UAL Weighs Exit From Bankruptcy
Several Months Ahead of Schedule
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
May 21, 2003
CHICAGO -- UAL Corp. is considering emerging from bankruptcy-court protection as early as this fall, months ahead of schedule, as the United Airlines parent aggressively reins in its once-towering expenses, said Jake Brace, the company's chief financial officer.
Mr. Brace also said UAL expects to meet the monthly financial targets for April and May set by lenders as part of the airline's bankruptcy financing package. The world's second-largest airline had warned as recently as March that it could breach those targets in May or June, forcing it to seek waivers from its lenders. Bolstering UAL's finances, Mr. Brace said, was $300 million in federal aid received this week, representing United's share of a government-aid package to help airlines hurt by the war in Iraq.
UAL, which filed for Chapter 11 bankruptcy protection in December, was brought low by high debt and deep losses caused by the worst-ever slump in U.S. aviation history. The airline is making good strides at cutting costs, but is by no means out of the woods. It posted a first-quarter loss of $1.3 billion, and its April passenger traffic, hit by the war in Iraq and the epidemic of severe acute respiratory syndrome, fell more than 13% from a year earlier. Indeed, Mr. Brace said that if United's revenue didn't pick up, the airline still could miss some of its lenders' financial targets by late summer.
Mr. Brace, in a telephone interview, said UAL is looking at the pros and cons of stepping out of Chapter 11 protection during the fourth quarter of this year or the first quarter of 2004, well ahead of a previous goal of emerging by June 2004. "We see no impediment to an early exit," he said. "But we want to come out a completely fixed company, not a partially fixed company."
Mr. Brace said an early exit from Chapter 11 would bolster public and employee perceptions about United, which just two months ago raised the possibility in court filings that it could be forced to liquidate. Putting bankruptcy behind it also would reduce management distraction and the expense of the legal process, he said. "But if you exit early, you can't necessarily get all that you want done in the time available," he said, referring to shedding additional financial obligations more easily done in court.
The executive said UAL is making more progress than it expected in lowering costs. "We're going to be significantly ahead of the $4 billion in [annual] savings" foreseen by 2005, he said. Some people with knowledge of UAL's evolving business plan suggest the savings could be closer to $5 billion a year.
United's employees last month agreed to more than $2.5 billion in annual savings. Current efforts to restructure aircraft leases and mortgages look like they will yield significantly more than $500 million in annual savings, he said. Further savings are expected from outsourcing more aircraft and engine maintenance to vendors, redoing airport leases and reducing municipal-bond obligations.
With cost-cutting agreements in hand, UAL is now finalizing its business plan, which it must present to prospective investors to secure financing to emerge from Chapter 11. "We're already talking to various parties, informally, on the debt and equity side," Mr. Brace said. "On the equity side, lots of people have talked to us."
People familiar with UAL's thinking said it isn't clear whether the company will seek private equity to help fund its exit from Chapter 11. But UAL clearly will be in the market for debt financing to help it repay its interim bankruptcy loan and build up a cash cushion for operations.
Repaying that so-called debtor-in-possession funding may not be as onerous as once thought. While four lenders pledged as much as $1.5 billion, UAL has drawn down only $800 million of the total, and people knowledgeable about the matter don't believe UAL is planning to tap the remaining $700 million.
UAL has said it hopes to revisit its application -- rejected last December by the government -- for $1.8 billion in federal loan guarantees that were part of $10 billion in potential loan backing originally offered to airlines following the Sept. 11, 2001, terror attacks. A government-backed loan "is the far greatest likelihood for exit financing," said one person familiar with UAL's situation.
One piece of UAL's business plan still up in the air is United's plan to better compete with low-fare carriers by starting a discount airline of its own. Now that United's pilots have agreed to much lower pay rates, some people close to the company suggest there is no longer a need for a separately branded and managed low-fare carrier to cater to leisure travelers. United currently expects to offer some sort of low-fare product. But Mr. Brace said its design hasn't been determined.
