Lufthansa Exit Financing?

[Ukridge]

When I have a moment I will have to research exactly where I read the following paragraph concerning United. It could have been in the FT or one of the continent's squids, frankly I am not sure. It is really of rather little importance as I am sure it is old news in the U.S. business press. It was not old to me however, and I would invite comment.
The aforementioned article was examining the possiblity of an equity stake by Lufthansa in United as a means of exit financing. I understand the limit is capped at 25% but two things point to a closer co-operation. Mr. Tilton has formed a fast friendship (whatever that word means in the business context - whether they would follow each other over the parapet whilst climbing out of the trench with bayonets fixed is questionable) with the CEO emeritus of Lufthansa Herr Weber. Second, Mr. Tilton made a broad appeal for this limit to be extended to 49% at a keynote address he gave in Washington to the Wings Club.
Lufthansa certainly has its hands full in the European market with the low-cost carriers but it is difficult to deny their predominance as the fulcrum and center of gravity of the Star. The article mentions that LH is pleased with the restructuring that United has undergone and is looking to further cement relations.
When Mr. Tilton speaks of having financing lined up has anyone considered that it very well may be the German Bund providing the lucre? Is it possible that those who advocate a chop shop cut up of United with asset transfers to Airways could not have considered that a viable, non-bankrupt, and well-managed Star partner could very well decide the future? Is the power not in Alabama but rather along the storied shores of the Main?
Should we not consider if it is LH that will decide who the regional carrier with RJs will be in the Northeast (read Airways) and who will be the North American main trunk carrier of size with reach far into Asia (and China!)? (read United)
As always, I have the questions but never the answers.
Cheers

 

[Ukridge]

Please everyone do not answer at once I guess this must have been an example of creative wotk within the business newsroom!

 

[737nCH11]

Hi UKridge,

I saw the same information in an article last month. The topic of said article was that several investors were interested in taking an equity stake in UAL, but that they were being spurned by the company. This is in line with CEO Tilton's comments about UAL wanting to forge it's own destiny.

The article mentioned that UAL execs felt reasonably optimistic about their chances with the ATSB, and it also talked about LH taking an equity stake in the company.


Cheers,


737

 

[USA320Pilot]

Ukridge & 737nCH11:

I have not seen the article you reference and if you could would you post the URL? However, I do remember just prior to UA filing for its formal reorganization, Glenn Tilton meet with Star Alliance CEO's and Lufthansa said at that time they would not invest in United, however, what's true on Monday could change on Wednesday.

A valid point is true for Lufthansa as well as US Airways in that if United is forced to sell part of its operation to obtain exit financing to enable it to emerge, much of the revenue lost from the sale could be retained through the alliance(s). With that said, could the Air China alliance be a means to replace lost revenue if United is forced to sell its Pacific operation to lets say Delta.

Lets not forget this was the exact strategy used by Pan Am when they were forced to sell the Pacific operation to United.

Previously I said another potential form of financing could be a corporate raider such as Marvin Davis or Carl Icahn entering the picture, just like at TWA.

I did hear and I do not remember the source, but if you remember I previously posted one potential option could be for somebody like David Bonderman and TPG to take control of both United and US Airways and form a relationship similar in scope to America West and Continental, which TPG when both of these companies were in bankruptcy.

Regards,

Chip

 

[Cosmo]

Ukridge:

I have not seen the article that you mentioned. However, IMHO Lufthansa would be unlikely to invest in United because it has been burned by its investment in Air Canada, which investment is now worthless due to that carrier's bankruptcy filing.

Chip:

While your scenario envisioning the United-Air China bilateral alliance being a means for United to replace some lost revenue after a forced sale of its Pacific operation is certainly possible, I think that it is highly unlikely to actually occur. According to this August 26, 2003, AP article in the New York Times, United's management now believes that the Pacific operation is vital to the carrier's future.

Tilton said the Asia-Pacific market, with its potentially huge economic growth, presents the "most significant" international opportunity for United.

