Private Investor May Hit UAL's Pensions
Christopher Steiner, 06.23.04, 6:30 PM ET (Forbes)
CHICAGO - As United Airlines hastily scrambles to throw together a third application for government aid, it's become clear that the airline will require a private-equity investor to exit bankruptcy.
Three questions remain: Who? How much? And what kind of concessions will the outside investor demand?
The amount of private capital that United Airlines' parent UAL (otc: UALAQ - news - people ) requires could be as little as $500 million, if the Air Transportation Stabilization Board agrees to United's latest proposal, which calls for $1.1 billion in government loan guarantees, down from its two previously rejected requests of $1.8 billion and $1.6 billion, respectively.
Most analysts, however, suspect that United's latest application will be rejected, leading to a loss of big bank loans and forcing Chief Executive Glenn Tilton to search for up to $2 billion in private capital.
Such an amount narrows the number of possible lenders. Two of the most-often mentioned, David Bonderman's Texas Pacific Group and David Bronner's Retirement Systems of Alabama, are likely out.
A source close to Texas Pacific Group says there is little current interest in a United investment.
Bronner, who heads the pension fund that injected $240 million into US Airways (nasdaq: UAIR - news - people ) to get that carrier out of bankruptcy in March 2003, says he's staying out of this one as well.
"I'm not sure who would want to play now," he says. "They're a great airline, but they have to get costs under control. Especially the pensions; you're talking billions there."
Ah. The pensions.
The six legacy carriers are saddled with more than $20 billion in pension deficits. United's tab of $6.2 billion is the largest.
In addition to demanding board seats and a large amount of control in the airline, an outside investor's primary cost-cutting concern will be the unwieldy pension-deficit bills, which will cost United more than $4 billion over the next five years.
Since falling into Chapter 11 after its first rejection for aid from the Air Transportation Stabilization Board in December 2002, United's management has been loath to consider relinquishing any control in the carrier in exchange for capital. They'll have to change their tune to get the kind of money they need.
Big banks like Citibank (nyse: C - news - people ) and J.P. Morgan Chase (nyse: JPM - news - people )--the banks that were lined up to give United $1.6 billion in government-backed loans--likely won't consider forking over cash sans government guarantees.
Pension costs are one of the primary cost-structure differences between the legacies and low-cost carriers such as Southwest Airlines (nyse: LUV - news - people ), Jet Blue Airways (nasdaq: JBLU - news - people ), AirTran Holdings (nyse: AAI - news - people ) and Frontier Airlines (nasdaq: FRNT - news - people ).
Pensions threaten to drag all of the major carriers into Chapter 11. AMR's (nyse: AMR - news - people ) American Airlines almost plunged into bankruptcy a year ago and Delta Air Lines (nyse: DAL - news - people ), weighed down by a pension deficit of $5.7 billion, has warned that it may be faced with bankruptcy later this year.
Already having succumbed to Chapter 11, United will now have to do something similar to what US Air did before exiting bankruptcy: terminate its defined-benefit pension plans. Doing so will eliminate $820 million in annual costs and free up desperately-needed cash flow.
But it will also agitate a fragile relationship with labor, perhaps eroding recent gains United has made in customer service and on-time performance, in which United ranked No. 1 during the month of April.
United's pilots choose to think that chopping the pension plans isn't necessary, but concede that much depends on the private investor bringing the cash.
"We could be dealing with Attila the Hun, we could be dealing with Santa Claus," said Steve Derebey, a United 737 pilot and spokesman for the United chapter of the Air Line Pilots Association. "It's all speculation right now."
What's not speculation is that United's costs remain too high. The airline's cost per available seat mile of 10.18 cents remains 30% to 40% higher than that of the low-cost carriers. As high as that number is, it doesn't reflect pension obligations.
With younger, more agile low-cost carriers pulling down fares, and fuel prices expected to cost United $750 million more than it had planned for the year, the airline needs to wrestle down costs that are under its control. The glaring and easy cost cut remains the airline's pension plan.
Unlike Tilton thus far, a private equity investor won't hesitate to break out the scissors.
