United Snags $1b In Loans, Buys Time To Reorganize

I know it’s hard to speak rationally and without emotion when we discuss issues like aviation about which all of us on this board are passionate, but let’s try.

Reiterating, I have NO interest in seeing United Airlines die. I am simply quoting the statistics regarding the survivability of airlines that have been through bankruptcy during the past 25 years and developing my expectations for the industry based on it. I wrote an extensive piece on the AA board under the earnings topic recently but let me quote a couple of items which I believe are essential if any of the legacy airlines is to survive and thrive.

Profitable operation – You gotta make money, something none of the legacies have done consistently for a number of years.
Strengthened balance sheet – all of the legacies balance sheets are badly damaged and will only be repaired by massive earnings, or more likely an increase in equity (possible if a company starts making money consistently) or selling off assets.
Reasonably amicable employee relations – This is the airline industry which isn’t known for great labor relations but it is also a service business where the employees truly have the ability to make or break the company.
Competitive Product – The product bar has been considerably raised over the past few years, primarily by JetBlue. The product has to be updated and revised which in itself is an expensive proposition. Each carrier will likely take different approaches but two themes are likely to be seen at every carrier: more space and greater access to technology both for entertainment and to do business. The product has to be considered high value when compared with other carriers.
Strong worldwide network – The legacy carrier advantage is that they can carry passengers to hundreds of points around the globe; the increased costs they bear as a result of operating a hub and spoke system should be offset by the brand loyalty they are able to generate as a “one size fits all†provider of transportation.

Not one person so far on that forum disagreed that those are the essential elements necessary for an airline to survive and thrive. Survive and thrive have to be defined in terms of 5 – 10 years from now, just as a human is not considered to have beaten cancer without being cancer free for 5 years. It’s relatively easy to emerge from bankruptcy but a lot harder to compete in the airline business for 5 years since that usually takes one through a down business cycle when it really becomes apparent what a company is made of.

I don’t slight anyone, customer or an employee, for being loyal to a company and I certainly hope that the employees will be above all people. It is not my intention to attack anyone’s loyalty, nor have I. I am here to inject a healthy dose of reality in the hopes of making everyone involved fight hard enough to survive and thrive. You should note by what I write that it is my desire to see the legacy airlines survive rather than be run into the ground and replaced by LCCs – which is exactly what so many people seem to assume will happen.

Looking at the list above, UAL is not consistently profitable – but then neither has any other legacy so far so it is hard to draw a firm conclusion at this point. Barring a major change in UAL’s cost structure which will be apparent in their earnings report next week, UA’s costs are still considerably higher than AA’s or CO’s. In fact, much maligned DL’s mainline, fuel-constant CASM was slightly less than 10 cents, just 5% higher than AA’s- AND DL HASNâ€T EVEN GOT PILOT CONCESSIONS YET! Unless UAL gets costs down quickly, at least three legacy competitors will have a CASM lower than UA’s (and NW is usually pretty competitive on the cost front as well). As for balance sheet strength, that is where most of my predictions as to who will survive originate. I can’t in my widest imagination envision a scenario (nor has anyone shown me a viable scenario) where UAL will emerge from bankruptcy current on all obligations and with a wad of money in the bank that approaches what AMR has in the bank now – and which will likely grow. UAL does not have the inherent wealth that AMR or DAL has in their owned regional carrier operations. The only unlocked source of wealth UAL has short of selling off flight related assets is its maintenance operations – but AA and DL have similar assets which they could unlock as well.

I won’t even discuss employee relations since it’s pretty apparent what UAL's track record in that department is. (and of course, we all read the press releases UA’s unions put out after the ATSB denial telling the company to look for cost cuts elsewhere – to translate to genteel English.) Again, we would all love to see that change but somehow I am doubting the lovefest we’ve seen over the past year will be over as soon as UAL starts talking to permanent lenders who will tell UAL that deeper employee cuts are needed to obtain exit bankruptcy financing. Because, you see, the HUGE DISADVANTAGE UAL faces is that it has to pay off all of the obligations needed to get out of bankruptcy (all of those disputed liabilities on the balance sheet) PLUS have a sum of money in the bank to compete when back in the real world. Airlines not in bankruptcy don’t have to come up with the cash to restructure all of their debts and are thus able to limp along and still be better off than UAL.

