Significant Layoffs

[UnitedChicago]

Speedbird:

You know...I'm a glass-half-full kind of guy. Yes the information is grim. But, I don't think the people of Untied should just give up at this point or become "experts" in their chances of survival.

I'm sure that the banks that provided the DIP financing were well versed on the loses that were coming. Yet, they still provided the funding.

In terms of how the results tie into the "cash flow positive" figures...the calculation is extremely complex. Obviously we do not even have half the facts. So any analysis by any of us - including analysts - is pure speculation.

Again - I completely realize the serious situation UA is in, but I'll be damned if I'm going to start calling my class half-empty and give up on UA.

I am extremely curious about what AA's loss is going to be for the year. I bet they're not to far away from UA's.

I'm flying next week to SFO...can't wait!

 

[Speedbird]

UnitedChicago:

I really admire you for your staunch support of United Airlines. But, these latest revelations from the BK court proceedings are very bad, and put this airline on deathwatch. You can spin the reports however you like, but the odds of this airline coming out of bankruptcy are shrinking at an alarming rate.

People talk about fuzzy math and the accounting methods of US companies all the time. But UAL had to present the "facts" to the BK judge yesterday without putting any lipstick on the pig.

The numbers (losses & projections) are truly devastating. Additionally, these numbers not adding up with what has been stated by the company and the DIP committee regarding target financial improvements for 2003, in order to secure additional DIP funding (even with the labor cost cuts).

It doesn't take a rocket scientist to figure out where this is going, without some kind of supernal intervention. I don't need to quote Boyd on this one.

 

[UnitedChicago]

Speedbird:

First of all, Boyd is a sensationalist...so don't take what he says at face value. Labor is BY FAR UA's largest cost.

Second, UAL has NOT reversed course in opposing State Street's sale. That article states that State Street simply filed with the SEC to sell the stock - a required step. They are still not allowed to sell under the judge's temporary injunction. UA has not reversed course.

 

[N421LV]

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Again - I completely realize the serious situation UA is in, but I'll be damned if I'm going to start calling my class half-empty and give up on UA.

I am extremely curious about what AA's loss is going to be for the year. I bet they're not to far away from UA's.

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Sounds like his AA glass is half-empty.

 

[UnitedChicago]

Speaking of AA 🙂

As I stated...I bet AA's loss will compare to UA's. Here's a quote from the WSJ in an article related to AA's layoff announcement:

American's parent company, AMR Corp. (AMR), lost nearly $3 billion in the first nine months of 2002.

Obviously UA is in more dire straights...but AA is not that far behind. I don't think people realize that.

 

[sfb]

How does the company lose $3 billion on $15 billion in revenue?

* They continue to pay pilots at a wage level which was barely workable at the inflated revenue levels enjoyed by the company in 1999-2000.
* They agree to a substantial pay raise for IAM-represented employees, even while the company was already losing millions per day.
* They continue to be stuck with leases and/or depreciation on aircraft which are parked in the desert.
* They continue to have as large a debt burden as they had before the economy went south, without the revenue and profit stream to offset the cost of that debt.
* Most of the laid-off employees were the ones with the least seniority, and thus the lowest pay rates. Laying off 20% of the company doesn't reduce labor expense by 20%.

Compare the first half 2002 numbers with the same numbers for 2001. Fuel expense was down dramatically thanks to lower oil prices and less flying. Maintenance (materials) was down over 25% due to less flying and the retirement of old planes. Commissions were way, way down, with fewer tickets and cuts in commissions paid. Even purchased services (I'm assuming catering and similar) were down better than capacity at a 20% drop. But wages only fell by about 10% (versus an over 18% decrease in headcount), what with higher average seniority and things like training float for the pilots. Landing fees and rents went up since, basically, airports raised landing fees and rents to make up for declines in traffic. DEN still needs to be able to service its bonds, after all. Depreciation didn't drop much because those parked planes still have to be depreciated, even if they're not flying. And aircraft rent stayed nearly constant since the company wasn't able to just drop its leases (at least, before Chapter 11).

With a 22% drop in revenue (driven both by a 14% drop in RPM's and an 11% drop in yield), but a drop in costs of only 17%, the company did very poorly -- especially given that 2001's results were also dreadful. To put it another way, even with MUCH lower fuel prices (nearly 20% lower), dramatically lower commission costs, and lower maintenance costs due to older planes being parked, the company's ASM cost STILL increased slightly.

In the 3rd quarter of this year, labor expense was 49% of total revenues; fuel was 14%, aircraft rent and depreciation together were 12% of revenues. The operating margin was -17%. Even with free planes or free jet fuel, the company would be losing money.

How do you fix it all? Well, the airlines haven't been too successful in raising fares. So, if you can't improve revenue, you need to either cut unprofitable capacity or cut the cost of providing that capacity. The first equals layoffs while the second equals paycuts. You're not going to get any special breaks on fuel prices, and even cutting aircraft lease expense in half only reduces operating costs by about 2.5%. On landing fees and leases at airports, you're stuck with what the airport is charging -- and the relevant authorities need to meet their bond payments (they'd also likely face legal action if they gave United price breaks over other airlines).

There's still a lot that's broken in the business model. Without decisive (and, unfortunately, painful) action in the short term, United will be out of business in three months. The pilots and FA's have seen the numbers; I think that's why they jumped on board as quickly as they have.

 

[UnitedChicago]

sfb:

Excellent post!

 

[Diversion]

Nice post, sfb. I tend to agree with your bottom line assessment of UAL's future, liquidation is appearing to be a more likely outcome every day. I certainly don't envy anyone facing these tough times at United right now.[BR][BR]Here's hoping that 2003 will bring a brighter future for the airline industry.[BR][BR]

 

[G4G5]

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On 12/31/2002 3:29:34 PM UnitedChicago wrote:

Speaking of AA 🙂

As I stated...I bet AA's loss will compare to UA's. Here's a quote from the WSJ in an article related to AA's layoff announcement:

American's parent company, AMR Corp. (AMR), lost nearly $3 billion in the first nine months of 2002.

