Ua Reorganization Plan

[Segue]

Subtitled "Are they kidding? Rosy Scenario Prepares United’s Reorganization Plan"

Interesting, fact-based analysis and commentary. Michael Roach asks some very good questions.

Click to "Comments on the United Reorganization Plan"
http://www.roachandsbarra.com

 

[AC AA LA FA]

Subtitled "Are they kidding? Rosy Scenario Prepares United’s Reorganization Plan"

Interesting, fact-based analysis and commentary. Michael Roach asks some very good questions.

Click to "Comments on the United Reorganization Plan"
http://www.roachandsbarra.com

[post="310707"][/post]​

UAL exit plan is a joke, pure fiction.....those poor souls...
exit Glen and co...the sooner the better..

 

[Bear96]

I'm sure when AA goes through Ch.11, they'll do it all perfectly.

 

[Segue]

I'm sure when AA goes through Ch.11, they'll do it all perfectly.

[post="310737"][/post]​

Seriously doubt that. The legacy carriers all have some serous pain to go through to get to where they can compete in this market. The point of Mr. Roach's comments is that there is still a lot of inefficiency in United left to cut out.

 

[Deleted by Moderator]

And now Mr Roach is an expert because he started a carrier that has done so well they needed to merge with another airline to survive? Are THEY kidding?

 

[767jetz]

And now Mr Roach is an expert because he started a carrier that has done so well they needed to merge with another airline to survive? Are THEY kidding?

[post="310762"][/post]​

My thoughts exactly! What makes all these self-proclaimed experts so informed? There are skeptics who have been predicting UA's demise long, long ago, and UA has beaten their expectations at every turn. This is no different.

Tilton and others have been preparing us through internal memos of the attcaks and skepticism that will increase as we get closer to emerging from bankruptcy. Looks like he was right again.

In the end, lets just sit back and see what happens. We'll see who gets the last laugh.

 

[JungleClone]

During Jake Brace's reign, the Finance folks at UA have a reputation for unrealistic revenue projections and assumptions not based on economic reality. However, if their POR was grossly out of whack, it's hard to imagine major banks ponying up rougly $3 billion in debt financing to get UA out of bankruptcy. Then again, this industry seems to be a magnet for people or institutions that love to throw good money after bad.

The REAL fun will begin for all of us once the wave of consolidation hits. It's starting to dawn on this industry that all the current airlines cannot survive and prosper. Not in the current climate. And it looks a lot worse from here, given the trends for the price of oil. So, I think the old military adage of "no battle plan survives the first contact with the enemy" is appropriate here. In other words, UA's POR is basically an exercise in dotting the i's and crossing the t's to get out of Chapter 11. Once exit happens, the landscape will change and UA's plan will have to change with it.

 

[Busdrvr]

UAL exit plan is a joke, pure fiction.....those poor souls...
exit Glen and co...the sooner the better..

[post="310726"][/post]​

At the risk of some ignorant dolt accussing me of being pedantic, this "analysis" illustrates the reason AWA went BK the first time.

So that "Sastal" will understand what I'm talking about, I'll attempt to carefully explain a few things.
A more accurate and reasonable estimation of value is obtained by running a "Monte Carlo" simulation. In short, all of the variables (cost, revenues) are assigned their mean values (in this case, the estimates), then are given a best guess distribution for the simulation (bell shaped curve that takes into account the best and worst case scenarios). Then the numbers are run a good 20,000 times and the mean value is estimated to be the REAL value of the enterprise when discounted back to present dollars. Why is this important? Simply put, it gets rid of the concern over some of the more ignorantly contradictive points of these two failed airline execs.
For example:
"UAL got cheap lease rates, when they expire, they'll surely pay more if the market is stronger."

Then they proudly proclaim that we will likely enter another recession that will change the revenue side.

So which is it? They assume their base reader (which appears to be a few AA F/A's) will believe that all the "worst case scenarios" will happen at the same time. Possible? yes, but so is the second comming after which we'll use our own wings to jet around the world. A real analysis would assign correlations between the variables in the simulation. In laymans terms, if we enter another recession, and yields go down, what is likely to happen to the lease rates on a 15 year old A320? Will they go up? Only if these two clowns start another airline...