Network strength is obviously UAL’s best advantage but that is being eroded. DL has bypassed UA as being the 3rd largest US carrier to S. America and has now announced enough new service to be on par with UAL in deep S. America, the one region where UAL was second only to AA. While UAL has been in bankruptcy, AA has managed to add service from NRT to every UAL gateway (metro area if SJC=SFO) except SEA; AA has already said they are all about getting into China and HKG, the most lucrative parts of UA’s Pacific network. Everybody has invaded the transcon markets. Most of UA’s competitive moves have been to shore up DEN, one of the most expensive hubs to operate and one which some analysts (I’m making no personal prediction) is most disposable in the UA network.

Clearly the reason banks continue to loan money to UAL or any other enterprise is because there is money to be made. DIP financing is fairly safe and there are significant profits for banks who venture into that financing. Creditors rarely pull the plug on airlines because it has always been more profitable for debts to be restructured over and over again over many years instead of pulling the plug on financing and taking that hit. Unless UAL turns around, lenders will line up to keep UAL afloat because they make money to do so and the cost of pulling the plug is higher than the risk of loaning just a little bit more money (or leaving the assets with UAL a little longer).

I’m glad you find my posts thought provoking, UnitedChicago. The goal of a public internet forum is to exchange ideas. Some of them just happen to be contrary to what you or others want to hear but that is the nature of human beings who have the right to think and speak freely. My role is not to make anyone feel good but rather to speak what I believe to be true. So sorry if it makes you or anyone else uncomfortable.
And, UK, some single, solitary voices have changed the course of human existence. Not saying I will be one of them but I think it is far more prudent to listen to another’s ideas than write them off as insignificant.
 
WorldTraveler said:
Profitable operation – You gotta make money, something none of the legacies have done consistently for a number of years.
Strengthened balance sheet – all of the legacies balance sheets are badly damaged and will only be repaired by massive earnings, or more likely an increase in equity (possible if a company starts making money consistently) or selling off assets.
Reasonably amicable employee relations – This is the airline industry which isn’t known for great labor relations but it is also a service business where the employees truly have the ability to make or break the company.
Competitive Product – The product bar has been considerably raised over the past few years, primarily by JetBlue. The product has to be updated and revised which in itself is an expensive proposition. Each carrier will likely take different approaches but two themes are likely to be seen at every carrier: more space and greater access to technology both for entertainment and to do business. The product has to be considered high value when compared with other carriers.
Strong worldwide network – The legacy carrier advantage is that they can carry passengers to hundreds of points around the globe; the increased costs they bear as a result of operating a hub and spoke system should be offset by the brand loyalty they are able to generate as a “one size fits all†provider of transportation.
WorldTraveler

What you quoted is what these employees at United were promised 10 years ago from ESOP. When the employees of UAL caved into 5.5 billion dollars in concessions in the mid 90's. With the threat of BK hanging over their heads by management, they were promised all this.

It happened to!!! UAL was VERY profitable to the tune of about 8 billion dollars. What did they do with all that money???? :up:

They promised employee’s seamless contracts, that drug on forever. :angry: Through the summer of hell, and the restraining orders against the employees. :(

Management wanted to empower the employees with more responsibility of their day-to-day operations, that lasted till just before the end of ESOP. Then the power of management reared its ugly head agian at UAL with mass firings, threats of lost employment and massive lay-offs.

They started a new LCC United Shuttle and like TED staffed it with mainline employees and wages. Said it would make loads of cash. They liked it till 9/11 when they ceased operation only because with the shuttle running they couldn't lay off maintenance employees to a certain calendar dated.

