UAL demise Bad Karma for NWA and DAL

Sonny Crockett

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Crain's Chicago Business

Rivals' weakness is United's edge

Northwest, Delta face Ch. 11 as fuel costs rise

September 05, 2005

By Julie Johnsson


United Airlines will feel the pain as jet fuel prices rise in Hurricane Katrina's wake, but not as acutely as some of its rivals.

With a large section of the Gulf Coast in ruins, disruptions to oil production and air transportation are likely to drain cash at Delta Air Lines Inc. and Northwest Airlines Corp., which have major operations in the blighted region. Delta and Northwest have hubs in Atlanta and Memphis, respectively.

The prospect of Chapter 11 looms for both airlines, which had warned they could be forced to seek bankruptcy protection even before the storm struck: Delta because it's running low on cash, Northwest if it's unable to gain $1.1 billion in labor concessions.

A Northwest spokesman declines comment, but points to a Sept. 1 Securities and Exchange Commission filing in which the airline warns that rising jet fuel prices could hasten its bankruptcy filing. Delta didn't return calls seeking comment.

Their misfortune could benefit United as it winds up a three-year bankruptcy reorganization.

Though loaded down with debt, United, the nation's No. 2 airline, will be in better financial shape than either Delta or Northwest to weather the coming winter, when soaring fuel costs and light passenger loads threaten to spark a liquidity crisis among the industry's weaker players.

ADVANTAGE: UAL

The Elk Grove Township-based carrier has among the lowest labor costs of the major airlines, a new deal that will trim aircraft financing costs by $2.9 billion over five years and the apparent confidence of its lenders, who've committed $3 billion in exit financing.

"It gives United, obviously, a strong advantage against the other legacy carriers," says industry analyst Julius Maldutis.

United doesn't expect the hurricane's aftermath to hamper its restructuring and plans to submit its reorganization plan soon, a spokeswoman says.

"We are focused on doing the work that will enable United to compete and face the challenges the industry presents," the spokeswoman adds. "Doing the work to restructure effectively ensures United can determine its future."

United faces considerable financial challenges, however. It still must convince creditors and a Bankruptcy Court that its business plan has sufficient cushion to withstand the current oil shock. And management's commitment to exit bankruptcy with all-debt financing will leave the airline heavily leveraged.

But survival is the name of the game in the coming months, as the U.S. airline industry heads for another shakeout. United holds a competitive advantage in its $1.87-billion unrestricted cash reserve, which will increase by about $1.4 billion with its exit financing. Delta and Northwest will have $1.19 billion and $1.23 billion, respectively, by yearend, analyst Ray Neidl estimates. United has positive operating cash flow, while Delta and Northwest are burning through about $4 million a day.

Cash will be crucial to surviving in an era when oil costs $65 a barrel or more. The 10 largest U.S. airlines are on pace to spend $25.8 billion on fuel this year, or 27% of their revenue, according to AirlineForecasts LLC, a Virginia-based market research firm. That's a 50% jump in fuel spending from 2004, when the airlines devoted 19% of total revenue to fuel.

"This is ugly stuff," says Vaughn Cordle, president of AirlineForecasts. "This is an industry-transforming phenomenon. I think it's going to force consolidation and it is going to lead to major restructuring."

United could gain if bankruptcy filings prompt Delta or Northwest to shrink operations, or spur consolidation in an airline industry some see as plagued by overcapacity. "You'd see some portion of the network go away," says Robert Mann, principal with R. W. Mann & Co., a Port Washington, N.Y.-based aviation consultancy. "Some portion of the existing revenue pool would be available to others."
 
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