UA Update & US/Industry Thoughts



[P]Exjetgurl, thanks for the correction. Oooppps, I meant the Ocotober 23-24 board meeting.[/P]
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[P align=justify][FONT face=Times New Roman size=5]Rueters Report[/FONT][BR][BR][FONT face=Times New Roman size=3]NO TIME TO WASTE [/FONT][BR]
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[FONT face=Times New Roman size=3]Discussions with individual coalition members to finalize their component of the $5.8 billion are moving forward, but at varying paces, Chief Financial Officer Jake Brace said in a statement. These discussions need to be brought to a quick resolution to achieve our common goal.[/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]UAL, which has warned of a possible autumn bankruptcy, said the third-quarter net loss amounted to $15.57 per share, compared with a net loss of $1.2 billion, or $21.43 a share, a year earlier. Revenue fell 9 percent to $3.7 billion. Before special items, the per-share loss was $8.82. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]There is no question that United continues to suffer from the financial challenges that plague our entire industry, the airline's new Chief Executive Glenn Tilton said in a statement. But he added, At this point, nobody should consider a Chapter 11 filing inevitable. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]PILOTS UPBEAT [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]A pilots union official said he believed the savings outlined Friday would be enough to pull United out of its financial crisis. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]When finalized these historic employee sacrifices will stabilize the company and permit United to access critical lending through the ATSB and the general capital markets, said ALPA official and UAL board member Paul Whiteford. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]The International Association of Machinists has been the most outspoken in its belief that pay cuts may not be needed. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]However, on Friday, an IAM spokesman said ongoing talks with management about participating in the $5.8 billion in labor savings were progressing well. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]UAL shares traded in a wide range on Friday, at one point dropping nearly 20 percent to $1.42 -- its lowest level in decades. Later, the stock recovered as word of the unions' deal spread. They were unchanged at $1.73 on the New York Stock Exchange in early-afternoon trading.[/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]ROULETTE? [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]Industry experts were not so sure United could get its house in order quickly enough.[/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]Labor unions seem determined to wait to the last possible minute before accepting lower take-home pay, said Joseph Schwieterman, an airline expert at DePaul University. That moment is rapidly approaching. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]With each passing day and week, Schwieterman said, bankruptcy becomes almost inevitable. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]Susan Donofrio, airline analyst at Deutsche Bank, also said time was running out. [/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]We also are somewhat skeptical that management will be able to achieve labor cost savings in time since they haven't done so thus far and it looks like their labor groups want to negotiate with management separately, she said.[/FONT][BR]
[P align=justify][FONT face=Times New Roman][FONT size=3][STRONG]CHIP'S COMMENTS:[/STRONG][/FONT][/FONT][BR]
[P align=justify][FONT face=Times New Roman][FONT size=3]I believe industry consolidation is the answer to match capacity and demand, but for any airline to participate they must survive the current short-term crisis. ALPA EF&A briefed the MEC that following the Gulf War there was a 25% decrease in traffic, it took about one year for traffic to return to pre-war levels, and the current fundamentals do not support continued industry viability for any U.S. carrier. The unprecedented crisis of continued terrorist attacks, the double dip recession, oil rising to over $30 per barrel, air fares at 20 year lows, rising security costs, and the pending war with Iraq are cyclical are there will be eventual stabilization.[/FONT][/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]In some respects the US Airways route network is more valuable than other trunk airlines because it primarily serves spokes versus large O&D markets. The government thoroughly understands this macroeconomic fact and its demise would likely result in what the DOT calls essential air service on a market-by-market basis being eliminated. Other airlines want US Airways and United to fail, so they can fix their problems on the backs of other company failures. However, if US Airways was not a viable medium or long-term candidate why would other investors be interested in acquiring the company, whom must provide an offer greater than the RSA?[/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]I suspect at US Airways there is a need for short-term W-2 cuts, pension changes to prevent fund payments during a period of cash outflows, and possibly work rules changes to reduce hourly wage rate reductions. However, those airline employees who elect to make these sacrifices will likely remain in place to benefit from the near-term industry restructuring/consolidation.[/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]It appears for US Airways' partner UAL, no union has reached an accord and the parties have agreed on a $5.8 billion cuts for 5.5 years. The unions and management began specific discussions on how the cuts would be administered and the company will likely submit a dual track loan guarantee application next week with one for the bankruptcy option and one for an out of court restructuring . The UAL board could decide on a bankruptcy filing at its October 23-24 meeting, which may be the deadline for the unions to try and prevent a formal reorganization.[/FONT][BR]
[P align=justify][FONT face=Times New Roman size=3]Chip [/FONT][/P]
[P]I don't see how United can avoid Chapter 11 until your alluded to May UAL board meeting. Quite frankly, I think it will be much, much sooner. I feel bad for the employees who have much of their retirement in stock options - it's looking very bleak.[/P]
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The only way airlines can afford consolidation in this environment is with significant assistance from the Federal Government. The costs of integration would simply be too much to bear, even if inefficiency was driven out via bankruptcy. So unless the feds are willing to help consolidate this industry, the only near-term solution I see is that airlines will become dramatically smaller in size, or liquidate outright. US is ahead of the game, in that they're already in bankruptcy and restructuring themselves at the present time. However, it's restructuring for an uncertain environment post-emergence from Ch.11. The industry revenue environment continues to deteriorate, with no end in sight. This makes the likelihood of US Airways emerging from Ch.11 in 1Q2003 extremely unlikely.

UA is at Ch.11's doorstep. We'll probably know in the next couple of weeks or so what track UA takes in their efforts to restructure. If UA does in fact file for Ch.11 protection, given the continued deterioration of the revenue environment, it will put considerable pressure on other airlines, specifically AA, to make MAJOR changes or else follow the same path. AA simply will not be able to allow UA to have a significant cost advantage over them due to the high number of markets where they compete head to head.

The bottom line is that you can only lower costs so much. You eventually reach a point of diminishing returns. And if you're unable to stimulate additional revenue, airlines will end up having to make major changes quickly unless they're sitting on a ton of cash. Otherwise, some may follow US and UA's path.
UAL777flyer, I agree with your assessment and thoughts. Nobody within the industry has the cash to acquire assets, but today’s news that there will be additional Equity Plan Sponsor (EPS) bidders for US shows there is investment capital available, for those who elect to restructure. I believe if the UA employees make the same sacrifice, there could be debtor-in-possession, ATSB, and EPS financing available for the Elk Grove Township based-carrier. But, I’m not sure if anybody will provide UA capital unless the governance is changed. Without any financial changes, UA’s fourth quarter financials could be:

September 30 unrestricted cash - $1.65 billion
September 30 restricted currency - $344 million
November 1 & 2 bond debentures- $41 million
November 17 debt payment - $300 million
December 2 secured debt payment - $575 million
December retroactive IAM payment - $70 million

UA’s third quarter cash burn rate was $7 million per day, up significantly from the second quarter, and the airline sad that the burn rate will be much higher in the seasonally slow fourth quarter, at a time when it will need cash to pay its bills.

Restricted & unrestricted cash - $1.99 billion
Fourth quarter debt payments – ($986 million)
Projected operational loss – ($920 million)
December 31 liquidity (with no changes) - $84 million

In a research note, Lehman Brothers said, “United announced another dismal quarter this morning. The company is fighting desperately to achieve an out-of-court restructuring, but we unfortunately believe there is simply not enough time left. We assign a high probability to a Chapter 11 filing in the next four weeks. United stated that nobody should conclude that a Chapter 11 filing is inevitable. Our expectation remains for a Chapter 11 filing some time in the next month.