These employees have already endured over a decade of crap, lies, and hollow promises from UAL management. They have lost millions of retirement dollars on ESOP and 10 years of lost wages. Now they are asked to sacrifice again, I commend them! :up: I had to move on I didn't have as much time as these employees have put into what used to be the worlds most well known airline. I am glad to be gone from UAL, I don't know how people can hang on at one of the WORST managed companies I was EVER exposed to. If I had 25 or 30 years there I might think different though.

UAL wants to blame all their problems on 9/11, but the employees know that management was well on the way to driving it into financial ruin long before that. The employees were only trying to get what they were promised from UAL a decade ago. :unsure:

These are facts that should wake up any DIP financier to DEMAND that the necessary changes be made in management and the business plan to see UAL survive, and not become a Pan Am or a TWA. But be aware! :eek: History is only repeating itself at UAL HELL! :down:
 
It's late, so a couple poorly written points to ponder.

If believe UAL's business model was so horrible prior to 911, and 911 isn't the reason for UAL's BK, could you kindly tell us what UAL's credit rating was before 911? Or on 912 for that matter. How does that compare to media Darling JB's today? I guess YOU GUESS saw it, but S&P didn't. you're in the wrong business, you should be giving your incredible talent and insight to wall street for billions a year... :rolleyes:

You cite DAL's CASM. What stage length did you correct that to? Seating configuration corrections? Corrections for high fee's at certain airports other airlines frequent more often (DEN's landing fee's are 7 times ATL's)?

They own their own regionals... OK, fair enough. how much debt are DAL, NWA and AMR servicing. When Cal, AWA, EAL, Pan Am went into BK, what was the financial condition of it's competitors? Were they literally BILLIONS in the equity hole? When some of them exited BK near neutral on equity, were there competitors fairly strong with positive numbers on the balance sheet? How about now? When UAL exits, it's competitor's will have attrotious balance sheets. UAL will have a clean one.

Let's talk lease payments for jets. Can DAL go to it's leasors and get big concessions? Maybe from some. but you must consider how many there are. Do you know anything of game theory? Let's pretend that I lease 2 jets to DAL at a very high rate. DAL says, "take a huge hit or we'll go BK" I'd say GTH!!. Why? As a small player, I'm not going to break them, and if I could, then someone else can to. So I say no. Collectively, would it benefit all the Leasors to come to an agreement? Sure!! but you've gotta understand the "prisoner dilemma" to see rational for the individauls to balk at what would benefit everyone if they held together.
 
Here's my first post, but I've been reading these forums for quite some time now. It amazes me how we have such a broad range of users here that know very little to what goes on in this industry (particularly UA) to some well-informed, excellent source of knowledged individuals posting. And some, who are just plain disgruntled about everything. But opinions are like a**holes, everybody has them. At least it beats the Airliners.net forums where everyone is a CEO of their favorite airline.

Couple points I'd like to make, especially in the financial health of certain legacy carriers...

I believe everyone can agree that 2Q is the best quarter for the airlines financially. This year, we have seen some jacked-up fuel prices that hurt everyone on the bottom line. The darling airlines of Wall St. (you know who) aren't so darling now when your YOY net profits has been slashed in half and your CASMs have been increasing due to growing pains (some too quickly I might add). As for the network carriers, red is the only pen available when they're filing their 10Ks to the SEC. AA may have well posted a modest $6M profit, but they still lost operationally at $25M this quarter. Considering they have slashed costs dramatically over a course of a year, it will only get worse if fuel prices remain averaging at $40/bbl. AA has a good cash on-hand, but their debt-laden balance sheet overshadows that. IMO, they've got a rough road ahead, and if UA/US cut even further, the pressure to stay competitive will be overkill to an already not-to-happy workforce.

