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Potential United Shutdown Might Help Rival Airlines
By Sonoko Setaishi
Dow Jones Newswires
NEW YORK -- Air fares might be on fire sale and the drumbeat of war might be getting louder, but there's hope for the airline industry in the eyes of at least some pundits: If UAL Corp.'s (UAL) United Airlines shuts down, most other airlines stand to benefit.
A potential Chapter 7 liquidation of the world's second-largest carrier, operating under protection from creditors since December, may be "the industry's best-case scenario," Jamie Baker, analyst at J.P. Morgan Securities Inc. in New York, wrote in a research note Thursday.
The shutdown of the Chicago carrier would help the surviving network carriers by boosting their revenue, Mr. Baker said. That, the analyst bets, would outweigh the potential negatives of the shutdown, such as the continuation of high industry labor costs and the likely emergence of a host of domestic startups that would pose a threat to the big airlines.
United says it's making progress toward its goal of emerging from Chapter 11 by June 2004 by slashing labor and other costs and pursuing strategies to make it more competitive, including the proposed creation of a low-fare division.
United's fate likely will become clearer in the next two months, during which the carrier must meet the strict financial targets set by the providers of its interim financing while discussing concessions with labor unions. A war with Iraq, particularly a lengthy one, could diminish its chance of survival. The direction of the economy and demand for air travel also will play a big role.
A liquidation is "not going to happen," said United spokesman Joe Hopkins. " Everything that we're working on is to transform United into a much more competitive entity that can be successful over a long period of time."
Even so, some industry executives and analysts have been speculating over which airline would be interested in which United assets and who the ultimate winner would be in the event of the carrier's shutdown.
"An ex-UAL industry is sufficiently compelling, in our view, and an inherent possibility given the industry's poor track record at Chapter 11 resuscitation," said Mr. Baker, who wouldn't speculate on the odds of United's emergence from Chapter 11. Mr. Baker doesn't rate UAL stock and doesn't own its shares. J.P. Morgan Chase & Co. (JPM) is involved in the $1.5 billion debtor-in-possession financing extended to UAL.
"I think that the industry would benefit overall from the fact that capacity would be pulled out" should United close its doors, said Michael Linenberg, airline analyst at Merrill Lynch & Co. in New York. In particular, Mr. Linenberg said, "there would be lots of opportunity for the financially stronger, profitable, low-fare, low-cost operators" such as Southwest Airlines Co.(NYSE:LUV) (LUV), JetBlue Airways Corp.(NASDAQ-NMS:JBLU) (JBLU) and AirTran Holdings Inc.'s (AAI) AirTran Airways.
Mr. Linenberg wouldn't handicap the likelihood of United's liquidation, saying it depends on many factors. The analyst doesn't rate UAL stock and doesn't own the shares.
UAL shares were down three cents, or 2.7%, at $1.07 in afternoon trading on the New York Stock Exchange. The stock reached a 52-week low of 64 cents on Dec. 9. Shares of a company in Chapter 11 typically become worthless during the proceedings.
Had United not flown last year, the other major network carriers would have posted much smaller losses, or even profits, estimates J.P. Morgan's Mr. Baker.
AMR Corp.'s (AMR) American Airlines, the world's largest carrier, would have lost about $2 a share, rather than the whopping loss of $12.97 a share posted in 2002. Continental Airlines Inc.(NYSE:CAL) (CAL), the nation's fifth-largest carrier, would have earned about $2 a share, rather than losing $4.52 a share. Northwest Airlines Corp.(NASDAQ-NMS:NWAC) (NWAC), the No. 4 U.S. carrier, would have roughly broken even, rather than having a red ink of $5.74 a share.
The greatest potential beneficiary, according to Mr. Baker, is America West Airlines parent America West Holdings Corp.(NYSE:AWA) (AWA). The owner of the No. 8 U.S. carrier would have earned about $4 a share last year, rather than losing $3.82 a share. Mr. Baker's estimates assume that the industry would capture 70% of United's revenue.
Burning through millions of dollars each day, United's big rivals likely can't afford to snap up any significant chunk of the carrier's assets should they go to the auction block, Mr. Baker and Merrill Lynch's Mr. Linenberg say.
However, the big airlines would likely race to move into United's domestic markets and vie for its prized international airport access.
American, for one, would move aggressively to seize United's Pacific routes, the two analysts say. The Fort Worth, Texas, carrier would also nearly dominate Chicago's O'Hare International Airport, unless low-fare carriers such as JetBlue expand into the city.
Continental and Delta Air Lines Inc.(NYSE
AL) (DAL), the third-largest U.S. carrier, would be eager to obtain United's slots at London Heathrow Airport, the two pundits say. Mr. Baker says Delta would be more likely to gain access to the airport.
Delta would also go after United's San Francisco hub, while Continental would push for its Denver hub and Southwest, the No. 6 carrier, would seek its Washington Dulles hub and could win it over JetBlue. Also up for grabs would be United's Los Angeles hub.
"Every major carrier remaining would be interested in enhancing their presence in those cities," Mr. Linenberg said.
United's liquidation wouldn't solve all of the industry's problems. If United shuts down and ends its efforts to slash labor costs with the help of the bankruptcy court, "current labor progress at AMR and elsewhere would similarly grind to a halt," Mr. Baker said. American has asked its employees for annual labor-cost savings of $1.8 billion, and Delta and Northwest have also said they must wring more cost savings from union contracts.
US Airways Group Inc. (UAWGQ), owner of the No. 7 U.S. carrier, which sought protection from creditors last summer, has cut its labor costs by more than $1 billion a year.
Another potential drawback for the big hub-and-spoke carriers: Southwest, the low-fare king, would take away an even greater share of the domestic market, Baker predicted.