"We are more committed than ever to the region, to China, to Hong Kong," Tilton said.

It seems to me that the Pacific operation would be the last international flying that United would sell, not the first. As the buyer of Pan Am's Pacific operation in 1985, United hopefully learned the important lesson that you don't sell the sector of your business with the greatest revenue and earnings potential if you have any desire for long-term corporate survival. JMHO.

 

[Ukridge]

I will do a bit of net searching to see where I read this article. I realize it is rather poor form of me to quote from it without being able to provide the URL so all may read and comment directly upon it rather than my second hand account. 737nch11 perhaps you could lend assistance if you saw it as well?
You do make a good point about Air Canada's trouble for Lufthansa Cosmo. The piece did seem to imply that in this case there are two other factors in play. Lufthansa has played a 'wait and see' game with United in the BK process. They wished to see the depth and breadth of United's restructuring and its potential to remain a viable entity. Lufthansa orginally demured in making an investement of any size last December when United declared BK. Now however, things look a bit better for United's survival and Lufthansa may wish to take a hand in matters. According to this report United is extremely important to Star and LH. LH does not have the option to, with any alactrity, pick up a U.S. carrier to replace United's place in the Star. The mere size of United over Air Canada makes perhaps for a different calculus. Simply put, if United were lost to Star, there would be significant repercussions for LH. Also the raiders who wish to chop-shop United are always just stage left and perhaps LH wishes to 'protect' its North Atlantic feed from these predators who exhibit as much management expertise as a three year old.
As, I say, I need to find the article so that I am not in danger drawing a conclusion that was not implied. I assumed that this had already 'made the rounds' in the U.S. business press and therefore would have been extent.
The China factor does surpise me however. Recently the new head of Lufthansa supposedly announced that Air China would join Star. This was vigourously (according to the FT) denied by the Chineese contingent. Yet a week later finds Mr. Tilton in harness in Asia announcing great plans.
Chip, I cannot comment on the China/United nexus and its potential for divestiture of assets as I have not read any reports on it other than the brief postings here. After noting the tenor though of some of the posts, I will anxiously await to see if United is to do any of this flying themselves. Would it merely be an alliance for Air China to do all the flying? This unfortunately seems (from postings here) to be the tack that United is taking - outsource all flying to Star and rely on regional jets at home. A concept that certainly is charting new territory.
Cheers

 

[Cosmo]

Ukridge:

It will be interesting to see if, and to what extent, the current U.S.-China service patterns change for United and Air China as a result of this agreement. According to the August 2003 OAG, the two carriers operated the following flights:

United
ORD-PEK / 777 / 3 x Weekly (Daily as of September 3)
SFO-NRT-PEK / 744 (Change to 777 in NRT) / Daily
SFO-PVG / 744 / Daily

Air China
JFK-PEK / 744 / 3 x Weekly
LAX-PEK / 744 / 4 x Weekly
SFO-PEK / 744 / 5 x Weekly

Actually, these schedules appear to be rather complementary. The only overlap, SFO-PEK (via NRT in United's case), could be eliminated if United shifted the flight to an ORD-PVG operation, probably using a 777. And perhaps Air China would start IAD-PEK twice or thrice weekly to connect the two capital cities. Anyway, it makes for some interesting speculation.

 

[767jetz]

Here is the full article that was refered to. Once again Chip is reading between the lines and adding his own, very biased OPINIONS. I see nothing in this article, or any other for that matter, that even implies that UA wants to code share to protect it's revenue incase it has to sell assets in Asia. If you read the full story, rather than just a few select words cut and pasted by Chip, you see that the idea is for UA to increase it's reach through code share and increased flying to Asia. NOT a back up plan incase of liquidation of assets.





United Airlines to Resume Full Trans-Pacific Services Next Month
By THE ASSOCIATED PRESS


HONG KONG -- United Airlines said Tuesday it will restore all trans-Pacific flights next month, including those from Hong Kong, as it attempts to recover from the sharp downturn in air travel caused by SARS.