UA... ahhh the bastard airline to some, the elusive moray eel like predator airline to others, or to some who just can't figure out what the hell UA is doing about their flawed, disfunctional, yada yada yada business that will utterly fall in the dismal abyss and liquidate to the likes of AA, DL, NW, US, and CO. And sure... if that were to happen, no one has money to pay their employees now, but they have enough money to buy UA assets when the time comes... right. Well, it's not going to happen anytime soon. I noticed a lot of the people here seem to forget that UA's costs has also been dramatically reduced, deeper cuts than AA I have to mention. But this sense of urgency that UA hasn't done enough or else it will fail gets a little old. The ATSB loan guarantee hype was way overblown... by the media, analysts, and to posters alike. It was cheap money, period. Tilton knew it, went for it, and lost. End of story. Gee... was it really a surprise that UA received $1B in DIP financing to pull through the waning period until 6/2005? Everything has a pricetag, even money itself. It will cost Tilton a little more than what he imagined to exit. The pensions. Will UA do something about it? Yes. This will be a hard pill to swallow to every employee group out there, but the inevitable will happen. Whether UA mgmt will slash and burn or will take a conservative approach to retire/modify certain pension plans, is the question. Whatever the path, it certainly does not look good now with a $4.1B debt to pay trying to re-establish your credit post bankruptcy. You don't want to hurt morale when it's slowly building on the upside for once. This will be a touchy subject in the months to come, but I believe most employees know there will be some major changes to their pensions.

All in all, I see UA having a prosperous future ahead if it continues to do things right within the restructuring process. I think many people out there, including other airlines, have underestimated the determination and willingness the company and its' employees have to emerge successfully and become a competitor, or much more... a moray eel. :ph34r:

Time will tell.
 
First of all, welcome to the boards, boozer! :)

That was a very nice first post. If you intend to consistently post with that level of quality, you will make a very welcome addition to these parts.

As you noted, USaviation isn't filled with people asking why UA doesn't fly hourly 747s between PSP and DBQ. It's a nice change of pace, isn't it?

I have a couple of comments on your post:
no one has money to pay their employees now, but they have enough money to buy UA assets when the time comes... right
There's a good reason for this. An airline can pretty easily issue debt to buy another airline's assets, because there should be a corresponding increase in profits. Paying employees more is (from an investor's perspective) generally of little more use than burning it. Granted, that's an oversimplification, but the distinction is important.

I noticed a lot of the people here seem to forget that UA's costs has also been dramatically reduced, deeper cuts than AA I have to mention.
So? In the end, if CASM is still higher than RASM, it doesn't matter how much costs have been cut. AA, by avoiding bankruptcy, has access to cheaper capital than does UA. This makes life easier for AA overall.

But this sense of urgency that UA hasn't done enough or else it will fail gets a little old.
Old or not, it's still true. And I agree that it's old.

All in all, I see UA having a prosperous future ahead if it continues to do things right within the restructuring process.
I certainly haven't written UA off the way I have US. UA is trying to do something to fix the problem (though, from what I've seen, not as much as AA is). That already puts them in a better position than US.
 
While UA gained a "reprieve" of sorts, they also gained a year to get "real lean, and mean". (The carving knife is being "steeled", as we speak). Pensions, and ANYTHING DENVER, is a sure bet !!

NH/BB's
 
I love a good facts based discussion and I think we have one going here based on the last several posts. Since none of us, to my knowledge, are full-time industry analysts or writers, the writing or thought quality is probably not as complete as we’d like to do nor have we done the research we would like. Nonetheless, there are some pretty rational presentations here and I enjoy being a part of them. Strato, let me add my welcome and appreciation for your well-presented thoughts. Keep ‘em coming.

Let me reiterate again that I don’t see any threat of UA failing within the foreseeable future (how long that is depends on your vision). I simply want to discuss of the longer-term trends which I believe will emerge as this industry tries again to reach the point of stability that it has been unable to reach for the past 25 years since deregulation.

