Private Investor May Hit Ual's Pensions

Schwanker

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Dec 20, 2002
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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.
 
"I'm not sure who would want to play now,"

That statement should scare the pants off every United employee. Time will tell but United's unwillingness to make even bigger cuts earlier may severely damage UAL's ability to restructure and exit bankruptcy. As other airlines restructure their costs, it becomes less and less compelling for anyone to invest in UAL.

There is no doubt that the events of the past couple days should also cause DL and NW's employees to rethink their willingness to work with their company.
 
United's unwillingness to make even bigger cuts, hmmm.... you mean United's un willingness to cede more market share than it already has. The cost side will continue to improve and we will be below AMR in cost after this quarter IMHO.

We are currently under the same attack we have been for the last couple of years at UAL, so no we are not scared. Just resolute to bring the competitive fight to all others who are so eager to take our jobs and our customers away.


JB Buppy
 
I've posted over and over since the UAL filing that it was obvious that some private equity investment would be required - apparently I was right.

Nobody in their right mind would loan a couple billion to a bankrupt company without an equity infusion.

None of my clients has ever succeeded in garnering big bank loans without risking some of their own money.

Let's hope UAL can find the equity capital and that it doesn't come at too big a price.
 
OH, Come on guys...it's only the pensions. Once we shed that we're "lean and mean"...where are my cheerleaders??? You DO want the lazy U to soar with the eagles now don't you...come'on, jump right up, lets take one for the gipper...
remember...a pilot is a terrible thing to waste :D
 
I just don't want to see any more employees lose their pensions. This is out of control. In order to save your job, you have to give up what you worked to save up for so you could retire, now you can't retire because your pension is gone, but you don't know if you will have a job. Talk about a dog chasing its tail. Just my thoughts and good luck to all............
 
This sounds like the ideal scenario for Carl Icahn to step in......and he sure knew how to "fix" TWA's pension problems.......
 
WorldTraveler said:
"I'm not sure who would want to play now,"

That statement should scare the pants off every United employee. Time will tell but United's unwillingness to make even bigger cuts earlier may severely damage UAL's ability to restructure and exit bankruptcy. As other airlines restructure their costs, it becomes less and less compelling for anyone to invest in UAL.

There is no doubt that the events of the past couple days should also cause DL and NW's employees to rethink their willingness to work with their company.
Interesting..... I had thought of this reasoning, myself.... and posted as much in a compare and contrast U's fast and furious strategy v. UAL's deliberate and plodding strategy. Could it be that the industry (at the time, I was thinking more 'economy') change so much as to make UAL irrelevant to creditors and the equity market? Has it?