Thursday February 13, 6:36 pm ET
By Neil Weinberg
UAL's Chapter 11 reorganization may just turn into an outright liquidation. Lenders, lessors and competitors are ready to pick up the pieces.
Even by the sickly standards of the American airline industry, UAL Corp. is a mess. After losing $3.2 billion last year, the nation's second-largest carrier is confronting the distinct possibility that it will not emerge from Chapter 11. It may instead be auctioned off in parts, the airplanes and landing slots carted off and the corporation liquidated in the manner of Braniff, Pan Am and Eastern.
Valiantly presiding over the Chicago-based parent of United Airlines is Glenn Tilton, a 54-year-old former oil executive who took the chief executive job in September. Perhaps radical thinking is just what is needed at this desperate juncture. But so far some of Tilton's moves have been--to put it politely--counterintuitive. To increase traffic he cut unrestricted walk-up fares by 40% in January out of United's two busiest hubs, Denver and Chicago O'Hare. That gained it some passengers but lowered the take from last-minute travel by an estimated $30 million a month.
Even without the discounts UAL (NYSE:UAL - News) was burning through money faster than jet fuel. In the fourth quarter it had an operating loss (earnings before depreciation, interest, taxes and airplane rent) of $478 million. Lenders, of course, have very limited patience with funding such operating losses, and if there is no prospect for reducing them, then the company would be worth more to creditors dead than alive. Starting in March, UAL's loan covenants require it to meet a schedule of reductions in operating losses and to break even by October.
If UAL can't meet the timetable, then debtor-in-possession lenders Bank One, J.P. Morgan Chase, Citigroup and CIT Group can begin confiscating planes, spare parts, routes and landing slots. "If things go badly, J.P. Morgan and Citigroup have a big incentive to seek liquidation and get their money back by calling in their collateral," says a lawyer following the bankruptcy. Publicly, United isn't conceding it's in any kind of death-spiral scenario. "The changes we're making should enable us to strengthen our operations and make us competitive," says United spokesman Jeffrey Green.
*Includes charges/provisions. **Includes UAL and US Airways obligations. Sources: Company and UAL bankruptcy filings; SpeedNews; Back Aviation Solutions. LAID LOW
United declared Chapter 11 bankruptcy in December with $21 billion in debt. A sampling of holders runs the gamut.
UNSECURED CREDITORS Amount($mil)
Debt held in trust $2,900
Indiana government authorities 162
Airbus 48
SECURED CREDITORS Amount($mil)
GE Capital $1,700
Boeing 1,300
Bank of New York 630*
Altria (Philip Morris) 536**
Pitney Bowes 100**
Walt Disney 83
If, that is, the unionized workers accept the changes. In January Tilton proposed to split off a big chunk of the carrier later this year and turn it into a low-cost, no frills airline, rumored to be named Starfish, that could compete with JetBlue (NasdaqNM:JBLU - News) and Southwest (NYSE:LUV - News). Pilots now making $225,000 (down from $316,000 last year) could be forced to trade down to jobs paying a maximum of $153,000.
Continental (NYSE:CAL - News) and US Airways (OTC BB:UAWGQ.OB - News) have gone the low-cost route before, without success. "If this is what they want to do, it's a nonstarter," stated Paul Whiteford, chairman of the 8,500-member United chapter of the Airline Pilots Association. It would, he added, "lead to the death of United Airlines." In other words a strike would push the airline out of business via the same route Eastern traversed.
By mid-March United must get its unions to agree to permanently hack off $2.4 billion in annual pay, or about 34% of their total. (Labor consumed half of UAL's $14.3 billion in revenue last year.) Mechanics and flight attendants have been publicly assailing Tilton for not offering a concrete proposal for them to consider. If no agreement is reached, United must petition the bankruptcy court to impose concessions.
To line up $1.5 billion in debtor-in-possession financing, United had to pay an unusually large 5% commission for a $300 million portion, plus a percentage point more in interest than WorldCom, Kmart or Adelphia paid. The postbankruptcy lenders are first in line during a liquidation, but even so they are taking a significant risk. If the workers won't come to work for reduced pay, then no lender is going to come out whole.
So far United has yet to buzz-cut any of its aircraft leasing deals. In fact, it just agreed to hold on to 154 of its 463 leased planes under the same old terms. But if the carrier starts offering, say, 25 cents on the dollar, big aircraft lessors like GE Capital (which owns 20 United planes) may just repossess and try to redeploy the jets to overseas carriers. When that market is saturated, the only thing to do with a commercial jet plane may be to park it in the desert in the Southwest, along with the 1,800 other jets already there.
Ready to feast on any leftovers are rivals like American, which would benefit from O'Hare's slots and routes. Continental lusts after United's Denver hub and its London Heathrow routes. Other hubs up for grabs would include Washington Dulles, San Francisco and Los Angeles. Delta, US Airways and Northwest would likely jump into the fray. With 20% of traffic already, and a strong tailwind at their backs, the discounters like Southwest, JetBlue and AirTran may be the biggest winners of all.
