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
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