Dave's Gloomy Forecast

[ohcaptainron]

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On 10/10/2002 536 PM UAL777flyer wrote:

The fact that certain key assets of US might not perfectly mesh with carriers other than UA isn't really the point. The point is that those carriers know what those assets could do to them in the hands of UA with US feeding the operation. They're not about to make it easy for UA. Chances are they'd up the bidding to make UA pay a high premium. Remember, it isn't up to US management. The final decision would rest with the bankruptcy judge.

Captainron says:
I agree with most of your asessment, there is no doubt that when these assets are sold others will look at what will affect their repective markets. Will the bidding compel UAL to overpay, most likly, after all they are more valuable to UAL than anyone else. From a regulatory standpoint the unknown competative issues have been fully exposed and the parties have a clear idea what will work and what won't.
In addition, even if UAL overpays somewhat it would be much less costly and have considerable less risk than a merger. It would also be a financable where under the forceable future a merger would not.
The most compelling component in my mind is the guaranteed revenue stream that would flow to US from UAL and the Star alliance. This is not likly with the other players for several already mentioned reasons. There is reason to believe that US management would encourage and support such a move to sell the assets in or out of BK that do not work in the reginal model because of the perceived value of the existing codeshare.
For that reason I do not expect US to emerge from BK on schedule, I think its more likly that this deal gets done in BK court with USs support within the next 12-18 months if UAL does not file.
If UAL does file and the economy improves in the third quarter of 03, somewhat longer.

I have a question, do UAL employees have id 95s or better on US airways yet? Thx

 

[Busdrvr]

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On 10/10/2002 536 PM UAL777flyer wrote:

The fact that certain key assets of US might not perfectly mesh with carriers other than UA isn't really the point. The point is that those carriers know what those assets could do to them in the hands of UA with US feeding the operation.

The final decision would rest with the bankruptcy judge.
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I'm not refering to how U's assest would mesh with other companies, I'm talking about what the DOJ would allow. I frankly don't think they'd allow DL, CAL, or AMR buy a substantial part of U's assest (maybe let CAL buy DCA). NWA is prob a differant story (if they dropped the CAL codeshare).

 

[avek00]

Where does the domino theory keep coming from?

A BK filing by UAL will NOT force the other majors to do the same. I'll run down the non-BK Big Six individually to explain why:

1. AMR - AA continues to hemorrage cash, but nonetheless has a cash cushion that gives the company 6-12 months to formulate and implement long-term solutions. The company is also equipped with arguably the best airline management team in the world. Labor concessions, if necessary, won't prove as difficult as they are at United because AMR's workgroups don't have control of the company.

2. DAL - Delta has made great strides in reducing its costs post 9/11, and could easily turn a profit in the new year with some adjustments to its revenue models. Furthermore, DL can optimize the use of its nonunion workforce, reducing (or increasing) compensation and staffing as needed.

3. NWAC - Northwest made great strides in reducing its costs BEFORE 9/11, and took drastic steps immediately after 9/11 to conserve precious dollars. As a result, it has the largest cash cushion/war chest of any of the majors, and is likely to be the first to reach profitability.

4. CAL - Simply put, CAL can't enter into a third reorganization. The BK Courts have what is known as a three-strikes rule; a company that files for BK a third time is presumed to have failed without possibility of further restructuring or rehabilitation.

So can we PLEASE put the domino theory to rest?

 

[chipmunn]

Ohcaptainron:

I'm not going to reiterate things over and over, but there is reason to believe your analysis of industry consolidation is wrong. At this point there is signficant uncertainty on how the industry will resolve the financial crisis. Obviously revenue is a problem, but a major part of the revenue problem is business travelers are flying on leisure fares due to low cost competition setting the fare structure.

Regardless, we will know more very, very soon regarding UA and its path to restructuring. By the way, UA employees can obtain ID95s on US.

