press? Yet Mr. Tilton could be in harness 20 hours as a day and vilified as one of the grossest incompetents since the British generalship in the Crimean War. Someone is doing a VERY good job at managing perception.

It all seems to be a triangle of marketplace, perception, and politics. All this is certainly beyond my knowledge but it is fun to ask and I appreciate the answers.

Cheers

 

[funguy2]

UKridge:

I think you have some valid points. I do believe that there will always be a need for network carriers. The problem is that the network carriers have lost control of the low-fare carriers that they once had. Since the total market for air travel has not grown at the same rate as the LCC's, somebody has to exit the market. I believe this must occur, from an economic perspective. Unfortunately, the weakest carriers financially, right now, are the legacies.

I think part of the "vocal" calls for the elimination of United are not really that. I believe that those "vocal" calls are for the federal government to allow business to happen. The fed's should allow market forces to act and for capitalism to do its thing. I don't think anyone disagrees that the ATSB was needed immediately after 9/11. Had the ATSB not been formed, there is a very good chance that every legacy and many of the LCC's (not to mention the regional jet providers) would have failed, potentially crippling our transportation system. But, now, many argue that the failure of one carrier, while certainly significant, would not be a devastating event to the national economy in general (i.e. we've survived these before). So some folks say the government should be hands off. I generally agree with that sentiment, but I do not see how the government can prop up the failing business model at US Airways and not prop up the failing model at United. But there is the reality that all this does it pro-long the inevitable, unless the prolonging leads to a radical change in business model to something more successful (like America West with their shift to LCC pricing after their ATSB loan).

And you are absolutely right about the LCC's and their management of expectations. When you buy a ticket on Southwest, and you get friendly service and a bag of peanuts, your expectations have been met, thus you are satisfied. The legacies offer a much more complex product, which makes it easier for one part to fail, thus expectations are not met, and unsatisfied customers.

 

[JetClipper]

All of the political pontificating, lobbying, etc. surrounding United's loan application reminds me of the route award process under the old Civil Aeronautics Board (CAB), particularly the "Transpacific Route Case." And all this time I thought we were living in a "deregulated" industry!

 

[Ukridge]

Good points funguy2. One of the additional questions that your explanation raises is one that Cosmo had addressed a number of weeks past - namely that of the idea of the Star Alliance and the concept of a "loss leader" for the U.S. economy. It could very well be that the government is not taking a look at it this way, but if I were making the decisions I would look at the overall economic impact that the loss of United would be versus the sustainment of a LCC. The Swiss wrestle with this problem with their national carrier. Though it has been of late a large cash sink, there is strong sentiment within Switzerland that the airline brings enough business into the country to afford the loss on the air transport side - sort of like the free ride to the casino concept but probably better described as butter at 80p a pound at the market.

If though, the plan is to allow airlines outside U.S. (through the Star) to provide the capacity to the U.S. and then rely on the LCCs to fly the domestic routes then I could see the government tilt away from United. If however, the economic engine of United was of great enough benfit to the U.S. economy (and this is assuming that it may be), perhaps they should think along the lines of the Swiss. I would think United would use this in their petition by quoting the strength of their alliances as the revenue it generates for the economy.

Cheers

 

[funguy2]

UKridge:

Good point and example. I had not thought of the situation in that way. However, I would have to disagree. I think in the US, there is no fear of a replacement for UAL (or US Airways for that matter) should they fail. Braniff was replaced. Eastern was replaced. Pan Am was replaced. I think that loss-leader concept is less of a concern here, as we don't have the same problems of a Swissair or Sabena.

I would also disagree that, in order to obtain the ATSB, UAL should focus on its own international structure. If UAL goes out of business, Lufthansa won't stop flying to Dulles or ORD. But if UAL stops flying, it would certainly take some time to redevelop the structure currently in place and operated by UAL... particularly its trans-Pacific ops. I guess I would say that our government wants to have it all... A robust LCC system and a robust network carrier system. I don't think they want one or the other.

 

[jimntx]

But if UAL stops flying, it would certainly take some time to redevelop the structure currently in place and operated by UAL... particularly its trans-Pacific ops.

I'm not convinced that even the trans-Pacific gap would be all that hard to fill. AA has more than enough flight attendants (5900+) and pilots on furlough right now that could be recalled in short order. All AMR would have to do is get financing to buy/lease some additional a/c." The agreements with the pilots and the flight attendants for "extra-long haul" are already in place.

Rumors continue to float that both AWA and ATA are looking at expanding into International flying. Trans-Pacific might be a little ambitious to start, but hey, in for a dime, in for a dollar.