Meanwhile, United's chief executive, Glenn Tilton, who begins a two-day trip to Beijing on Wednesday, said he will discuss cooperation plans with mainland Chinese airlines to help United expand into the booming mainland Chinese aviation market.

United, the world's No. 2 carrier, slashed 75 percent of its flights in and out of Hong Kong at the peak of the severe acute respiratory syndrome outbreak, said Mark Schwab, a United vice president.

The airline, which earns 17 percent of its revenue from trans-Pacific routes, has been gradually restoring its services since SARS fears eased in June, Schwab said. The airline will also resume daily flights between Hong Kong and Singapore on Oct. 26, he said.

SARS first surfaced in mainland China late last year and killed 299 people in Hong Kong. The virus prompted travel warnings across Asia and devastated Hong Kong's tourism industry.

United Senior Vice President Graham Atkinson said the airline is "seeing a significant upturn in terms of business travelers' pent-up demand," but a full recovery is only expected by the end of this year or early next year.

Tilton said he will discuss with mainland Chinese carriers possible cooperation such as code-sharing, frequent-flyer programs and facility sharing.

The code-sharing agreement would allow United to put its UA flight numbers on its mainland partner's services and sell seats as if they were on United flights.

Tilton declined to name a partner, but hinted that it might be Air China.

"In the event that a code-share with Air China would happen, that would be a good thing, and would benefit passenger connectivity," Tilton said. He said the possible tie-up was one of the "worst-kept secrets" in the airline industry.

Tilton said the Asia-Pacific market, with its potentially huge economic growth, presents the "most significant" international opportunity for United.

"We are more committed than ever to the region, to China, to Hong Kong," Tilton said.

Tilton said he hopes the Chinese partners will eventually become a member of Star Alliance, a network comprising 16 carriers, which includes United, Air Canada, Deutsche Lufthansa and Singapore Airlines.

Selina Chow, chairman of the Hong Kong Tourism Board, said despite a strong rebound in the short-haul market, the number of visitors from the United States in July was still down 42 percent compared with the same month last year.

"This is understandable because it always takes a bit more time to rebuild confidence in the long-haul market and convert interest into actual travel," Chow said.

 

[737nCH11]

UAL IS NOT going to scale back their Asia flying. That is the biggest cash cow the company has. The China codeshare is to pick up intra-China passengers and feed them to UAL.

Some folks are trying WAAAYYYY too hard to read things into these press releases.

 

[Ukridge]

"Some folks are trying WAAAYYYY too hard to read things into these press releases. "

Sorry, I hope that it is not me. I had merely asked about the possibility of LH providing exit financing. Chip dances around the maypole all the time saying how this is going to be the end of the world for United, yet I see Mr. Tilton taking a methodical approach to the BK exit strategy. I was merely wondering if United already had a general idea of where they could find money (i.e. LH) and therefore were politely telling the loan sharks to take their leave. In other words, all there are many issues on the table, not a single person seems wrapped in panic over the possibility that there will not be money at the exit.
Cheers

 

[737nCH11]

UKridge,

Nope, it wasn't you. It was Chip.


Hope things are well in England. I've never been there, but I have always wanted to go. My main hobby is gardening, and I would love to visit some of the incredible gardens around the U.K.


737

 

[ZMAN777]

With that said, could the Air China alliance be a means to replace lost revenue if United is forced to sell its Pacific operation to lets say Delta.

Lets not forget this was the exact strategy used by Pan Am when they were forced to sell the Pacific operation to United.

Chip,

Hey, get a grip! Pam Am NEVER had a code-share agreement with UAL! When they sold their Pacific routes to UAL it was strictly a cash deal.

Anyone who knows UAL operations and strategic route plans (obviously this doesn't include YOU!) would know that the Pacific will continue to be UAL biggest jewel.