My predictions regarding the long-term viability of United Airlines are based on the long-predicted, other-industry-modeled, unmet and so-far blocked needs the airline industry has to consolidate to several major players. Further, no carrier is close to being a world- and nationwide aviation power as it exists in so many other industries: GM is still a major domestic (I believe w/ about 1/3 of the market) and global power (operations worldwide); other examples exist in most other highly capital intensive industries like the airlines. The only reason significant consolidation hasn’t occurred up this point is because the government has been afraid that an airline with more than 20% market share would wield undesirable power even though many companies in other industries like GM, AT&T, Wal-Mart etc have market shares far in excess of what AA (the current largest airline) has. Further, no US airline is close to providing truly global service, although AA comes the closest. Before we as a country allow airlines from other countries to have greater access to our markets, we need to make sure US airlines have the opportunity to build themselves to the size they need to be to compete against the flag carriers from other countries and still not unduly control the marketplace.

Three years ago, I would have predicted that UAL would have been one of the global and domestic aviation powerhouses. Post bankruptcy, I do not see how UAL can be more than a large domestic and international airline. While I appreciate the gut confidence some of you have that UA will survive and thrive, I need for you to provide some facts that give me some sense of confidence that UAL will be able to compete against much richer airlines that may soon be able to acquire competitors, an exercise which, again, has been repeatedly stifled by the government but which is now limited more by legacy airline finances. UAL’s need for Chapter 11 protection was due not to their credit rating pre-9/11 but to their lack of cash management in December 2002 which allowed a huge amount of debt to come due at a time when cash was shrinking. Many people saw the crisis developing.

During the late 90’s, AA, DL, and UA all generated in excess of $3B annually in free cash flow. Instead of positioning themselves to successfully compete for decades to come, the legacy airlines bought planes, repurchased stock, handed out pay raises to just about everyone, and engaged in other non-strategic exercises which certainly included fattening executive bank accounts. To a great extent, the big three were not very distinguishable, including in the balance sheet or cost areas. 2001 brought a dose of reality and the industry is finally doing what it should have done years ago – learning to compete with the LCCs that are dictating the shape of the industry.

All of the legacies, UA included, have dramatically reduced costs and will continue to do so since there is an incessant urge for a company to compare its employee costs to those at other similar airlines. It is very likely that the legacies will all end up with fairly similar cost structures. What is remarkable is that DL has achieved costs fairly close to AA which has completed a significant phase of its restructuring while DL has not launched what are billed to be its largest changes. Every legacy airline is engaging in significant cost reduction and will likely continue to do so until we get close to some equilibrium with LCC costs. As noted, LCC costs are only going to rise as their operations become more complex; and as the LCCs age and their dramatic growth begins to slow. Legacies, meanwhile, will start growing again which will push their costs down. UA and US particularly need overall system growth – not just remove some assets and use newer ones more productively.

No, DAL’s costs are not adjusted when compared with UAL’s or AMR’s. The most commonly used adjustment is stage length yet Delta flies the shortest average stage lengths of the big 5 (only US is shorter). You could also adjust, to Delta’s benefit, for DL’s much higher percentage of costly connecting passengers and its smaller population bases at its hubs (DL and US’ hub city sizes are on the bottom end of the scale). At some point, however, adjustments become rationalizations. Any company has the responsibility to deploy its assets where they are most productive. DEN is an expensive operation to operate in and was grossly managed from a cost standpoint when it was built; UAL’s choice now, which they didn’t make when the airport was being built, is to tell DEN to get their costs down or risk using a major network carrier as the largest tenant. US did that to PIT and may well be better off for it.

So the real difference seems to come down to balance sheet strength. Bankruptcy is not a process that allows UAL to wipe out its debts (it will not be “cleanâ€) but to restructure them. AMR’s nearly $4B in cash is way in excess of what is needed and will go a long way either to allow AA to expand or to shore up its balance sheet; DAL has removed nearly all airplane capital expenditures for several years, providing clearly enough time to start rebuilding its balance sheet. I’ve already talked about the underlying assets AMR and DAL have in their regional operations.