Several Months Ahead of Schedule
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
May 21, 2003
CHICAGO -- UAL Corp. is considering emerging from bankruptcy-court protection as early as this fall, months ahead of schedule, as the United Airlines parent aggressively reins in its once-towering expenses, said Jake Brace, the company's chief financial officer.
Mr. Brace also said UAL expects to meet the monthly financial targets for April and May set by lenders as part of the airline's bankruptcy financing package. The world's second-largest airline had warned as recently as March that it could breach those targets in May or June, forcing it to seek waivers from its lenders. Bolstering UAL's finances, Mr. Brace said, was $300 million in federal aid received this week, representing United's share of a government-aid package to help airlines hurt by the war in Iraq.
UAL, which filed for Chapter 11 bankruptcy protection in December, was brought low by high debt and deep losses caused by the worst-ever slump in U.S. aviation history. The airline is making good strides at cutting costs, but is by no means out of the woods. It posted a first-quarter loss of $1.3 billion, and its April passenger traffic, hit by the war in Iraq and the epidemic of severe acute respiratory syndrome, fell more than 13% from a year earlier. Indeed, Mr. Brace said that if United's revenue didn't pick up, the airline still could miss some of its lenders' financial targets by late summer.
Mr. Brace, in a telephone interview, said UAL is looking at the pros and cons of stepping out of Chapter 11 protection during the fourth quarter of this year or the first quarter of 2004, well ahead of a previous goal of emerging by June 2004. "We see no impediment to an early exit," he said. "But we want to come out a completely fixed company, not a partially fixed company."
Mr. Brace said an early exit from Chapter 11 would bolster public and employee perceptions about United, which just two months ago raised the possibility in court filings that it could be forced to liquidate. Putting bankruptcy behind it also would reduce management distraction and the expense of the legal process, he said. "But if you exit early, you can't necessarily get all that you want done in the time available," he said, referring to shedding additional financial obligations more easily done in court.
The executive said UAL is making more progress than it expected in lowering costs. "We're going to be significantly ahead of the $4 billion in [annual] savings" foreseen by 2005, he said. Some people with knowledge of UAL's evolving business plan suggest the savings could be closer to $5 billion a year.
United's employees last month agreed to more than $2.5 billion in annual savings. Current efforts to restructure aircraft leases and mortgages look like they will yield significantly more than $500 million in annual savings, he said. Further savings are expected from outsourcing more aircraft and engine maintenance to vendors, redoing airport leases and reducing municipal-bond obligations.
With cost-cutting agreements in hand, UAL is now finalizing its business plan, which it must present to prospective investors to secure financing to emerge from Chapter 11. "We're already talking to various parties, informally, on the debt and equity side," Mr. Brace said. "On the equity side, lots of people have talked to us."
People familiar with UAL's thinking said it isn't clear whether the company will seek private equity to help fund its exit from Chapter 11. But UAL clearly will be in the market for debt financing to help it repay its interim bankruptcy loan and build up a cash cushion for operations.
Repaying that so-called debtor-in-possession funding may not be as onerous as once thought. While four lenders pledged as much as $1.5 billion, UAL has drawn down only $800 million of the total, and people knowledgeable about the matter don't believe UAL is planning to tap the remaining $700 million.
UAL has said it hopes to revisit its application -- rejected last December by the government -- for $1.8 billion in federal loan guarantees that were part of $10 billion in potential loan backing originally offered to airlines following the Sept. 11, 2001, terror attacks. A government-backed loan "is the far greatest likelihood for exit financing," said one person familiar with UAL's situation.
One piece of UAL's business plan still up in the air is United's plan to better compete with low-fare carriers by starting a discount airline of its own. Now that United's pilots have agreed to much lower pay rates, some people close to the company suggest there is no longer a need for a separately branded and managed low-fare carrier to cater to leisure travelers. United currently expects to offer some sort of low-fare product. But Mr. Brace said its design hasn't been determined.