By Sonoko Setaishi
Dow Jones Newswires
NEW YORK -- Air fares might be on fire sale and the drumbeat of war might be getting louder, but there's hope for the airline industry in the eyes of at least some pundits: If UAL Corp.'s (UAL) United Airlines shuts down, most other airlines stand to benefit.
A potential Chapter 7 liquidation of the world's second-largest carrier, operating under protection from creditors since December, may be "the industry's best-case scenario," Jamie Baker, analyst at J.P. Morgan Securities Inc. in New York, wrote in a research note Thursday.
The shutdown of the Chicago carrier would help the surviving network carriers by boosting their revenue, Mr. Baker said. That, the analyst bets, would outweigh the potential negatives of the shutdown, such as the continuation of high industry labor costs and the likely emergence of a host of domestic startups that would pose a threat to the big airlines.
United says it's making progress toward its goal of emerging from Chapter 11 by June 2004 by slashing labor and other costs and pursuing strategies to make it more competitive, including the proposed creation of a low-fare division.
United's fate likely will become clearer in the next two months, during which the carrier must meet the strict financial targets set by the providers of its interim financing while discussing concessions with labor unions. A war with Iraq, particularly a lengthy one, could diminish its chance of survival. The direction of the economy and demand for air travel also will play a big role.
A liquidation is "not going to happen," said United spokesman Joe Hopkins. " Everything that we're working on is to transform United into a much more competitive entity that can be successful over a long period of time."
Even so, some industry executives and analysts have been speculating over which airline would be interested in which United assets and who the ultimate winner would be in the event of the carrier's shutdown.
"An ex-UAL industry is sufficiently compelling, in our view, and an inherent possibility given the industry's poor track record at Chapter 11 resuscitation," said Mr. Baker, who wouldn't speculate on the odds of United's emergence from Chapter 11. Mr. Baker doesn't rate UAL stock and doesn't own its shares. J.P. Morgan Chase & Co. (JPM) is involved in the $1.5 billion debtor-in-possession financing extended to UAL.
"I think that the industry would benefit overall from the fact that capacity would be pulled out" should United close its doors, said Michael Linenberg, airline analyst at Merrill Lynch & Co. in New York. In particular, Mr. Linenberg said, "there would be lots of opportunity for the financially stronger, profitable, low-fare, low-cost operators" such as Southwest Airlines Co.(NYSE:LUV) (LUV), JetBlue Airways Corp.(NASDAQ-NMS:JBLU) (JBLU) and AirTran Holdings Inc.'s (AAI) AirTran Airways.
Mr. Linenberg wouldn't handicap the likelihood of United's liquidation, saying it depends on many factors. The analyst doesn't rate UAL stock and doesn't own the shares.
UAL shares were down three cents, or 2.7%, at $1.07 in afternoon trading on the New York Stock Exchange. The stock reached a 52-week low of 64 cents on Dec. 9. Shares of a company in Chapter 11 typically become worthless during the proceedings.
Had United not flown last year, the other major network carriers would have posted much smaller losses, or even profits, estimates J.P. Morgan's Mr. Baker.
AMR Corp.'s (AMR) American Airlines, the world's largest carrier, would have lost about $2 a share, rather than the whopping loss of $12.97 a share posted in 2002. Continental Airlines Inc.(NYSE:CAL) (CAL), the nation's fifth-largest carrier, would have earned about $2 a share, rather than losing $4.52 a share. Northwest Airlines Corp.(NASDAQ-NMS:NWAC) (NWAC), the No. 4 U.S. carrier, would have roughly broken even, rather than having a red ink of $5.74 a share.
The greatest potential beneficiary, according to Mr. Baker, is America West Airlines parent America West Holdings Corp.(NYSE:AWA) (AWA). The owner of the No. 8 U.S. carrier would have earned about $4 a share last year, rather than losing $3.82 a share. Mr. Baker's estimates assume that the industry would capture 70% of United's revenue.
Burning through millions of dollars each day, United's big rivals likely can't afford to snap up any significant chunk of the carrier's assets should they go to the auction block, Mr. Baker and Merrill Lynch's Mr. Linenberg say.
However, the big airlines would likely race to move into United's domestic markets and vie for its prized international airport access.
American, for one, would move aggressively to seize United's Pacific routes, the two analysts say. The Fort Worth, Texas, carrier would also nearly dominate Chicago's O'Hare International Airport, unless low-fare carriers such as JetBlue expand into the city.
Continental and Delta Air Lines Inc.(NYSE
AL) (DAL), the third-largest U.S. carrier, would be eager to obtain United's slots at London Heathrow Airport, the two pundits say. Mr. Baker says Delta would be more likely to gain access to the airport.Delta would also go after United's San Francisco hub, while Continental would push for its Denver hub and Southwest, the No. 6 carrier, would seek its Washington Dulles hub and could win it over JetBlue. Also up for grabs would be United's Los Angeles hub.
"Every major carrier remaining would be interested in enhancing their presence in those cities," Mr. Linenberg said.
United's liquidation wouldn't solve all of the industry's problems. If United shuts down and ends its efforts to slash labor costs with the help of the bankruptcy court, "current labor progress at AMR and elsewhere would similarly grind to a halt," Mr. Baker said. American has asked its employees for annual labor-cost savings of $1.8 billion, and Delta and Northwest have also said they must wring more cost savings from union contracts.
US Airways Group Inc. (UAWGQ), owner of the No. 7 U.S. carrier, which sought protection from creditors last summer, has cut its labor costs by more than $1 billion a year.
Another potential drawback for the big hub-and-spoke carriers: Southwest, the low-fare king, would take away an even greater share of the domestic market, Baker predicted.