In reality, all of the airline’s balance sheets were badly damaged after Gulf War I with Delta’s being among the worst because of the costly Pan Am asset acquisitions. Delta was tremendously helped by Eastern’s failure which helped it return somewhat to balance sheet parity with UAL and AMR. DAL and NWA both have a lot of short-term unsecured debt which will either be paid off in the next couple years or be wiped out in bankruptcy. I don’t believe any of the major airlines have any stockholder equity but that hasn’t stopped NWA from becoming a strong player since I don’t believe that have had any for 10 years.

You are right, Bus, that the biggest obstacle DAL faces is restructuring aircraft costs. Given that DAL owns a higher percentage of its fleet than UAL, they are much more locked into what they have. Many analysts, however, do not estimate DAL’s aircraft costs to be as widely out of line as UAL’s were going into bankruptcy. DL has said it will remove some 737 classics which will improve productivity of the remaining fleet. It is noteworthy that AMR (AA plus AE, I presume) said they flew more ASMs this quarter than they did a year before, but with 60 fewer aircraft.

UAL simply must restructure its business far better than what any other legacy will do in order to be a viable long-term survivor. AMR and DAL will not remain stagnant and NWA looks like it is ready to move the cost cutting effort forward just as Delta has done; CO has promised further cuts as well. The competition is not sitting still and will invest in their product, expand their networks, and maybe even engage in merger and acquisition activity in the time it takes for UAL to get out of bankruptcy; UAL will not be able to significantly engage in those activities until they are out of bankruptcy. UAL staked its future on obtaining ATSB loan guarantees so it is only to be expected if everyone doubts UAL’s survivability since they didn’t get them.

I will be more than happy to see UAL as a prosperous, viable company for years to come but they are going to have to fight much harder than they have so far and be a lot smaller than their competitors. If they do, they could rewrite aviation and business history. Now wouldn’t that be a great tribute to the past three years?
 
Some very bad news this morning about the pensions:

UAL Corporation Reaches Agreement to Amend DIP Financing Credit Facilities

Friday July 23, 10:51 am ET

Amendments Provide Liquidity Necessary to Complete Restructuring

Maturity Date Extended Through June 2005

Terms Reflect DIP Lenders' Confidence in UAL Financial Performance


CHICAGO, July 23 /PRNewswire-FirstCall/ -- UAL Corporation (OTC Bulletin Board: UALAQ - News), the holding company whose primary subsidiary is United Airlines, today reported it has successfully negotiated an agreement to amend its debtor-in-possession (DIP) financing credit facilities with its current lenders, including JPMorganChase, Citigroup, and CIT, and a new lender, GE Capital.

The facilities will provide UAL with an additional $500 million in available funds, delivering the liquidity necessary to complete UAL's successful restructuring. The maturity date is June 30, 2005, giving the company additional flexibility as it moves to assemble an exit financing package. The agreement maintains the favorable interest rates and types of covenants established in the amended DIP agreement of May 2004.

The company will seek bankruptcy court approval of the amended DIP agreement at the omnibus hearing currently scheduled for August 20, 2004.

"Without the Air Transportation Stabilization Board (ATSB) loan guarantee, we need to do more restructuring and cost reduction work to formulate a business plan that will attract the financing necessary to exit Chapter 11. The amended DIP gives us the time and money to do this essential work in a systematic and measured way," said Jake Brace, United's executive vice president and chief financial officer. "The willingness of lenders to participate in the amended DIP following the denial of the federal loan guarantee reflects their confidence in our financial performance and ability to become more competitive by further improving our cost structure."

The amended DIP agreement contains financial covenants that do not permit the company to make any payments inconsistent with its current financial projections, effectively prohibiting further pension contributions before exit, unless the lenders otherwise consent based on a modified business plan. As a result, the company does not expect to make any pension contributions before exit because such payments would diminish the company's liquidity and reduce flexibility, thus impairing the company's ability to attract exit financing. In and of itself, this decision does not affect the benefits currently being paid under these plans.