Revenue? They attack UAL's revenue projections DESPITE the fact that the best guess is that they are already exceeeding these projections by a LARGE amount. UAL's estimated PRASM increase for 2005 was in the 5% range, while the latest reported month (august) showed an increase of 9%. Somehow I'm not so worried about making 2.1% in an out year.

Even more alarming is their insistance that UAL is relying on an ever increasing share of domestic flying going over to Express. This is simply not true. UAL's Express reliance will soon peak and remain at a constant level, not increase (or at least that's the "plan").

Finally, they attack UAL's plan to forego growth over the next 5 years. Newsflash, UAL gave the banks what they wanted: a no growth, conservative plan that still showed UAL with the ability to pay back the loans. 20 minutes after emergence, UAL will do what UAL sees as the appropriate post BK route. If that is growth, then it will happen (it will).

 

[SVQLBA]

And now Mr Roach is an expert because he started a carrier that has done so well they needed to merge with another airline to survive? Are THEY kidding?

[post="310762"][/post]​

Roach and Sbarra used to be at Unisys where the industry "Scorecards" they wrote were usually pretty good reading.

Whatever their past track record in management, their criticisms of the UA plan I think are very fair. The arguments that are particularly strong are:

1) ridiculously optimistic RASM forecasts (UAL's use of 1990-2000 as a "typical" period is especially convenient and unrealistic)
2) optimistic fuel price forecasts
3) continued belief that the competition and strategic threat is the other legacy carriers, not the LCCs
4) viewing international as a "safe haven" when everyone and their pet dog, not to mention LCC start-ups will be piling into international in the next 5 years

As for Busdrvr's comments -- yup, they (UAL and Sbarra and co) should have done a Monte Carlo analysis. However, it's not at all impossible to have increasing lease rates at a time of decreasing RASM. There are lots of people looking for good used widebody aircraft at the moment (driving up lease rates), but the pricing they'll use when they get those widebodies will drive RASM down. S&R's argument that UAL's RASM improvement was driven by load factor, not yield, and load factor is close to its ceiling is very sound.

S&R argue that UAL is ignoring cyclicality (they are), but that's not why they argue yields/RASM will fall -- they argue it will fall because that's the long-term trend since deregulation. UAL just decided to conveniently base their own plan around the late 90's internet-driven yield blip.

Just to be clear -- UAL has definitely proved a lot more resilient than a lot of the critics thought, and much of the criticism has been simplistic (e.g., Boyd's criticism of Ted). However, S&R do raise some good points regarding the assumptions in the business plan.

 

[Busdrvr]

1) ridiculously optimistic RASM forecasts (UAL's use of 1990-2000 as a "typical" period is especially convenient and unrealistic)

Keep in mind, much of the trend of late was driven by LCC's with significantly lower costs. Now, Jblew is talking about losing money during a Q that UAL and CAL will likely report modest operating proifits (if not net after re-org expenses). the "downward pressure" from the LCC's appears to be on the verge of going away, and with it at least one more LCC (IAIR)

2) optimistic fuel price forecasts

Personally, I don't think they are optimistic. Spend some time looking at BP's spreadsheet of energy consumption and prices over the last 30 years and a clearer picture of the current dynamics can be seen. $3 a gallon gas was the slap in the face that has appeared to change behavior. And a lower price a year from now won't drive demand back up to past levels (assymetric price elasticity of oil). I've also seen the numbers and models of one of the more accurate consultants. I think 50 is reasonable if not high for a 5 year window.

3) continued belief that the competition and strategic threat is the other legacy carriers, not the LCCs

It will be if the current belief that merger mania will overtake the industry comes to fruition.

4) viewing international as a "safe haven" when everyone and their pet dog, not to mention LCC start-ups will be piling into international in the next 5 years

This I actually agree with to a point. The dollar is now at what I consider a parity and long term equilibrium value. Idiotic short term oriented policies of the treasury secretary can change that (Rubin), as could increased interest rates to quash inflation, putting us at a disadvantage vs our foriegn friends. It is of not that they cited CAL's internation expansion in the article intimating that we all can't expoand, while failing to realize all of CAL's proposed new markets are ones UAL doesn't compete in. There is a pretty big Int pie, with enough goodies for the US legaices to split for now. As to LCC entry, where? London? The LCC international markets arguably already have LCC traffic (Virgin At.)

