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World News & Analysis
Chapter 11 Vexes United, Haunts US Airways
Aviation Week & Space Technology
08/02/2004, page 26
David Bond
Washington
As United extends financing and stops funding pensions, US Airways faces Sept. 30 hurdles and commits to low fares
Bankruptcy's Toll
The perils of Chapter 11 bankruptcy reorganization and its aftermath remain on vivid display as United Airlines amends its debtor-in-possession (DIP) financing for a still longer haul and US Airways continues a series of stopgap deals with its creditors.
United and four lenders--JPMorgan Chase, Citigroup, CIT and GE Capital--agreed on new DIP financing that will extend the loan's maturity six months to June 30, 2005, double available funds to $1 billion and bar payments into pension plans until the company exits bankruptcy protection. The pension provision, affecting $568 million in payments due this year, drew union opposition and an expression of "great concern" from the federal Pension Benefit Guaranty Corp., which said it would be illegal. The International Assn. of Machinists and Aerospace workers sued.
UNITED NEGOTIATED the credit extension after the Air Transportation Stabilization Board (ATSB) declined June 28 to review its third and final rejection of a loan guarantee for part of what the carrier planned as a $2-billion financing package to exit Chapter 11. In a July 26 bankruptcy court filing, United said it will need the additional time and DIP cash to come up with further cost-cutting and restructuring to attract investors without the federal guarantee.
The carrier touched off the pension controversy July 14, when it said it would defer a decision on whether to make a $72-million quarterly minimum contribution due the following day. Last week it told the bankruptcy court it will skip all pension-fund contributions until it exits bankruptcy unless DIP lenders allow them based on a modified business plan. Pension funding obligations comprise $404 billion due Sept. 15, $92 million due Oct. 15 and more than $4 billion in 2005-09. Withholding the 2004 payments would have the effect of increasing end-of-year liquidity by $568 million, more than the additional DIP financing.
The larger question is whether United will try to get out of its four big defined-benefit pensions altogether, in favor of defined-contribution plans with lesser, more predictable obligations. The carrier left that question hanging.
"In the absence of a federal loan guarantee, United's long-term business plan must have cash flow and liquidity levels that the capital markets are willing to finance," United told the bankruptcy court. "Because United's existing pension funding obligations will remain a huge financial burden after exit, it is incumbent on United to study all possible options and to determine whether United can sustain this burden and still attract exit financing. At the present time, however, no decisions have been made, and much work and analysis remains to be completed."
United is pressing for further concessions on compensation and productivity from the same unions it is squeezing on pensions, and CEO Glenn Tilton promised full consultations with labor before any pension changes are made. In a recorded message July 27, Tilton acknowledged that the decision to stop funding the pension plans had caused "significant anxiety."
Issuing a second-quarter financial report July 29, United saw "significant improvement" in a $438-million swing in operating results, from a $431-million loss in last year's June quarter to a $7-million profit this year. The 2003 results were depressed as the Iraq war and SARS disrupted traffic and yields, but this year's had to overcome a 53.3% increase in fuel costs.
United came up with a $438-million turnaround in second-quarter operating results, but it will need more cost-cutting to attract Chapter 11 exit financing.
Revenues and operating expenses converged at $4 billion to produce the narrow profit. Revenues gained 30% year-over-year as traffic growth outpaced capacity increases, 20% to 13%, and unit revenue was up 10%. Even yields grew, by 3%. Costs were up 14% on the additional capacity, but the cost per available seat mile was down 10% and would have dropped 17% if it weren't for fuel. Productivity, measured by available seat miles per employee, gained 14%.
United ended the quarter with $2.2 billion in cash, $1.4 billion of it unrestricted, down from $2.6 billion and $1.9 billion, respectively, on Mar. 31. Operating cash flow was positive, by $62 million. Third-quarter bookings are favorable on increased capacity, but the carrier expects its average fuel price to increase to $1.23 per gallon from the second quarter's $1.18.
FOR US AIRWAYS, pitfalls loom in the much nearer term. Announcing second-quarter financial results July 27, the carrier revealed that it had to make a second set of concessions to the ATSB in order to win a waiver of June 30 financial-ratio covenants in its guaranteed loan. The next check on covenant compliance is Sept. 30, which also is the expiration date of an interim agreement on revised financing for continued deliveries of regional jets. CEO Bruce Lakefield said further concessions from US Airways' unions will be needed by then to hold both of these agreements together, as well as to avoid big fall-winter financial losses that would threaten the carrier's cash position.
Lakefield took pains to play down the company's seemingly favorable second-quarter performance, in which it turned a $147-million 2003 operating loss--excluding a $214-million security-fee refund--into an $83-million profit. In a conference call with securities analysts, Lakefield said the results were "encouraging" but had to be viewed in "proper context."
