Is US'' business partner UA stuck in a quagmire of mud?

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USA320Pilot

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Last week there was no change to the pattern of UA management contradicting itself, further strengthening the argument there is dissension within the executive suite and there may not be a true plan to exit bankruptcy.

On Tuesday, UA chief financial officer Jake Brace called Wall Street Journal reporter Susan Carey and told her the airline was evaluating the possibility of emerging from bankruptcy earlier than expected. We see no impediment to an early exit, Brace told the Journal We are looking at the pros and cons of doing it, UA spokesman Jeff Green told Reuters. However, less than one week later, chief executive officer Glenn Tilton told reporters at an industry event, the company would not be pushed into setting a date for exiting Chapter 11 protection.

Why the disagreement between two key executives and the apparent change of heart in less than one week?

Meanwhile, on February 13 Tilton said, “This strategy (low cost operator internally called Starfish) gives us the best opportunity to create two things: prosperity and jobs. The strategy that is the alternative to this is to dramatically shrink.â€

However, on Thursday, May 29, Brace gave his second exclusive telephone interview this week to the national news media when he called New York Times reporter Micheline Maynard. Brace told Maynard “the low-cost carrier is not the centerpiece of our strategy. The centerpiece of our strategy is about serving business travelers and their needs profitability.â€

Again I ask the question, why the change of heart and why the change in developing a restructured business plan, when the company has lost nearly $1.7 billion in just four months? Does it seem to be an effective approach to continually change your strategy when you are burning through your liquidity?

Meanwhile, UA continues to have problems with Atlantic Coast Airlines (ACA), the unsecured creditors committee, and the six airports who all have filed motions against the company. ACA is playing hard ball in negotiations and deferred CRJ orders, the creditors have not seen the analysis and reports completed by McKinsey & Co. and appear to be concerned about the plan of reorganization (POR), and the cities of Los Angeles, San Francisco, Denver, Chicago (all reportedly of the unique corporate transaction), and now Indianapolis and New York are seeking back lease payment or would like to court to evict UA from its gates and facilities.

I believe its obvious there is discontent within the UA executive suite and clearly within almost all of parties who have an interest in the company’s bankruptcy.

Meanwhile, I believe UA’s biggest problem is that the airline recognizes it will not meet its stringent EBITDAR, revenue, and cash flow requirements as soon as this summer and certainly in October after traffic and revenue seasonally drops after Labor Day. UA’s biggest short-term challenge is the airline must be cash flow positive in October, which appears unlikely. In fact, Brace indicated this acute problem in last Wednesday’s Journal article when he said that the airline could still miss some of its financial targets by late summer. Interestingly, on May 30 the Associated Press reported while officials of the airline express confidence that United also will meet its lenders' May 31 benchmark, it must make dramatic improvement to get back to positive cash-flow by the end of October as required.

I believe it’s clear that UA has enormous problems, which it may not understand how to address. The company’s efforts to articulate a business plan, POR, and disclosure statement seem stuck in a quagmire of mud. Moreover, until management and UA EF&A can come up with an idea on how to cut more costs and generate more revenues I believe the company’s ability to attract exit financing will be limited, if non existent.

Wall Street sources have told me Texas Pacific Group suggested they had doubts with current management and their ability to return UA to profitability. Thus, I believe UA first has to lobby hard for the federal loan guarantee, which will require the airline to project a 7 percent profit margin in 7 years, something the airline could not previously do when the board said the airline’s revenue targets were overly optimistic.

Once the airline completes its business plan, management must submit its application to the ATSB who will turn over the financials to Fitch Rating, who will provide and independent audit and forward a recommendation to the board.

Interestingly, on Friday the USA Today reported a $50 billion increase in debt since 1998 and heavy pension funding obligations mean that most of the nation’s major airlines will continue to struggle with weak cash flows for years, a report from Fitch Rating says. Airline debt analyst Bill Warlick says its not yet clear that a revenue recovery has begun, or, if it has, how big or long it will be. Even if a modest revenue recovery is under way, Warlick says most major carriers will struggle to maintain positive cash flow under the weight of the $26 billion of debt maturing between 2003-2006. American, Delta, and Northwest face debt payments alone of more the $1 billion in 2005 alone.