By amending the DIP and not making these pension contributions, the company believes it will have adequate funding until its exit from bankruptcy. These actions will enhance UAL's flexibility while it continues to restructure in a challenging and uncertain marketplace.

In the absence of a federal loan guarantee, United's long-term business plan must have cash flow and liquidity levels that the capital markets are willing to finance. Because existing pension plan contributions will remain a huge financial burden after exit, it is incumbent on United to study all possible options and to determine whether United can sustain this burden and still attract exit financing. At present, no decisions have been made and much work and analysis needs to be completed. United is beginning to discuss this situation with its unions and other stakeholders.

http://biz.yahoo.com/prnews/040723/cgf024_1.html

I feel for all UAL employees and retirees. It is a very dark day.
 
WorldTraveler said:
...none of us, to my knowledge, are full-time industry analysts...
No, but I've been a part-time analyst recently. I've been blessed with a wonderful academic opportunity to do some significant analysis of the industry and trends.

The only reason significant consolidation hasn’t occurred up this point is because the government has been afraid that an airline with more than 20% market share would wield undesirable power even though many companies in other industries like GM, AT&T, Wal-Mart etc have market shares far in excess of what AA (the current largest airline) has.
There are a number of significant motivations for the difference. A dominant airline has a much greater monopoly power than does an automobile manufacturer, long-distance carrier (post-breakup), or retailer.

Three years ago, I would have predicted that UAL would have been one of the global and domestic aviation powerhouses.
Not me. They felt disjointed and arrogant in 1999. Back on PlaneBusiness, we had many heated discussions on this very topic.

During the late 90’s, AA, DL, and UA all generated in excess of $3B annually in free cash flow. Instead of positioning themselves to successfully compete for decades to come, the legacy airlines bought planes, repurchased stock, handed out pay raises to just about everyone, and engaged in other non-strategic exercises which certainly included fattening executive bank accounts.
The reason for this is simple. They confused the profitability with the long-term viability of their business model. In other words, they thought it would continue forever.
 
mweiss said:
Being current isn't the issue. Pensions are much more expensive than DC plans. That's the issue.
No disagreement from me at all that AA's DB plans (and UAL's, for that matter) are much more costly than a DC plan; B6 and WN have a decided advantage against all legacy carriers in that area.

My point is that it may be several years before that issue really comes home to roost at AA, while it is currently a huge problem at UAL. Right now, UA is deferring $570 million in contributions due in 2004 (and who knows how much that will be due in 2005?) because its DIP lenders have forbidden it to make the contributions. By time UAL emerges (if ever), it will be down at least $1 billion in required minimum pension contributions, while AA will probably still be current.

AA's pension issues are a very long term issue, while UAL's pension issues could keep it from seeing 2006. AA may very well have to seek CH 11 protection down the line to cancel its pensions (especially if UAL does), but for now, pension contributions at AA are a managable expense. At UAL, pension contributions are forbidden by its lenders.
 
“There are a number of significant motivations for the difference. A dominant airline has a much greater monopoly power than does an automobile manufacturer, long-distance carrier (post-breakup), or retailer.â€

Academically, perhaps. In reality, there are still more than enough legacy and LCC airlines to prevent any carrier from gaining the pricing power necessary to legally exercise monopolistic or powers. I also think that you will see an LCC-type fare structure throughout the US in the next year or so which will go a long ways toward mitigating government concern about industry concentration, esp. when coupled with airport access changes that have occurred in the last few years.


“Not me. They felt disjointed and arrogant in 1999. Back on PlaneBusiness, we had many heated discussions on this very topic.â€

But UAL’s bankruptcy can probably be characterized as the first step they took that permanently changed their future.