"The second quarter is traditionally the strongest quarter for US Airways," he said. "We count on the second quarter to generate the cash and earnings required to compensate for comparatively weaker first and fourth quarters. Unfortunately, the small profit we earned in the second quarter of this year is not an indication that we have successfully turned the corner to achieve sustained profitability."
UNRESTRICTED CASH stood at $975 million on June 30, down $3 million during the quarter and thus "somewhat disappointing," according to CFO Dave Davis. "We can expect that without a lower cost structure, we will be in a cash-burn situation in the second half of the year," he said.
US Airways' first collision with ATSB covenants came with this year's Mar. 31 review, and the impact was far more substantial than the latest one. The federal guarantee applies to $900 million of the $1-billion loan by which the carrier exited Chapter 11 in March 2003, and to win a waiver of covenants it paid down the loan by $250 million, even though amortization wasn't due. For the June 30 waiver, US Airways agreed to make larger principal payments when amortization begins, in October 2006. But the waiver doesn't apply to the next review, on Sept. 30. Covenants become progressively more difficult, Davis said, so a further waiver and more concessions may be needed then.
Renegotiation of regional jet financing with GE Capital, Bombardier and Embraer was triggered by a credit downgrade from Standard & Poor's, like Aviation Week & Space Technology a unit of The McGraw-Hill Companies. In the biggest change, US Airways converted orders for 23 CRJ200 aircraft due for delivery this year into CRJ700s. Four of the CRJ700s will be delivered this year and 19 will be delayed until 2005 and 2006. US Airways will be allowed to convert the CRJ700s into CRJ900s if it can win a scope-clause change from its pilots to permit operation of the larger aircraft. But if it doesn't come up with labor and other cost reductions by Sept. 30, the financing will have to be renegotiated yet again.
US Airways is phasing in low, simplified fares in competition with low-cost rivals, notably Southwest Airlines at Philadelphia, and this strategy seems to be locking the carrier into a low-cost model that would amount to the most fundamental restructuring among the big U.S. network airlines.
BIG AND SMALL, low-cost and otherwise, airlines have complained with one voice this year about excess capacity in the market and an inability to offer anything but the lowest fares. Even profitable low-cost carriers are unhappy about their yields. But Ben Baldanza, US Airways' senior vice president for marketing and planning, made clear how much his airline is changing.
"We no longer believe that there is simply too much industry capacity," he told analysts, "but rather that there is an oversupply of high-cost capacity and an undersupply of low-cost capacity. We intend to transform our capacity into the low-cost category, and we know there is a market for our product with low costs."
Chapter 11 Vexes United, Haunts US Airways
Aviation Week & Space Technology
08/02/2004, page 26
David Bond
Washington
As United extends financing and stops funding pensions, US Airways faces Sept. 30 hurdles and commits to low fares
Bankruptcy's Toll
The perils of Chapter 11 bankruptcy reorganization and its aftermath remain on vivid display as United Airlines amends its debtor-in-possession (DIP) financing for a still longer haul and US Airways continues a series of stopgap deals with its creditors.
United and four lenders--JPMorgan Chase, Citigroup, CIT and GE Capital--agreed on new DIP financing that will extend the loan's maturity six months to June 30, 2005, double available funds to $1 billion and bar payments into pension plans until the company exits bankruptcy protection. The pension provision, affecting $568 million in payments due this year, drew union opposition and an expression of "great concern" from the federal Pension Benefit Guaranty Corp., which said it would be illegal. The International Assn. of Machinists and Aerospace workers sued.
UNITED NEGOTIATED the credit extension after the Air Transportation Stabilization Board (ATSB) declined June 28 to review its third and final rejection of a loan guarantee for part of what the carrier planned as a $2-billion financing package to exit Chapter 11. In a July 26 bankruptcy court filing, United said it will need the additional time and DIP cash to come up with further cost-cutting and restructuring to attract investors without the federal guarantee.
The carrier touched off the pension controversy July 14, when it said it would defer a decision on whether to make a $72-million quarterly minimum contribution due the following day. Last week it told the bankruptcy court it will skip all pension-fund contributions until it exits bankruptcy unless DIP lenders allow them based on a modified business plan. Pension funding obligations comprise $404 billion due Sept. 15, $92 million due Oct. 15 and more than $4 billion in 2005-09. Withholding the 2004 payments would have the effect of increasing end-of-year liquidity by $568 million, more than the additional DIP financing.
The larger question is whether United will try to get out of its four big defined-benefit pensions altogether, in favor of defined-contribution plans with lesser, more predictable obligations. The carrier left that question hanging.
"In the absence of a federal loan guarantee, United's long-term business plan must have cash flow and liquidity levels that the capital markets are willing to finance," United told the bankruptcy court. "Because United's existing pension funding obligations will remain a huge financial burden after exit, it is incumbent on United to study all possible options and to determine whether United can sustain this burden and still attract exit financing. At the present time, however, no decisions have been made, and much work and analysis remains to be completed."