Obviously UA is in more dire straights...but AA is not that far behind. I don't think people realize that.
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While I admit that things are bad at AA they aren't nearly as bad as UAL's difficulties.

Let's be realistic having 3 CEO's in a year and a half didn't help. I would trust AA's mgt team over any other major(Crandel is only a call away). Let's be honest AA's financial house is in much better shape, I could go about the details if you want.

Their is one thing you have not considered.

When/IF UAL winds up CH7 in 2003, the current aviation infastructure could absorb the extra capacity and as most analysts feel it could be considered a financially health move for the industry(remember the ATSB loans were not established to keep the status quo, jungle rules apply). NWA to Asia, AA to Latin/South America, Delta to Europe and the LCC for the greater 48, their are options. But GWB would be hard pressed to let the number one carrier go CH7 right after the number two.He fully realizes that this would have an adverse effect on the industry, current system capacity could not replace one and two going under together(or 2 and 3, or 2 and 4). More importantly, the ramp up time to replace the capacity would hinder his economic recovery plan even further. Not something he want's to be looking at come 2004, an election year. At that point he would have to step in(a la Chrysler).

So while AA balance sheet may not be that of IBM's, so what? All AA has to do is outlast UAL. Given UAL's current situtation, what do you think? So, enough with the grim AA talk.

 

[Busdrvr]

SFB,
1. If fuel was 12% and deprec and jet rent totaled 14% while operating losses were 17%, please explain how 17% is greater than 26%.

2. UALs labor cost as a percentage of total costs was somewhere in the middle of the pack. In other words, IT IS A REVENUE PROBLEM. If you put only ONE seat on a jet, then it follows you will likely have trouble getting adequate revenue for that seat. Likewise when you put 10 less seats than NWA and 24 less seats than JBlu on an A320, it's tough to get enough of a premium on the remaining seats to be profitable.

3. Pull out your calculater and run the numbers using the 3rd Q numbers and cash burns reported by Glenn. I'll think you'll come to the conclusion that UAL will have a significant level of special chargesd to get to that 3 billion number. Expect a significant impairment on the value of the 19 year old 767-200 that are being permanately parked (only in NYC LaLa land can a 25 year old NB jet still have 20% of it's value...) a bigger hit on the 747-400s and some other non-cash items (maybe the 1.2 billion (at cost)in treasury stock that is worth about 35 million at todays prices) and a charge for pension liability.

4. The latest proposed paycuts were suggested BY THE COMPANY< NOT THE UNIONS. The amounts requested are projected to meet ALL the DIP requirements PLUS a little bit extra (100 million) in case things slow down a little. If the IAM plays ball, the DIP requirements WILL be met. as a matter of fact, we nearly met the DIP requirements THIS year (prior to the revenue falloff from the potential of BK filing.) Most analyst think next year will be significantly better.

 

[Rhino]

Busdvr, SFB said free rent OR fuel.

The fact that UAL labor costs are in the middle of the pack in terms of % means nothing.

Operating losses don't include one-time special charges usually.

It's almost unbelievable how the UAL situation got so bad so fast. Hope things stabilize and that you're right about being able to meet DIP requirements.

 

[Tango-Bravo]

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On 12/31/2002 8:42:20 PM Busdrvr wrote:

2. UALs labor cost as a percentage of total costs was somewhere in the middle of the pack. In other words, IT IS A REVENUE PROBLEM...
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Busdrvr:

Finally, a point on which we agree! But why the revenue problem for the likes of UA, US and AA? Can't begin to recall all the times you've stated your case for the worlds-apart superiority of the product offered by the Big Six airlines compared to WN and B6.

Seems to me that pax should happily pay a hefty premium for all the perks and frills offered by UA et al. That, unfortunately, is where the real world gets in the way. Since it's a proven axiom that money talks, perhaps the lack of pax who are willing to pay more money to fly with "full-service" airlines is telling us a story quite different from yours about the product offered by the Big Six.

 

[NewHampshire Black Bears]

UnitedChicago;

Sincere thanks for the vote of confidence regarding my true feeling about UALs current position.
A day does'nt go by, that I'm not horrified at what you guys/gals are dealing with.

Working for AA, I've learned to accept our historical good luck, no matter at who's expense it has come by.

BUT, and it's a big BUT,
this is one time that I don't want to enjoy good luck, from UA's misfortunes. Not at this potential magnitude !!

You guys are NOT an EA or BN, or an old and sick PA.

As a big NY Yankees fan, I try to keep in mind ol' Yogi Berra's famous words. "It ain't over, till it's over"

With all fingers crossed, hang in there.
Hopeing 2003 brings some relief !!!!!!

NH/BB's
AA

 

[kcabpilot]

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On 12/31/2002 1:57:12 PM UnitedChicago wrote:

You know...I'm a glass-half-full kind of guy.

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Half-full (or empty) only pertains to an instant in time. If you blink and there is less in the glass than there was before - it is no longer half-full.

If United is going to survive then management has to abandon this assault on the employees. They could try ASKING for our help - that would probably work.

They could also try getting rid of 25 or 26 of those sideline corporations that are sucking the life out of this company. It's no wonder they can't produce the figures - they have no idea where all the money is going.

 

[Busdrvr]

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On 1/1/2003 4:46:22 AM kcabpilot wrote:

If United is going to survive then management has to abandon this assault on the employees. They could try ASKING for our help - that would probably work.

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Where have YOU been. They've been "asking" you for over a year.