Considering this grim report, and considering AA, DA, & NW are financially stronger than UA, and Fitch Rating will audit UA’s federal loan guarantee application, one has to wonder how the Fitch Report will weigh on the board’s decision on whether or not to approve a revised UA loan guarantee.

There is no secret getting a federal loan guarantee is crucial to UA exiting bankruptcy because the debtor-in-possession financing by law must be repaid before the airline can emerge from court protection. If the airline can somehow get the loan guarantee, the exit financing and equity plan sponsor discussions will be much easier and on much better terms.

Why? Think of how much more equity US would have had to find to repay the DIP, etc. in the absence of the ATSB loan. If UA can get the loan, the exit financing will be a much easier sell. If they do not, it may be hard for them to get enough equity to make an appropriate exit – if at all.

Thus, the key issue remains how can the airline meet its late summer and October EBITDAR, revenue, and cash flow requirements, where Brace said the airline could still miss some of its financial targets by late summer?

Meanwhile, Reuters reported on Saturday Tilton was firming up the carrier's $1.8 billion federal loan guarantee bid around a plan that would rely on substantial cost savings and several strategies to boost revenue and capture business travel, which should come as no surprise.

The company has obtained annual cost savings of about $2.5 billion in labor concessions, nearly $700 million in annual cost cuts from renegotiated aircraft leases and other mortgages, and the US alliance revenue, but that does not appear to be enough to satisfy the board.

According to Reuters, still to be determined as part of UA’s recovery plan is the amount of Chapter 11 exit financing and who will supply it, as well as the scope of a low-cost operation, and a final lineup of regional carriers, which are all significant obstacles to overcome if airline is going to successfully emerge from bankruptcy.

In conclusion, as I have said before, in my opinion, Brace's telephone interview’s are suspect, there are a number of conflicting reports that indicate there is disagreement between key bankruptcy parties and within UA's management team, and UA is far from exiting bankruptcy. From this observer’s perch, the company still has a tremendous amount of serious obstacles and the airline's future is far from certain.

Best regards,

Chip
 

Busdrvr

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Chip, LET IT GO!! Welcome to Star, BUT LET IT GO!! Of course there is disention at WHQ. We don't pay executives to be lap dog yes men (may be cheaper though). Of course there are diff of opinion on the CC. They all have diff priorities. The LCC was NEVER the center peice of our strategy. It was a large part (approx 30% of current flying), but NEVER the centerpiece. The centerpiece is the other 70%. The initial UAL strategy was to place that 30% under a diff company with it's own stock (kind of like pinicle/NWA). There is also a fair chance that it was as much a negotiating tactic as anything. If you look at what ALPA gave up, you'll see we paid DEARLY to retain "one list". We gave the company the ability to fly ALL the NB they want at some of the lowest pay rates and most flexible work rules in the industry. UAL is nearly cash flow positive now. we DON'T have one billion due in 2005 (but maybe the airlines that didn't give the creditors the bird..yet, have something to worry about). Cost is king and we just became the cheapest. That means, all things being equal, on any given route against say NWA, when we break even, they lose money. Thats 180 out from last year. Don't worry man, we'll be around. Just curious, what's your take on the codeshare? I think it's working GREAT. we've added direct service to DEN from CLT (you guys upguaged) and we're now adding 4 times a day service from CLT to IAD (RJ's for now). Just the other day, I sat next to a U FF in FC from CLT to DEN. He was going to HNL and was meeting his father in LAX, so the codeshare got his business for UAL on all three legs (don't know why he didn't do CLT to LAX non-stop on U). He told me that before the deal, he would have done AMR or DAL for the trip. Hopefully you guys are getting some of the action. Your speculation is fun to read, but the simple truth is that UAL is WAY on it's way to BK exit. After all, we got our DIP's from banks, not from some ornery old coot from Alabama who gets off on the power trip. Those banks had faith in our future, and I think it is proving to be well placed.
 
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USA320Pilot

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Busdrvr:

I certainly understand your passion and the uncertainties airline employees have when their company is in bankruptcy.