However, it's not at all impossible to have increasing lease rates at a time of decreasing RASM. There are lots of people looking for good used widebody aircraft at the moment (driving up lease rates),

Not impossible, just unlikely. Just as the chances that a 10 year old 777 will see it's value increase in 5 years as the 787 enters the market. Don't hold your breath on that one. In valuating the entity, one must look at the LIKELY scenarios with an eye to the possible, not the other way around.

S&R's argument that UAL's RASM improvement was driven by load factor, not yield, and load factor is close to its ceiling is very sound.

so you are suggesting that UAL's August load factors went up 9% to account for the 9% increase in RASM..... I'll have to recheck those numbers.... Maybe that's one of the reason that UAL projects declining RASM growth after next year. Maybe they've factored that in.

Nice response though SVQBA. Glad to see someone around here capable of criticising UAL with some arguments that are well crafted and have merit vs the typical evil empire response of "UAL sucks" and "sky Nazi's rule"

 

[TechBoy]

Busdrvr,

Generally agree with your analysis, but I think you're a bit off on the International point. UA does compete for traffic in the new CO markets via the LH codeshare. It may not be the biggest competitor, but the extra seats are competing for the fairly stable number of premium fares over the pond. If every legacy is planning on growing international faster than the market is growing, somebody is going to be out of luck when the music stops. UA competes fairly well against the US legacies in international, but not that much better.

Also, I can't imagine calling Virgin a LCC. Every UA FA should be required to fly in Upper Class once to see how it should be done. I have no doubt that Virgin commands a revenue premium over UA.

Otherwise, I think that UA will make it. They have removed lots of costs. Even to the point of making way too many transcons on the 319. :-(

 

[SVQLBA]

1) ridiculously optimistic RASM forecasts (UAL's use of 1990-2000 as a "typical" period is especially convenient and unrealistic)

Keep in mind, much of the trend of late was driven by LCC's with significantly lower costs. Now, Jblew is talking about losing money during a Q that UAL and CAL will likely report modest operating proifits (if not net after re-org expenses). the "downward pressure" from the LCC's appears to be on the verge of going away, and with it at least one more LCC (IAIR)

Whatever jetBlue's, AirTrans' Frontiers troubles in the short term, the expansion of the LCCs will continue. Just look at how yields have fallen in Europe and traffic has developed as Ryanair, easyjet and others have expanded. WN created the blueprint, but Europe shows us how far this may go. Yes -- there are differences. The point is, just because B6 may not make a net profit for a few quarters (how long has it been since UAL made an honest-to goodness net profit?), it doesn't mean the LCC threat is diminishing.

You only have to look at the aircraft delivery schedules -- all those 73NGs and A320s will be going somewhere.

2) optimistic fuel price forecasts

Personally, I don't think they are optimistic. Spend some time looking at BP's spreadsheet of energy consumption and prices over the last 30 years and a clearer picture of the current dynamics can be seen. $3 a gallon gas was the slap in the face that has appeared to change behavior. And a lower price a year from now won't drive demand back up to past levels (assymetric price elasticity of oil). I've also seen the numbers and models of one of the more accurate consultants. I think 50 is reasonable if not high for a 5 year window.

You could well be right but how quickly will demand drop or supply increase to drop prices by $15-20 per barrel? I don't see what there is that could trigger such a near term drop, even if in the long term prices will draw back. However, the UAL business plan is avg $50/brl in 2006 (of R&S are right).

3) continued belief that the competition and strategic threat is the other legacy carriers, not the LCCs

It will be if the current belief that merger mania will overtake the industry comes to fruition.

True ... there's a lot of excess hub capacity and consolidation of the hub and spoke system would allow up-gauging (hence lower unit costs) while maintaining, mostly, overall service levels. But who will be able to drive the current 6 legacy carriers (AA, CO, DL, NW, UA, LCC) into, say, just 3? (3 seems to be the accepted end-state number of H&S carriers.) And the LCC threat will still be there for the survivors.