I suggest you limit your discussions to operations you're more familiar with....mostly East of the Mississippi!

Cheers,

Z B)

 

[USA320Pilot]

Zman & 767jetz:

Zman said: Hey, get a grip! Pam Am NEVER had a code-share agreement with UAL! When they sold their Pacific routes to UAL it was strictly a cash deal.

Chip answers: I never said it did.

767jetz said: Once again Chip is reading between the lines and adding his own, very biased OPINIONS.

Chip answers: Yes, it was a thought on a possible outcome and more of a late night question than an opinion or inside knowledge, which was simply made to promote discussion. Normally, I use the phrases "I believe" or "in my opinion", however, the comments were meant to be thought provoking comments versus inside information. Nothing more, nothing less.

In regard to United creating a code share with Air China nobody truly knows if the deal was to strictly add additional revenue or if its been created to provide a buffer in the event the Pacific is sold, to help provide exit financing/liquidity.

I do know that Greg Taylor, United senior vice president of planning, testified in court that the unsecured creditors committee asked the company to sell its Pacific operation, along with its LAX, DEN, and IAD hubs. In addition, it's widely known on Wall Street that Delta Air Lines is interested in acquiring United's Pacific operation to round out its network.

I believe United would be reluctant to sell its Pacific operation and I have no knowledge of whether or not this asset is up for sale, however, if the company must sell assets to provide its own exit financing, you can only sell what the buyers desire.

In regard to the Air China agreement, China has a huge population base and the code share will improve United's POR, regardless of management's intent.

Zman, in regard to your smart aleck comment of "I suggest you limit your discussions to operations you're more familiar with....mostly East of the Mississippi!", I have 21 years of experience flying in the Navy and Air Force, was the Program Manager for the Navy's E-6 (B707-320) project, and during my tenure at the Naval Air Test Center, I was the only pilot who was duel qualified in two aircraft as a Flight Examiner. I have flown complex combat and R,D,T,& E flights though out the world, therefore, I disagree with your comment that I believe was designed to be demeaning. I was just wondering...what's some of your flight experience since I'm typing this from the {removed by Moderator - please do not post security related infomation}?

Best regards,

Chip

 

[ZMAN777]

Chip,

I'm jabbing my finger in your chest because you put out statements like I've pointed out knowing fully well only in the most extreme circumstances would UAL ever consider selling the Pacific. It's akin to U selling off PHL. That's why I said "get a grip". Come on Chip, be realistic. Yes, it is a possibility albeit an extremely unlikely one. I'll venture you this....UAL will sell it's Pacific routes the same time U sells off both PHL and CLT. Sound likely? Of course not. So why bother expending the effort to even hammer the keyboard with such nonsense?

Regarding my flight experience, I think my credentials speak for themselves:

F-4C/D/E models (Two PACAF tours at both Kadena and Osan AB)
F-5E/F Aggressor Pilot/Instructor (Clark AB/Nellis AFB)
MiG-21/MiG-23 Project Pilot 4477TES Nellis AFB
F-15C Mission Commander/IP (Langley AFB)

I consider that the important stuff. Oh yeah, I fly airline stuff as well. (Yawn!)
Nuff said!

Cheers,

Z B)

 

[767jetz]

Woooaaahhhh! This is turning into a pi$$ing contest now! Next we're going to hear who has the bigger ****!

(I know, Z... he asked for it!)

Chip, I think Z is poking his finger in your chest, not to bash your flying knowledge, just your airline knowledge. Sticking to things east of the Mississippi implies that that is where USAir will stay, that is where your company is, and while you may think you know the inner workings of USAir and be Big Dave's best bud, you know very little about United Airlines, who is a major player west of the Mississippi.

Flying experience aside, I happen to agree with Z.

On a totally different subject, I have reported you to the "Geek Police" and "Mothers Against Nerds." They said that if you use the words "smart aleck" again, they will be knocking on your door.