The reality of the situation is industry wide revenue has deteriorated to an unsustainable point and something much change.

I do not share your rosy financial projections and there are two real questions: will UA continue to meet its EBITDAR, revenue, and cash flow requirements (without one time gains like the IRS tax refund and second federal aid package) and can the company obtain the loan guarantee?

Without these two items I think the airline will be in deep, deep trouble and even Brace is concerned or he would not have told the news media last week the airline could still miss some of its financial targets by late summer.

Moreover, the Associated Press seems to share my sentiment when they reported while officials of the airline express confidence that United also will meet its lenders' May 31 benchmark, it must make dramatic improvement to get back to positive cash-flow by the end of October as required.

Busdrvr, what's your opinion of the Brace and AP comment regarding the EBITDAR, cash flow, and revenue requirements?

Regardless, my interest in UA is only how it effects US and our employees. If AA or NW had on and off corporate transaction discussions or an alliance, my energies would be directed at the Ft. Worth or Eagan based-companies, not UA.

However, it's been no secret that UA and US have held on and off discussions on different corporate combinations for most of the last eight years, thus my interest in your company. At this point there is so much uncertainty on how things will turn out nobody can predict the future, even Dave Siegel (who I can directly respond for) and presumably Glenn Tilton, but it should be an interesting summer as we proceed in the future.

In regard to your comment about the alliance I share your opinion.

Best regards,

Chip
 

Slam&Click

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On 6/1/2003 9:39:44 AM Chip Munn wrote:

At this point there is so much uncertainty on how things will turn out nobody can predict the future, even Dave Siegel (who (sic) I can directly respond for)
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Mr. Munn:

Have you been officially appointed representative and spokesperson for David Siegel at US?  Gee, I believe I must have missed that press release.  Would you please provide the publication date so that I may amend my oversight?

Thanks!

 

Busdrvr

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On 6/1/2003 9:39:44 AM Chip Munn wrote:

Busdrvr:


The reality of the situation is industry wide revenue has deteriorated to an unsustainable point and something much change.

I do not share your rosy financial projections and there are two real questions: will UA continue to meet its EBITDAR, revenue, and cash flow requirements (without one time gains like the IRS tax refund and second federal aid package) and can the company obtain the loan guarantee?

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Chip, If the revenue picture (I''ve checked, it is improving and the companies emphasis is now on revenue generation now that the turnip is bled out) does not improve adequately enough for UAL to meet it''s numbers or get close enough for a waiver from the DIP''s (like Mr Alabama gave you), then I think any practical objective view would see NWA, CAL and AMR in BK by then and U doing a repeat trip (one bill just doesn''t go as far these days). Given the published numbers, UAL''s performance is on track to be better than all the other hub and spoke airlines. I don''t think the DIPs would walk away from the best performer.
 

Falco

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Busdriver, chip has hit the nail on the head on this one. The big reason UA has turned around on this and said they want to exit early is they want the government money to get the DIP requirements off their head. It is highly unlikely UA will meet the October requirements. They want to do exactly what U did, get the government money quick before the DIP financers pull the cash. And your comments about DAL, NWA, and CAL are way off, all of these carriers have long legs. CAL was profitable in MAY, and will be so in June, July and August. DAL will lose a little money this summer, but has a large cash horde. NWA is the weakest of the three, largely because of the SARS thing, but has a ton of cash.
 

Busdrvr

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On 6/1/2003 8:12:54 PM Falco wrote:

"The big reason UA has turned around on this and said they want to exit early is they want the government money to get the DIP requirements off their head."

Getting the DIPs out of the picture is the reason companies ever exit BK. It''s nice to control your own destiny.

"It is highly unlikely UA will meet the October requirements."


Please cite some numbers, not some analyst to back that up.

"And your comments about DAL, NWA, and CAL are way off, all of these carriers have long legs. CAL was profitable in MAY, and will be so in June, July and August. NWA is the weakest of the three, largely because of the SARS thing, but has a ton of cash."