4) viewing international as a "safe haven" when everyone and their pet dog, not to mention LCC start-ups will be piling into international in the next 5 years

This I actually agree with to a point. The dollar is now at what I consider a parity and long term equilibrium value. Idiotic short term oriented policies of the treasury secretary can change that (Rubin), as could increased interest rates to quash inflation, putting us at a disadvantage vs our foriegn friends. It is of not that they cited CAL's internation expansion in the article intimating that we all can't expoand, while failing to realize all of CAL's proposed new markets are ones UAL doesn't compete in. There is a pretty big Int pie, with enough goodies for the US legaices to split for now. As to LCC entry, where? London? The LCC international markets arguably already have LCC traffic (Virgin At.)

Agree to an extent. Yes, it's a big international pie. But, don't believe that CO flying, e.g., EWR-Bristol won't be draining some traffic away from UA's JFK-LHR route. It's classic fragmentation. UA has, IMO, been far too hub-centric in its international route development, especially in Europe.

Also, whether the service gets added to secondary cities or hubs, the additional capacity will be bound to dilute yields.

International LCCs: MaxJet pulled a last-minute change and is going with an all business service, rather than the transatlantic LCC originally proposed. We'll see if they stick with that. London-NY area is the prime market for an LCC, but there are others with enough volume. Virgin Atlantic is very price competitive at the upper end but not exactly an LCC at the low end. Not exactly a transatlantic LCC.

However, it's not at all impossible to have increasing lease rates at a time of decreasing RASM. There are lots of people looking for good used widebody aircraft at the moment (driving up lease rates),

Not impossible, just unlikely. Just as the chances that a 10 year old 777 will see it's value increase in 5 years as the 787 enters the market. Don't hold your breath on that one. In valuating the entity, one must look at the LIKELY scenarios with an eye to the possible, not the other way around.

I agree - partly: the more likely scenario is that lease rates and int'l RASMs will fall (as hulls get added to the fleet). However, with supply constrained (not many parked 763s these days, US carriers not able to afford 777s) lease rates are holding up. Yes, int'l RASMs in some areas are going up but I think the last set of monthly and quarterly results showed that where carriers have piled in with lots of new capacity, RASM is flat to decreasing.

S&R's argument that UAL's RASM improvement was driven by load factor, not yield, and load factor is close to its ceiling is very sound.

so you are suggesting that UAL's August load factors went up 9% to account for the 9% increase in RASM..... I'll have to recheck those numbers.... Maybe that's one of the reason that UAL projects declining RASM growth after next year. Maybe they've factored that in.

RASM improvement (for all the legacies) over the last 1-2 years has been a mix of yield and l.f., and this year has seen some yield improvement. However, looking over the last 2 years as a whole, the majority of the RASM change has been driven by the 5-10% or so increase in average l.f.

Nice response though SVQBA. Glad to see someone around here capable of criticising UAL with some arguments that are well crafted and have merit vs the typical evil empire response of "UAL sucks" and "sky Nazi's rule"

[post="310821"][/post]​

Happy to have a good discussion. UAL's doing a number of things right (especially around operational execution, marketing is improving, etc.) but, to me, its depressing that their strategic view (as evidenced by the POR) is still as blinkered as it was pre Ch.11 (remember the Dutta "strategic" study -- the only problem with UAL is that we are high cost?) It may get them the exit financing, but ignoring the strategic issues won't benefit them long-term

 

[Busdrvr]

The point is, just because B6 may not make a net profit for a few quarters (how long has it been since UAL made an honest-to goodness net profit?), it doesn't mean the LCC threat is diminishing.

I disagree. The one constant over the last 20 years is that the costs at the SWA and Blews of the world were significantly lower than UAL's. It ain't entirely so anymore.

You only have to look at the aircraft delivery schedules -- all those 73NGs and A320s will be going somewhere.

The same place as all those jets on UAL's delivery schedule on Sept 10 2001?

You could well be right but how quickly will demand drop or supply increase to drop prices by $15-20 per barrel? I don't see what there is that could trigger such a near term drop, even if in the long term prices will draw back. However, the UAL business plan is avg $50/brl in 2006 (of R&S are right).

