- Dec 23, 2006
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UAL board looking at asset sales
Spinning off units could raise $16 billion
By Julie Johnsson | Tribune staff reporter
September 26, 2007
The board of United Airlines parent UAL Corp. is mulling spinning off several key assets, including the airline's popular frequent-flier program, as directors contemplate shrinking the carrier while substantially increasing its cash stash, United sources said Tuesday.
Among the options that United may consider, according to analysts, are shrinking its real estate portfolio, which includes the 66 acres that its former headquarters in Elk Grove Township sits on, and selling or leasing overseas routes, landing slots and airport gates. The Chicago-based airline also is exploring divesting much of its maintenance unit, known as United Services, as part of an effort to convert assets into cash, the Tribune previously reported.
Whether or not firm decisions will be made when the directors meet this week in San Francisco is not clear. United's directors meet each September to survey the airline's business environment, study its operations and discuss strategy. The three-day session this year, however, also is expected to include debate on large-scale spinoffs that would pare down the airline and at the same time build up its cash reserves.
A United spokeswoman said the company doesn't comment on board matters.
United Chief Executive Glenn Tilton told analysts during an earnings call in July that the airline was looking into strategic options for Mileage Plus, United's 45 million-member frequent-flier program.
And United last month confirmed to the Tribune that it was mulling a sale or joint venture of its giant maintenance facility at San Francisco International Airport. The airline has set up a detailed analysis of that business for potential partners seeking to do due diligence, says a source with knowledge of the company's plans.
Both moves represent a change in course for the second-largest U.S. airline, which until recently has seemed focused on building its business by pursuing a merger or acquisition. Tilton, a former oil industry executive, has been a vocal advocate of airline industry consolidation.
But mergers have been tough to pull off in the unpredictable airline industry. With few options to consolidate, Tilton may look to Plan B, analysts say.
"If you can't sell the company lock, stock and barrel, then maybe you look to sell it in parts," said Robert Mann, a consultant and principal with R.W. Mann & Co., based in Port Washington, N.Y.
Frank Boroch, an analyst with investment bank Bear Stearns, calculated in a July report that United could raise about $16 billion if it sought buyers or business partners for units that weren't integral to its core flight operations.
In the report, circulated widely within United as well as the airline industry, Boroch estimated that Mileage Plus, the second-largest frequent-flier program in the world, could attract about $7.5 billion from potential buyers, and United Services about $330 million.
He also valued the real estate portfolio at about $200 million and its international routes, domestic landing slots and airport gates at $2.2 billion.
"Now is the time when these units have a value that will decline at the end of the business cycle," said Mann. If United waits, he said, "it won't have an opportunity to do this again until when the next upswing occurs."
Doing so now would enable the highly leveraged airline to pay down debt and repair its balance sheet, pay shareholders a special dividend, build cash to help fund merger activity or perhaps attract a private-equity buyer, analysts say.
However, United's directors also will have to weigh potential benefits against the cost of losing direct control over divisions that long have supported its operations. Mileage Plus, for example, generated $600 million in revenue for the airline in 2006; United Services brought in about $280 million, Boroch said.
In a recent briefing to analysts, United's management deemed Mileage Plus "a greater challenge to spin off," wrote Credit Suisse analyst Daniel McKenzie in a Sept. 19 note.
United executives admitted to analysts that they have run the maintenance division poorly as a business, according to McKenzie. He said he believes an outside partner could rapidly build up the business.
Any theories about what this means from UAL employees?