 

[funguy2]

I'm not convinced that even the trans-Pacific gap would be all that hard to fill. AA has more than enough flight attendants (5900+) and pilots on furlough right now that could be recalled in short order. All AMR would have to do is get financing to buy/lease some additional a/c." The agreements with the pilots and the flight attendants for "extra-long haul" are already in place.

Rumors continue to float that both AWA and ATA are looking at expanding into International flying. Trans-Pacific might be a little ambitious to start, but hey, in for a dime, in for a dollar.

I have no doubt that AMR and DAL (among others) would be all over UAL's route authorities. But, there would still be a service gap while the highest bidder prepares for service assuming UAL takes the Pacific into Liquidation with it. Think of Pan Am's latin routes... There was a service gap before those were replaced. However, it is more likely that these routes get sold as an operating entity before liquidation because of their value (like Pan Am's European routes were taken over by DAL).

I guess I was thinking in terms of a sudden shut down of UAL in the short term, even though that is unlikely.

 

[WorldTraveler]

Funguy2,
You are correct that UAL is very unlikely to be directly liquidated. United Airlines is a powerful business with strong value as an operating entity, something that probably cannot be said for USAirways. The creditors are far more likely to minimize their losses if they can transfer a portion of UAL’s liabilities to another airline. In the Pan Am transatlantic acquisition, Delta paid a relatively small amount (seems like it was about $500M for PA’s continental Europe operation, hired between 1/3 and ¼ of PA’s workforce, and took over some of PA’s more valuable aircraft and other debt. Of course, DL paid a high price because the transatlantic market was very weak but there was a relatively small upfront cost. As I recall, UAL’s LHR acquisition was largely in cash with few assumed liabilities. Given the state of the US industry now, I would expect that most carriers would only be able to complete a transaction similar to DL-PA. UAL has many options they can exercise before they will liquidate but they will have to begin selling some of their valuable route authorities, which will necessitate a dramatic overhaul of their business plan.
I also wonder whether AA has limited its ability to pick up the NRT portion of UA’s network since they now (or soon will be) flying every NRT route to US metro area that UA serves except SEA. Is it possible that the DOJ would argue that AA’s acquisition of at least the NRT hub from UA’s network might be anti-competitive since it is unlikely that any other carrier would immediately step in and replace the lost US-NRT services.

I also think that Delta could turn out to be the real dark horse that emerges in picking up any United assets that become available. Unlike American, Delta has very little overlap with United so can trump an American bid by being willing to take over a larger set of UAL assets. I don’t think there is any doubt that the contest will be between AA and DL. Both companies’ ownership of their regional carriers give them a tremendous financial advantage over other competitors who have already sold off their regional carriers.

However, any of the remaining legacy carriers could make a compelling argument that they would improve their profitability if they picked up UA assets and added them to their network since they are all artificially small because of downsizing and not operating at peak efficiency. The compelling argument for consolidation among the network carriers is that their share of the travel market is expected to continue to shrink while the LCCs' share will grow. The only way to "fix" the legacy model will likely be to eliminate several of the competitors with the most efficient ones remaining.

Ukridge,
You are totally correct about the perception the LCCs have been able to build. The reality is that none of the legacy airlines have redefined their identity to demonstrate that they are a viable business model. It sure appears to me that airlines like AA and DL at least consider it in their best interest to allow the weakest carriers in the industry to fail before dramatically changing the business model, although both AA and DL seem well aware of the issues that must be addressed but are only taking steps to correct parts of it.
Ultimately, I don’t the ATSB will have to make a decision regarding UAL; the marketplace will make it for them by virtue of the fact that their business plan will not work. Remember that this sense of foreboding which now faces UAL has happened before and was punctuated only briefly by a genuine sense of hope that the company could be saved. The fact that the legacy portion of the airline industry has never really turned around since 9/11 and the airline downturn preceded 9/11 speaks volumes to the argument that the legacy business case is in need of overhaul. No, the LCCs haven’t built a dramatically better mousetrap but they do have much lower costs than the legacy carriers. The winners will be those companies that can get their costs down faster than the drop in revenues. So far, UAL is not giving anyone any sense of being able to restructure their operations to a profitable level even with the help of the bankruptcy laws.

 

[boeing787]

Not true. If fuel had been reasonable this quarter UAL would have turned a profit. That's a fact. By the way I doubt AA nor DAL will get their hands on it.

 

[Fly]

Considering that WorldTraveler works at Delta, of course he thinks they'll be the airline getting the routes. Got to keep YOURSELVES out of BK, World. They won't be buying anything