UAL's investors say: 'Show me'

USA320Pilot

Veteran
May 18, 2003
8,175
1,539
www.usaviation.com
UAL's investors say: 'Show me'

CHICAGO (The Wall Street Journal) - Investors are having a hard time figuring out the new United Airlines.

After an initial honeymoon following the carrier's Feb. 1 emergence from a prolonged stay in bankruptcy-court protection, investors appeared to sour on United's parent, UAL Corp. Pressure is on the company to produce stellar second-quarter results or risk losing credibility on Wall Street. UAL's new stock, which achieved a high of $43 a share in late March, hit a low of $26 early last month and then rose a bit. But it closed Friday on the Nasdaq Stock Market at $26.76, down 6.5 percent. The airline's disappointing first-quarter results, its high unit costs and its middle-of-the-pack revenue performance seemed to stifle earlier enthusiasm.

Some analysts have the stock at a "buy," others at "hold," and one at "reduce." Most agree the company didn't do enough to cut its costs during its 38-month stay in Chapter 11. Some think its strategy of offering a variety of services - from premium to budget - at a time when competitors are streamlining their operations is costly and flawed. There are concerns about discount king Southwest Airlines expanding service in Denver, a United hub, and planning to touch down Oct. 5 in Washington's Dulles International Airport, another United hub.

Making the bet even more difficult are questions about the airline industry as a whole: Will carriers be able to push through more fare increases? Will they maintain their disciplined capacity restraint? What will oil prices do? Will there be other combinations, following the merger last fall of US Airways Group Inc. and America West?

The June 30 quarter is typically stronger for airlines. Some of United's peers including AMR Corp.'s American Airlines, Continental Airlines and US Airways are expected to be solidly profitable in the period, and their shares have soared in anticipation. Merrill Lynch last week estimated that eight of the largest carriers would produce a total of $1.2 billion in quarterly net profit, the industry's first profitable quarter since September 2000. Still, it downgraded American, Continental and US Airways on the hunch that they have limited upside for now.

United could lose its remaining supporters on Wall Street if it doesn't fare better when it reports financial results late this month. "The frustration with United has been the company's inability to drive nonlabor costs lower," Lehman Brothers analyst Gary Chase said in a research note after a $306 million first-quarter loss, which excluded a huge accounting gain tied to its reorganization. "For this reason, we believe United has become a 'show me' situation for investors."

Nevertheless, Lehman rates the stock an equivalent of a "buy" and on Friday raised its second-quarter profit forecast to 65 cents a share from 40 cents a share on higher revenue expectations. The firm makes a market in UAL shares and owns more than 1 percent of its common stock.

In early May, when UAL announced its first-quarter results, it said it was dissatisfied with its controllable-cost performance. The carrier's cost to fly a seat a mile on one of its own jets rose 11 percent in the quarter, or 3 percent excluding costlier fuel, from a year earlier.

Helping costs go up were a 19 percent increase in purchased services such as outsourcing and post-bankruptcy professional fees, an 18 percent increase for maintenance and a 5 percent increase in salaries, driven by $69 million of stock-based compensation expenses related to awards of stock to management. UAL's top 400 managers will receive 9.8 million shares, 8 percent of the total, in restricted stock or stock options vesting over four years, with the first 20 percent vesting next month.

United said at the time that it would have more stock-based compensation expenses in the second quarter, along with higher maintenance spending and noncash expenses related to fresh-start accounting.

The company, with a market capitalization of about $2.8 billion, announced plans to cut $300 million from its expenses this year and $400 million more in 2007.

Last month, UAL said it would cut at least 1,000 salaried and management jobs, out of 9,400, by year's end to reduce general and administrative overhead by $100 million. That will add a severance charge of unknown magnitude to the second-quarter results.

UAL, the nation's No. 2 airline by traffic after American, said its planes were more than 88 percent full in June, a record for the month. But the carrier is being plagued by mediocre punctuality and occasional pilot shortages caused by scheduling problems.

The company has pledged to introduce more efficiency to its operations and vowed to advance some of the planned 2007 savings into this year.

But will it be enough? Two weeks ago, the average estimate of analysts surveyed by Thomson Financial saw the company earning just five cents a share in the second quarter. Now the average earnings forecast is up to 46 cents a share. Prospects for the third quarter, seasonally UAL's best period, are better.

"We know we have work to do, and we're doing the work," says Jake Brace, UAL's chief financial officer. Mr. Brace says some investors don't understand UAL's cash-generation power, which is being hidden by noncash charges related to its exit from Chapter 11. UAL's restructured balance sheet, minimal capital-expenditure requirements and limited debt obligations are helping the company generate large amounts of cash, which falls straight to the bottom line.

Glenn Tilton, UAL's chairman and chief executive, acknowledged last month that many investors are going to be watching earnings reports for the second and third quarters to serve as a "proof point" for the turnaround story the company is laying out.

Even some analysts who have upgraded the stock aren't enamored of the airline's story.

"United is pursuing a business model that has been proven ineffectual for over 20 years," Bear Stearns analyst David Strine said in a research note marking up the shares to the equivalent of "buy" from "peer perform." But "given all the negative news on United and a somewhat unclear message, we believe the first sign of improvement will be an important catalyst." Bear Stearns makes a market in UAL stock.
 
Oh lookie, the funny little man is back!