Chip

 

[chipmunn]

[P][FONT face=Times New Roman size=3]Busdrvr:[/FONT][/P]
[P][FONT face=Times New Roman size=3]Why is it so hard to believe the UA board is tired of labor trying to control the corporation? Moreover, why is it so hard to believe the ATSB could believe UA will not be able to obtain a Fitch Rating projected 7 percent profit margin within seven years unless the governance issue is dealt with? Could it be the UA board is sick and tired of answering to labor and wants to eliminate the governance issue so management can make decisions in the best interest of the company? In addition, Avek's comments are accurate.[/FONT][/P]
[P][FONT face=Times New Roman size=3]Chip [/FONT][/P]

 

[chipmunn]

[P][FONT face=Times New Roman size=3][STRONG]Airline pension plans latest threat to cash flows[BR][/STRONG][BR]Credit Suisse First Boston analyst Jim Higgins, who has been aggressive in taking down the airline industry and individual stocks, now says pension plans are the latest threat to cash flows. [BR][BR]In a note to clients, he said the shortfall in revenues would further dampen near-term liquidity -- already pressured by debt payments, capital expenditures and lease payments -- when cash pension contributions are added to the outflow.[BR][BR]The combination of under-funded pension plans and dreadful equity market performance may result in companies having to contribute cash to their pension plans that is far above historic levels, Higgins said.[BR][BR]Certain carriers have company-specific issues that will modify cash outflows over the next few years, Higgins said, but [/FONT][FONT face=Times New Roman][FONT size=3][STRONG]Delta, Northwest and UAL appear especially hard hit. [BR][/STRONG][BR]And that doesn't include a war-risk scenario. Add in the impact of an attack on Iraq, and Higgins said several carriers teeter on required minimum cash levels to avoid bankruptcy, notably AMR, America West and Continental. [STRONG]Higgins has already said he expects to see UAL in bankruptcy.[BR][/STRONG][/FONT][/FONT][/P]

 

[chipmunn]

[P][FONT face=Times New Roman size=3]Ohcaptainron:[/FONT][/P]
[P][FONT face=Times New Roman size=3]By the way, I undestand McKenzie Consulting is recommending to the board a unique coporate restructuring and Jake Brace does not have total support.[/FONT][/P]
[P][FONT face=Times New Roman size=3]Chip [/FONT][/P]
[P] [/P]

 

[chipmunn]

[FONT face=Times New Roman size=3]Following the 1991 Gulf War according to the IATA:[/FONT][BR]
[UL]
[LI][FONT face=Times New Roman size=3]There was a 25% decrease in passenger traffic during the 1st month of the war[/FONT] [BR]
[LI][FONT face=Times New Roman size=3]Traffic recovered to pre-war levels within about 1 year[/FONT] [BR]
[LI][FONT face=Times New Roman size=3]The industry economic recovery took several years, increased fuel prices compounded profitability problems[/FONT] [BR]
[LI][FONT face=Times New Roman size=3]International (especially transatlantic) travel was effected the most, but made the strongest recovery[/FONT][/LI][/UL][FONT face=Times New Roman size=3]There is reason to believe Congress will pass the Airline Relief bill, but now it could occur after the election on November 5. The bill is expected to provide the airlines with war-risk insurance, reimbursement for security mandates for cockpit door reinforcements and equipment, and possibly other initiatives in the event of war with Iraq.[/FONT][BR][BR][FONT face=Times New Roman size=3]Interestingly, the U.S. hub and spoke airline with the least war exposure is US Airways because of its route network and lower cost business model due to the formal reorganization. Meanwhile, a war places UAL particularly at risk of a bankruptcy filing, which without immediate restructuring agreements from all stakeholders, could occur within a three to four weeks. [/FONT][BR][BR][FONT face=Times New Roman size=3]Chip[/FONT]

 

[ohcaptainron]

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On 10/10/2002 10:43:25 PM chipmunn wrote:

Chip says:

I'm not going to reiterate things over and over, but there is reason to believe your analysis of industry consolidation is wrong. At this point there is signficant uncertainty on how the industry will resolve the financial crisis. Obviously revenue is a problem, but a major part of the revenue problem is business travelers are flying on leisure fares due to low cost competition setting the fare structure.