†The reason for this is simple. They confused the profitability with the long-term viability of their business model. In other words, they thought it would continue forever.â€

Which is why all of the legacies have been working post-haste for 3 years to get their costs down. Now that employees believe the industry is permanently changed, the pace of change will quicken.

“AA's pension issues are a very long term issue, while UAL's pension issues could keep it from seeing 2006. AA may very well have to seek CH 11 protection down the line to cancel its pensions (especially if UAL does), but for now, pension contributions at AA are a managable expense.â€

Not all carriers will choose to follow UAL’s or even US’ every financial move. Airlines will start differentiation themselves in a number of ways, including cost elements. Some airlines like AA and DL may not gut their pensions immediately; DL is already on a path to eliminating defined pensions for non-pilot employees over the next several years. It probably would take bankruptcy to dump the pension plans, a remedy that may be more painful than the disease. Each company and its employees will weigh the value of pension benefits and make cuts and improve productivity elsewhere to compensate for the pension burden. At any rate, the current pension funding crisis will probably somewhat abate as interest rates rise along with the stock market’s performance. Pensions are not likely to be the easy-to-fund benefits they were in the late 90’s but neither will they be the black hole they are today.
 
Ouch. It appears changes to DIP loans came at a very high price. Perhaps the real cost will be reflected in lost Employee Moral and productivity. But, that may not be good for anyone. All should hang in there and do their best.
 
mweiss said:
No, but the carriers inside don't get to enter into contracts. It's hardly a great advantage sitting in there.
Could you please elaborate on the inability of a corporation in the ch11 BK process to enter into contracts? While the market dictates the behavior of those with whom the corporation would like to contract, and there may be certain specific and narrow areas (commodties trading - aka fuel hedging perhaps?)where the corporation cannot contract because of the ch11 process, there is no blanket or widespread prohibition of the right to contract with whomever it wishes so long as it is in the normal and ordinary course of business (simple and basic example - it may still contract with members of the public to provide the service of transportation from A to B; it may still enter into a contract with XXX fuel supplier to provide fuel at ABC airport; and etc, etc). Generally, any who deal with this CH11 corp may impose any terms they like in the body of such contract like a cash only term. CH11 certainly invites more onerous terms to any K it enters into and the free market will dictate what those terms will be. K's entered into during the CH 11 process are not automatically discharged upon exit - OTW, why would anyone deal with a BK corporation on any other than a cash basis - and are usually paid for in the normal course of business or as a component of the exit financing package.
You may have a point, however, if you are referring to contracts requiring obligation (for acquisition OR sale of assets) which are not in the ordinary course of business - these invoke the scrutiny of the BK court and must pass his review for fitness and absense of economic waste - AND, all the pre-filing creditors get to weigh in on the transaction (not to mention the divulging to competitors in open court). If this is what you meant then I agree.....and no, I don't think that CH11 is a wonderful place for a corporation to find itself....
 
UnitedChicago said:
Excuse me - exactly how will they be at a disadvantage? Do the carriers OUTSIDE bk court have the power of a judge to void contracts? Do they carriers OUTSIDE bk court have the continued ability to use the court process to refine their business plan? Do the carriers OUTSIDE bk have the power to reject leases and renegotiate aircraft leases? Sure carriers OUTSIDE bk will use the threat of bk to reduce costs - but they will never have the leverage and power the bk provides to get costs as low.

Just say it - you don't like United and you hope they fail. Well - you can not like United - but United certainly will not be failing.

I'm willing to trust that GE agrees.
Do the carriers OUTSIDE bk court have the power of a judge to void contracts?

UnitedChicago,

I would not take this ‘advantage’ lightly. Abrogating an employee contract is not as simple as going to the BK judge and asking for abrogation. I believe (corrections are appreciated) that the ‘only’ airline that has ‘survived’ a contract abrogation is CAL. Trust me when I say that an attempt to abrogate the union contracts here at the LazyU may not be as docile as your post implies.

JMHO.
B) UT
 

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