United is pressing for further concessions on compensation and productivity from the same unions it is squeezing on pensions, and CEO Glenn Tilton promised full consultations with labor before any pension changes are made. In a recorded message July 27, Tilton acknowledged that the decision to stop funding the pension plans had caused "significant anxiety."
Issuing a second-quarter financial report July 29, United saw "significant improvement" in a $438-million swing in operating results, from a $431-million loss in last year's June quarter to a $7-million profit this year. The 2003 results were depressed as the Iraq war and SARS disrupted traffic and yields, but this year's had to overcome a 53.3% increase in fuel costs.
United came up with a $438-million turnaround in second-quarter operating results, but it will need more cost-cutting to attract Chapter 11 exit financing.
Revenues and operating expenses converged at $4 billion to produce the narrow profit. Revenues gained 30% year-over-year as traffic growth outpaced capacity increases, 20% to 13%, and unit revenue was up 10%. Even yields grew, by 3%. Costs were up 14% on the additional capacity, but the cost per available seat mile was down 10% and would have dropped 17% if it weren't for fuel. Productivity, measured by available seat miles per employee, gained 14%.
United ended the quarter with $2.2 billion in cash, $1.4 billion of it unrestricted, down from $2.6 billion and $1.9 billion, respectively, on Mar. 31. Operating cash flow was positive, by $62 million. Third-quarter bookings are favorable on increased capacity, but the carrier expects its average fuel price to increase to $1.23 per gallon from the second quarter's $1.18.
FOR US AIRWAYS, pitfalls loom in the much nearer term. Announcing second-quarter financial results July 27, the carrier revealed that it had to make a second set of concessions to the ATSB in order to win a waiver of June 30 financial-ratio covenants in its guaranteed loan. The next check on covenant compliance is Sept. 30, which also is the expiration date of an interim agreement on revised financing for continued deliveries of regional jets. CEO Bruce Lakefield said further concessions from US Airways' unions will be needed by then to hold both of these agreements together, as well as to avoid big fall-winter financial losses that would threaten the carrier's cash position.
Lakefield took pains to play down the company's seemingly favorable second-quarter performance, in which it turned a $147-million 2003 operating loss--excluding a $214-million security-fee refund--into an $83-million profit. In a conference call with securities analysts, Lakefield said the results were "encouraging" but had to be viewed in "proper context."
"The second quarter is traditionally the strongest quarter for US Airways," he said. "We count on the second quarter to generate the cash and earnings required to compensate for comparatively weaker first and fourth quarters. Unfortunately, the small profit we earned in the second quarter of this year is not an indication that we have successfully turned the corner to achieve sustained profitability."
UNRESTRICTED CASH stood at $975 million on June 30, down $3 million during the quarter and thus "somewhat disappointing," according to CFO Dave Davis. "We can expect that without a lower cost structure, we will be in a cash-burn situation in the second half of the year," he said.
US Airways' first collision with ATSB covenants came with this year's Mar. 31 review, and the impact was far more substantial than the latest one. The federal guarantee applies to $900 million of the $1-billion loan by which the carrier exited Chapter 11 in March 2003, and to win a waiver of covenants it paid down the loan by $250 million, even though amortization wasn't due. For the June 30 waiver, US Airways agreed to make larger principal payments when amortization begins, in October 2006. But the waiver doesn't apply to the next review, on Sept. 30. Covenants become progressively more difficult, Davis said, so a further waiver and more concessions may be needed then.
Renegotiation of regional jet financing with GE Capital, Bombardier and Embraer was triggered by a credit downgrade from Standard & Poor's, like Aviation Week & Space Technology a unit of The McGraw-Hill Companies. In the biggest change, US Airways converted orders for 23 CRJ200 aircraft due for delivery this year into CRJ700s. Four of the CRJ700s will be delivered this year and 19 will be delayed until 2005 and 2006. US Airways will be allowed to convert the CRJ700s into CRJ900s if it can win a scope-clause change from its pilots to permit operation of the larger aircraft. But if it doesn't come up with labor and other cost reductions by Sept. 30, the financing will have to be renegotiated yet again.
US Airways is phasing in low, simplified fares in competition with low-cost rivals, notably Southwest Airlines at Philadelphia, and this strategy seems to be locking the carrier into a low-cost model that would amount to the most fundamental restructuring among the big U.S. network airlines.
BIG AND SMALL, low-cost and otherwise, airlines have complained with one voice this year about excess capacity in the market and an inability to offer anything but the lowest fares. Even profitable low-cost carriers are unhappy about their yields. But Ben Baldanza, US Airways' senior vice president for marketing and planning, made clear how much his airline is changing.
"We no longer believe that there is simply too much industry capacity," he told analysts, "but rather that there is an oversupply of high-cost capacity and an undersupply of low-cost capacity. We intend to transform our capacity into the low-cost category, and we know there is a market for our product with low costs."