Captainron says: I want to thank you in advance
for not wanting to repeat yourself time and time again.I look foward to not hearing about any more unique transactions.
I agree that there is significant uncertanity regarding the financial crisis in the industry, unfortunatly your scenerio does not hold water.
You and I will have to disagree.
While it is true that business travelers are not willing to pay traditionaly priced fares, that in itself DOES NOT define the problem completly, we have the worst economy in 45 years by most measures, so while the yield is definatly depressed the more sailent problem is that people are NOT traveling at any price. The low cost producers are more nimble in their capacity model and are sizing accordingly. This lends itself along with their cost/revenue model to be profitable, By the way US Airways despite the progress in the cost area is not there yet. This will become more evident in the comming months.

Chip says;
Regardless, we will know more very, very soon regarding UA and its path to restructuring. By the way, UA employees can obtain ID95s on US.

Captainron says; I agree and thanks.
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[Busdrvr]

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On 10/10/2002 11:12:06 PM avek00 wrote:

Labor concessions, if necessary, won't prove as difficult as they are at United because AMR's workgroups don't have control of the company.

What?! Since when did United's workgroups have control of the company? When did AMR's pilots become less biligerant than UALs? When did the labor situation at AMR get so rosey (TWA LLC?)? Since UALs workgroups control the company, why were the pilot's and Mechs contracts sooooo late? Please, for once, research the limitations of the UAL ESOP. I don't think you have even a rudimentary understanding of it.

DAL - Delta has made great strides in reducing its costs post 9/11, and could easily turn a profit in the new year with some adjustments to its revenue models.

Like what? DALs CASM will likely go up as they cut capacity to the degree UAL had in the past.

Furthermore, DL can optimize the use of its nonunion workforce, reducing (or increasing) compensation and staffing as needed.

You'd like that, wouldn't ya? You think maybe as DAL starts yanking around the non-union workforce, they may decide to organize?

NWAC - Northwest made great strides in reducing its costs BEFORE 9/11, and took drastic steps immediately after 9/11 to conserve precious dollars. As a result, it has the largest cash cushion/war chest of any of the majors, and is likely to be the first to reach profitability.

But owe the most to the pension fund, when adjusted for revenue, of all the majors. Potential cash drain. Imagine the trouble going head to head with lower cost structured UAL in the PAC. Not good!

4. CAL - Simply put, CAL can't enter into a third reorganization. The BK Courts have what is known as a "three-strikes" rule; a company that files for BK a third time is presumed to have failed without possibility of further restructuring or rehabilitation.

Is that case law? Is there a time frame involved? Has that been tested in an industry where all the other players also declared BK? If it is case law, why did Bafoon threaten it in the days immediately following 9/11? Are the CAL lawyers and Bafoon unaware of the 3 strike law? Or is it more of a principle?

So can we PLEASE put the "domino theory" to rest?

If you put the crazy labor running the show theory about UAL to rest. the domino theory is likely MUCH more accurate.
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[N628AU]

Captainron,

One issue with your theory here is that US and UA will only see revenue increase and the full benefit of the codeshare when passengers fly on their aircraft, regardless of who performs the ticketing. United will no doubt likely benefit most from poaching loyal US passengers that ordinarily would choose AA or DL to reach a destination where US does not serve. US will benefit from keeping those passengers, plus United passengers looking for better connections in the East. For example, a US passenger in CLT that needs to go to TUS right now would most likely choose AA through DFW or DL through ATL. That passenger now stays on US/UA via DEN or LAX.

Most likely, this relationship will go no further than NW/CO did. Which one there saw siginifcant cuts ot route transfers to the partner? For US to see the full benefit, they must grow longer stage lengths by adding more transcontinental flights, especially to LAX/SFO/DEN to linkup with short haul UA and UAX flights.