Christopher Steiner, 06.23.04, 6:30 PM ET (Forbes)
CHICAGO - As United Airlines hastily scrambles to throw together a third application for government aid, it's become clear that the airline will require a private-equity investor to exit bankruptcy.
Three questions remain: Who? How much? And what kind of concessions will the outside investor demand?
The amount of private capital that United Airlines' parent UAL (otc: UALAQ - news - people ) requires could be as little as $500 million, if the Air Transportation Stabilization Board agrees to United's latest proposal, which calls for $1.1 billion in government loan guarantees, down from its two previously rejected requests of $1.8 billion and $1.6 billion, respectively.
Most analysts, however, suspect that United's latest application will be rejected, leading to a loss of big bank loans and forcing Chief Executive Glenn Tilton to search for up to $2 billion in private capital.
Such an amount narrows the number of possible lenders. Two of the most-often mentioned, David Bonderman's Texas Pacific Group and David Bronner's Retirement Systems of Alabama, are likely out.
A source close to Texas Pacific Group says there is little current interest in a United investment.
Bronner, who heads the pension fund that injected $240 million into US Airways (nasdaq: UAIR - news - people ) to get that carrier out of bankruptcy in March 2003, says he's staying out of this one as well.
"I'm not sure who would want to play now," he says. "They're a great airline, but they have to get costs under control. Especially the pensions; you're talking billions there."
Ah. The pensions.
The six legacy carriers are saddled with more than $20 billion in pension deficits. United's tab of $6.2 billion is the largest.
In addition to demanding board seats and a large amount of control in the airline, an outside investor's primary cost-cutting concern will be the unwieldy pension-deficit bills, which will cost United more than $4 billion over the next five years.
Since falling into Chapter 11 after its first rejection for aid from the Air Transportation Stabilization Board in December 2002, United's management has been loath to consider relinquishing any control in the carrier in exchange for capital. They'll have to change their tune to get the kind of money they need.
Big banks like Citibank (nyse: C - news - people ) and J.P. Morgan Chase (nyse: JPM - news - people )--the banks that were lined up to give United $1.6 billion in government-backed loans--likely won't consider forking over cash sans government guarantees.
Pension costs are one of the primary cost-structure differences between the legacies and low-cost carriers such as Southwest Airlines (nyse: LUV - news - people ), Jet Blue Airways (nasdaq: JBLU - news - people ), AirTran Holdings (nyse: AAI - news - people ) and Frontier Airlines (nasdaq: FRNT - news - people ).
Pensions threaten to drag all of the major carriers into Chapter 11. AMR's (nyse: AMR - news - people ) American Airlines almost plunged into bankruptcy a year ago and Delta Air Lines (nyse: DAL - news - people ), weighed down by a pension deficit of $5.7 billion, has warned that it may be faced with bankruptcy later this year.
Already having succumbed to Chapter 11, United will now have to do something similar to what US Air did before exiting bankruptcy: terminate its defined-benefit pension plans. Doing so will eliminate $820 million in annual costs and free up desperately-needed cash flow.
But it will also agitate a fragile relationship with labor, perhaps eroding recent gains United has made in customer service and on-time performance, in which United ranked No. 1 during the month of April.
United's pilots choose to think that chopping the pension plans isn't necessary, but concede that much depends on the private investor bringing the cash.
"We could be dealing with Attila the Hun, we could be dealing with Santa Claus," said Steve Derebey, a United 737 pilot and spokesman for the United chapter of the Air Line Pilots Association. "It's all speculation right now."
What's not speculation is that United's costs remain too high. The airline's cost per available seat mile of 10.18 cents remains 30% to 40% higher than that of the low-cost carriers. As high as that number is, it doesn't reflect pension obligations.
With younger, more agile low-cost carriers pulling down fares, and fuel prices expected to cost United $750 million more than it had planned for the year, the airline needs to wrestle down costs that are under its control. The glaring and easy cost cut remains the airline's pension plan.
Unlike Tilton thus far, a private equity investor won't hesitate to break out the scissors.