In the past week to two weeks, the price of wholesale unleaded gas has droped by close to 70 cents, representing a drop of close to 25%. The catalyst? a drop in YOY demand for gas following the price spike. Things are finally turning WRT gas.

RASM improvement (for all the legacies) over the last 1-2 years has been a mix of yield and l.f., and this year has seen some yield improvement. However, looking over the last 2 years as a whole, the majority of the RASM change has been driven by the 5-10% or so increase in average l.f.

I disagree. I don't think the last 5% of LF, sold at bargain basement internet prices, have done much for the margins. I'd be surprised if that last 5% counted for more than a 2.5% jump in RASM. Additionally WRT yields over the next 5 years, I think one of the more shallow notions of those two yahoo's is the prediction that yields will continue in the downward direction of much of the 90's. This seems to look at the notion that the bottom is zero, not that the bottom is the level that the cheapest player can add capacity at. IOW, if JBLEW could add capacity at cost levels (real cost, not the current creative accounting of honest Dave) lower than the rest of the industry, they would, and yields would naturally go down as a result. Flash forward to today, when we've pretty much hit the point where NOBODY, without the help of INVESTMENT income (hedges), can add capacity at a cost lower than the current yields. The downward pressure will abate, and yields will change direction and increase with the costs of the cheapest players in the industry.

its depressing that their strategic view (as evidenced by the POR) is still as blinkered as it was pre Ch.11 (remember the Dutta "strategic" study -- the only problem with UAL is that we are high cost?) It may get them the exit financing, but ignoring the strategic issues won't benefit them long-term

The story from a UAL Captain goes that he had Dutta on a flight (in first of course) during the glory days, and while talking to the crew before flight he got a young flight attendant pretty excited when he proclaimed that UAL needed to be the third largest Airline in the U.S. That was until the Capt explained to the F/A that UAL was currently the largest... Thanks for reminding me why I hate most MBA's....
I agree with your assessment of strategic vision. My only remark is that all those who've I've heard from who have talked to (or been talked to) by Glenn state that the strategic vision is prefaced with a wink and a nod. Another common theme is "payback time". I think the employees have no choice but to be optimistic and hope that the long term plan is NOT the POR.

 

[TechBoy]

In the past week to two weeks, the price of wholesale unleaded gas has droped by close to 70 cents, representing a drop of close to 25%. The catalyst? a drop in YOY demand for gas following the price spike. Things are finally turning WRT gas.

Huh? I want to start buying gas where you do. I just checked the NYMEX charts and gas is down about 30 cents from its peak.

 

[FWAAA]

Huh? I want to start buying gas where you do. I just checked the NYMEX charts and gas is down about 30 cents from its peak.

[post="311155"][/post]​

Busdrvr is correct. You appear to be confusing pump prices with wholesale futures prices.

Wholesale gasoline futures hit a peak of $2.92/gallon on Aug 31, and last week dropped below $2/gallon. Actually, Busdrvr understated the magnitude of the drop.

Gasoline for November delivery fell 8.97 cents, or 4.4 percent, to $1.9725 a gallon in New York. Futures touched $1.965, the lowest for a contract closest to expiration since Sept. 26. Prices reached a record $2.92 a gallon on Aug. 31. Futures are 48 percent higher than a year ago. Gasoline has the biggest move of any commodity today.

http://quote.bloomberg.com/apps/news?pid=1...5pQ4&refer=home

Gasoline for November delivery rose 0.69 cent, or 0.4 percent, to $1.8075 a gallon in New York. Prices are down 23 percent during the eight sessions through yesterday and have dropped 38 percent from a record $2.92 reached on Aug. 31.

Pump Prices

Pump prices haven't fallen as much as futures. Regular gasoline averaged nationwide during the last three days fell 1.4 cents $2.871 a gallon. Prices are down 6.1 percent from the record $3.057 a gallon on Sept. 2, according to the AAA, the nation's largest motoring organization. Retail prices are 46 percent higher than a year ago.

http://www.bloomberg.com/news/markets/energy.html

Wholesale gasoline futures have dropped like a rock since Labor Day. Too bad JetA hasn't tracked alongside; Jet fuel is still very expensive.