 

[Busdrvr]

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On 10/10/2002 11:36:10 PM chipmunn wrote:


[FONT face="Times New Roman" size=3]Busdrvr:[/FONT][/P]


[FONT face="Times New Roman" size=3]Why is it so hard to believe the UA board is tired of labor trying to control the corporation? Moreover, why is it so hard to believe the ATSB could believe UA will not be able to obtain a Fitch Rating projected 7 percent profit margin within seven years unless the governance issue is dealt with? Could it be the UA board is sick and tired of answering to labor and wants to eliminate the governance issue so management can make decisions in the best interest of the company? In addition, Avek's comments are accurate.[/FONT][/P]


[FONT face="Times New Roman" size=3]Chip [/FONT][/P]
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Why is it so hard to believe that labor has little control over the BOD? Why is it hard to believe that labor wants to be profitable? Why is it so hard to believe that if the BOD had listened to ALPA's BOB rep in 2000, the company would have literally BILLIONS more in assest and cash today? Creighton readily acknowledges he should have listened. One more time...Can ANYONE name an instance where UALs labor BOD members prevented a sound business decision from being made? Can ANYONE give an instance that the Labor BOD members were able to grant themselves contracts richer than they would have been able to without the seats? The labor BOD members give UAL SOMEONE on the BOD who actually has a clue about the industry, unlike our partime mental giants like Hazel O'Learry. Don't you think that if the labor BOD members were actually such a disaster, the ATSB wouldn't have allowed U to put them on YOUR board? Of course U's ALPA and the IAM have proven in the past that they are MUCH more reasonable fellows than those wild eyed UAL guys

 

[iflyjetz]

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On 10/10/2002 11:12:06 PM avek00 wrote:

Where does the domino theory keep coming from?

4. CAL - Simply put, CAL can't enter into a third reorganization. The BK Courts have what is known as a three-strikes rule; a company that files for BK a third time is presumed to have failed without possibility of further restructuring or rehabilitation.

So can we PLEASE put the domino theory to rest?
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[/blockquote]

The domino theory originated in the Kennedy administration. It involved containing communism and was the reason why the US entered the Vietnam conflict. But that's not what you were referring to. [img src='http://www.usaviation.com/idealbb/images/smilies/9.gif']
As for the domino theory in the airline industry, it has to do with being competitive. Chip's been going on about how U has been able to lower their CASM significantly; UAL would do the same in BK. That would significantly disadvantage the other majors, who would (as the theory goes) eventually have to follow suit. I did not originate the theory; it's been written about before.
As for the three strike rule, I did several searches and was unable to find any reference to it. Avek, can you please post a reference to the rule? Thanks.

 

[UAL777flyer]

iflyjetz,

Well, right now, the other majors still have access to the capital markets. Will that continue? Hard to say. If we go to war with Iraq, the banks and other lendors will probably shut their doors to all airlines. But as it stands now, other airlines still have access to capital. The question then becomes: is it worthwhile for another airline to pay a decent some for key US assets to avoid them getting into the hands of UA because if they were to go to UA, they would put that airline at a significant revene disadvantage, which could end up costing them a whole lot more than the price of said assets. So that was basically my logic.

I'm curious why you think that UA is not interested in U's most valuable assets, DCA gates and slots. I tend to disagree. Those assets add considerable value to UA by plugging the only gaping whole in their network.

As for any asset sale being decided by a bankruptcy judge, I said that because I am very doubtful that US will emerge from Ch.11 in 1Q2003. I think that is very unrealistic, given the extreme likelihood that we'll be going to war with Iraq, as well as the continued weakening of the revenue picture. I think it's more likely they'd emerge closer to the Summer of 2003.

I agree with you regarding UA's necessity to obtain an ATSB loan guarantee to make such a scenario work. However, I'm doubtful we (UA) will be able to one outside of bankruptcy. I just don't think that UA's unions will give what's necessary within the very narrow window of time left before UA would have no other alternative than to seek protection via Ch.11.

 

[UAL777flyer]

Chip,

Ahhhhhhhhhhhhh yes. Those Mckinsey people are all over the property. Nothing like bean counters and fat trimmers, errrrrrrrr, I mean consultants, running rampant. I'm curious what you mean by McKinsey recommending a unique corporate restructuring. And what do you mean when you say that Jake Brace may not have support?