No, not Kim Jong Il . . . the USAirways Captain-guy-thing!
 
The "messenger" has returned (although I thought he said on many occasions that he did not visit the United board, so I'm certainly "surprised" by his return)! :p

Two weeks ago, the average estimate of analysts surveyed by Thomson Financial saw the company earning just five cents a share in the second quarter. Now the average earnings forecast is up to 46 cents a share. Prospects for the third quarter, seasonally UAL's best period, are better.
With a little over 100 million UAUA shares outstanding, this means the analysts expect to see a net profit of about $50 million in the 2nd quarter and perhaps $75-$100 million in the 3rd quarter. While this amount will undoubtedly be less than the net profits seen by some of its peers (and less than United needs to regularly achieve in order to ensure long-term success), it is still a major step in the right direction. But as Brace and Tilton say ...

"We know we have work to do, and we're doing the work," says Jake Brace, UAL's chief financial officer. Mr. Brace says some investors don't understand UAL's cash-generation power, which is being hidden by noncash charges related to its exit from Chapter 11. UAL's restructured balance sheet, minimal capital-expenditure requirements and limited debt obligations are helping the company generate large amounts of cash, which falls straight to the bottom line.
Despite the $306 million 1st quarter net loss (before reorganization gains), United nonetheless recorded a positive cash flow from operations of roughly $400 million. Not too bad under the circumstances, IMHO.

Glenn Tilton, UAL's chairman and chief executive, acknowledged last month that many investors are going to be watching earnings reports for the second and third quarters to serve as a "proof point" for the turnaround story the company is laying out.
Even with anticipated 2nd (and 3rd) quarter profits, United cannot slacken its drive to reduce non-labor costs and enhance revenues. We'll see how that proceeds over the next year or so.

"United is pursuing a business model that has been proven ineffectual for over 20 years," Bear Stearns analyst David Strine said in a research note marking up the shares to the equivalent of "buy" from "peer perform." But "given all the negative news on United and a somewhat unclear message, we believe the first sign of improvement will be an important catalyst." Bear Stearns makes a market in UAL stock.
If United's business model is in such poor shape, why would he recommend the stock? Because the brokerage houses make commissions on stock trades, whether the recommendation is "buy" or "sell".

Merrill Lynch last week estimated that eight of the largest carriers would produce a total of $1.2 billion in quarterly net profit, the industry's first profitable quarter since September 2000. Still, it downgraded American, Continental and US Airways on the hunch that they have limited upside for now.
This just shows that the article can be construed both positively and negatively for many carriers, including a certain Tempe-based airline. Of course, I'm sure that wasn't the "messenger's" intent. :shock:
 
At least he did not use the ICT/UCT phrases. I suppose the Ritilin might be wearing off.
 
Cosmo, Cosmo, Cosmo. Once again letting clear thinking and sound reasoning enter into your arguments now are you? Are you Sir in a profession that places a premium on the examination of facts and the presentation of a measured analysis of them? Did the hapless USA320 pilot let his guard slip for a moment and think that you would let his patently provocative purpose go unchallanged? Well played sir, well played.
Cheers
 
He didn't want to be one to let the cat out of the bag, so he posted this article to plant the seed. You see, there IS an ICT being discussed. He didn't want to be THE ONE to break it you guys. Apparently Tilton and Company are scratching their heads, because United is STILL hemmoraging money. So the senior officers have been in discussions with Airways about an ICT that involves UAL's Asia and Heathrow routes. I'm not one to gossip, but A320 has a direct source who has been keeping him abreast of the discussions (a very reliable source). The hang up is with the LHR route authorities. It is no secret that Doug Parker wants to better allign the size of his ego to the size of his penis. Airways wants to dump the JFK-LHR route authority and have it transferred to PHL. Because US-UK negotiations are at a stalemate, the ICT has grown increasingly complex. But stay tuned. A320 will get you guys the full scoop as soon as he hears back from his "very reliable source." And remember, you didn't hear it from me.

Shhhhhhh...

Over and out...
 
While I will admit that there is a certain entertainment value watching everyone poke fun at our notorious court jester :lol: , everyone should keep in mind that attention seekers thrive on any attention they can get... even the negative kind. In some circles it's called Narcissistic Supply.

If we allow it to happen to this thread, I predict many pages of long winded drivel about things that "may or may not happen," littered with words like "minnow," "swallow," "jumpseat," "executive suite," "transaction," and of course a good dose of "when would NOW be a good time..." :blink:

In the mean time, we'll just have to wait until at least '07 to get an accurate judgement of United's post bankruptcy performance. Until then everything is just speculation by the same analysts who are historically critical of UA and historically wrong more times than not.

Enough said...
 
While I will admit that there is a certain entertainment value watching everyone poke fun at our notorious court jester :lol: , everyone should keep in mind that attention seekers thrive on any attention they can get... even the negative kind. In some circles it's called Narcissistic Supply.
I agree, why even give him the time of day? Let's just comment on the article. Cosmo has some excellent points.
I haven't looked into UAL's financials enough recently to have anything to add.
 
I agree, why even give him the time of day? Let's just comment on the article. Cosmo has some excellent points.
I haven't looked into UAL's financials enough recently to have anything to add.
Uh...why don't you reread his and everyone else's posts.

All he did was post the article...no comment anywhere. All anyone else has done is attack the messenger.