NEVER MENTIONED DAL (for the reason you cited). Please provide the info that shows CAL was "profitable" in may. They may have been cash flow positive, due to government cash, and creative secondary financing of spare part (a second mortgage on PARTS, now that''s leveraged to the hilt) and I think they have some pretty big loan payments due in June or July. NWA has TONS of cash, but they have no real assest other than NRT slots to finance BK, so they would go early to enter with as much cash as possible, and almost result in BK self-financing. If UAL isn''t meeting DIP in OCT (DIP numbers are CUMULATIVE), then AMR is definately BK by then

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USA320Pilot

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Busdrvr:

Again, I wish no harm to UA and its employees and my only concern is how will UA's problems effect US and its employees. I have no other special interest and I believe its important to note my career, pay, and benefits have been much better by staying at US than returning to UA after I elected to decline recall as part of the "570" -- thus I have no "ax to grind".

I first learned of UA's revenue problem from a source close to UA, who you regularly see their name in the press. Since I broke the news of this major problem, both Jake Brace and the Associated Press have publicly reiterated my comments, per my post above.

Moreover, speaking at the Star Alliance news conference at the National Press Club on May 31, UA chief executive officer Glenn Tilton said, "United's chief problem now is not filling plane seats, but low revenue."

Now Tilton, Brace, and the AP have echoed my comments I broke on this website last week.

I believe it's important to note even if UA meets its summer DIP financing requirements, that only buys the airline time. Traditionally, traffic dramatically drops after Labor Day, UA still has significant SAR exposure, and the company continues to financially hemorrhage.

In my opinion, nobody truly knows how this will turn out because there are so many parties who will have a say in the company's bankruptcy proceeding. The court, the creditor's committee, the ATSB, the four DIP financiers, potential equity plan sponsors, Fitch Rating, EETC holders, etc.

As I have said before, it will be interesting to see how this turns out.

Best regards,

Chip
 

Bear96

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On 6/2/2003 12:13:11 AM Chip Munn wrote:

Busdrvr:

Moreover, speaking at the Star Alliance news conference at the National Press Club on May 31, UA chief executive officer Glenn Tilton said, "United''s chief problem now is not filling plane seats, but low revenue."

Now Tilton, Brace, and the AP have echoed my comments I broke on this website last week.

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OMG I must be a fargin'' GENIUS because I have been saying this for months now!

Hmmm... let''s see... healthy load factors; improvements in cost through Ch.11 and renegotaited contracts and leases; yet still losing money...

***I*** want credit for "breaking" this incredible insight that the problem is LOW YIELD!

Dang I''m good...
 

767jetz

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On 6/2/2003 9:00:04 AM PineyBob wrote:


Hey Bear,
Define "Fargin" I am familiar with fugging, freakin'', frickin'', & such but "Fargin" is new. Is that like the VW ads or something?

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You both forgot about flippin''.
 

Dea Certe

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PineyBob,

See the film "Johnny Dangerously" with Michael Keaton and Mary Lu Henner. "Iceholes" and "bastages" also made it to the vocabulary. It''s a funny movie, one of my favorites.

Dea
 

avek00

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Aug 28, 2002
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Not at all busdrvr. NW, CO, DL, and US are not even close to the essentially free-fall state that UA and AA are currently in.
 

767jetz

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On 6/2/2003 8:14:25 PM avek00 wrote:

Not at all busdrvr. NW, CO, DL, and US are not even close to the essentially free-fall state that UA and AA are currently in.

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Free-fall????????????!!!!!

Give me a break. Are you related to Chip by any chance?

Why don''t you stick to subjects you actually know something about.
 

jj

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Remember Joe Piscopo "Its a fortee fore magnum-It shoots through schools"! great movie.
 

ITRADE

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On 6/3/2003 9:28:06 AM 767jetz wrote:


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On 6/2/2003 8:14:25 PM avek00 wrote:

Not at all busdrvr. NW, CO, DL, and US are not even close to the essentially free-fall state that UA and AA are currently in.

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Free-fall????????????!!!!!

Give me a break. Are you related to Chip by any chance?

Why don't you stick to subjects you actually know something about.

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I'd say that until SARS and fuel pricing are fully dealt with, most all the majors are in freefall.

I just looked at a trip to Shanghai next week on UA. The seat map showed the 747 as being no more than 30% full.
 
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