United flies into bankruptcy No. 2 carrier seeks protection from creditors, largest bankruptcy in industry history. December 9, 2002: 8:00 AM EST By Chris Isidore, CNN/Money Staff Writer
NEW YORK (CNN/Money) - United Airlines, the world's No. 2 airline, filed for bankruptcy protection Monday, succumbing to continued losses and staggering debt payments it could no longer afford to make.
The decision to file for bankruptcy in the U.S. Bankruptcy Court in the Northern District of Illinois follows a weekend of meetings of the company's board of directors, and a warning from union leadership that the bankruptcy was "unavoidable and imminent."
The carrier says it has arranged for about $1.5 billion in loans, known as "debtor-in-possession" financing needed to fund operations during a court supervised reorganization.
CHICAGO, Dec. 9 - UAL Corporation, the parent company of United Airlines, filed for bankruptcy protection this morning, after bankers and lawyers for the company reached agreement on Sunday night on the terms of a loan deal that will allow the company to keep operating in bankruptcy court, shielded from creditors.
The filing, made in Federal Bankruptcy Court in Chicago, lists $25.4 billion in assets, making it the largest bankruptcy in the airline industry by far and the seventh largest American corporate bankruptcy. The second-biggest airline bankruptcy, US Airways, listed assets of $7.7 billion when it filed for Chapter 11 protection in August.
United, the world's second-largest airline, would get $1.5 billion of so-called debtor-in-possession financing as it operates under bankruptcy protection. Of that, $800 million would be available 10 days after the filing, according to people briefed on the terms of the deal. Four lenders - Citigroup, J. P. Morgan Chase, Bank One and the CIT Group - would each provide $300 million, and Bank One would provide an additional $300 million to reach the total. That separate package provided by Bank One, which issues the credit cards linked to United's frequent-flier program, would make up a sizable part of the amount available after 10 days.
Debtor-in-possession financing gives United enough cash to keep up its operations in the early stages of a bankruptcy restructuring. The lenders get first claim on the airline's assets, ahead of other creditors. Later in its restructuring, United would have to look for exit financing.
In a statement, UAL said that it would "maintain its ability to continue its global operations and continue its long-standing commitment to its customers, safety and reliability." The airline said that all tickets for current and future flights would be honored, and that the bankruptcy filing would not affect frequent-flier and code-sharing programs.
Many industry experts have speculated that United should emerge from bankruptcy protection considerably smaller, but stronger. That is because United has the strongest worldwide route network of any carrier, as well as valuable assets in its landing rights at Heathrow Airport in London and at various Asian cities. Until American Airlines bought Trans World Airlines last year, United was the world's largest carrier.
One person close to United said the company would begin negotiating with its unions for deep concessions within days of a bankruptcy filing.
United's union leaders had tentatively agreed in the last month to give up $5.2 billion over five and a half years as United sought concessions to bolster its application for a $1.8 billion federal loan guarantee.
But industry experts say United will have to seek much deeper concessions, which could involve asking the bankruptcy judge to rid it of existing labor contracts and the current governance structure, which allows representatives of the pilots' union and machinists' union to sit on the board.
Lawyers for the company will ask the bankruptcy judge on the first day of the filing to allow the airline to keep up its operations at current levels. The court will then assemble a creditors' committee within a week or so. That committee, driven by a desire to see debts repaid, will have a large hand in the governance of the company.
GE Capital and Boeing Capital, the financing arm of the Boeing Company, are two of United's largest creditors and will undoubtedly seek to be on the committee. GE Capital has about $1.9 billion tied up in United, and Boeing has about $1.3 billion, according to people briefed on those arrangements. That money is linked to loans, aircraft leases and investments.
Boeing indicated in November that United was trying to renegotiate its payment terms. Aircraft values and lease payments have dropped by about 15 to 40 percent since the terror attacks of Sept. 11, 2001, particularly on older planes, and United is most likely renegotiating with those numbers in mind.
"That remains an open issue and we can't predict the outcome of those discussions," Russell Young, a spokesman for Boeing Capital, said in a phone interview on Sunday.
United is by far Boeing Capital's largest customer.
Most of Boeing's money has gone toward loans for new aircraft. That debt is primarily secured by about a dozen relatively new 777 planes. Each plane has a list price of $150 million and an actual price of $100 million. Those planes are usually used on more profitable routes, and it would generally be in United's interests to renegotiate payment terms rather than have those planes repossessed.
The company will have 60 days from filing to make payments or renegotiate terms. Otherwise, the creditors will have a right to repossess the planes. But if a creditor like Boeing took back planes, that company would have to redeploy them elsewhere, and that could be more costly than, for example, extending payment schedules.
UAL was pushed to the edge of bankruptcy last Wednesday when the Air Transportation Stabilization Board, a federal panel set up to dole out financial aid to the airline industry after the Sept. 11 attacks, rejected the company's $1.8 billion loan guarantee application. One person familiar with that decision-making process said that United's estimate of its future revenue was two to three times the number that analysts for the board reached. And that person said the $5.2 billion that United offered in labor concessions was not solid enough because it included things like forgone future pay raises rather than real cuts, and it included provisions that would have moved pay amounts back up to 2000 levels in 2008.
The board also realized that United would have to start making pension payments of $1 billion a year starting about next year, the person close to the board said. Fitch Ratings, a credit-rating agency, was brought in to advise the board, and it gave the requested loan a low grade.
Speaking of Mr. Tilton, the UAL chief executive, this person said: "He was given bad financial and strategic advice. He put all his eggs in one basket."
Rich-fine-green I think the QF flights to LAX are just about full as it is. UAL will still operate under "bankruptsy protection" whilst they sort out their finance and size, so a lot of the main routes will not be effected.
While United Airlines' CEO sought to reassure customers Monday that operations are, for now, unchanged even though the company filed for bankruptcy protection, his lead attorney told a federal judge that the airline is plowing through $20 million in cash a day.
That's much more than the $7 million that the company had said it was burning through each day.
And it shows that United faces a classic reorganization dilemma: How to keep your customers happy and flying while letting your creditors and employees know just how bad your condition is.
"There's a very real and urgent need to impress upon the court, the creditors and the workers that the company needs a lot of financial help very quickly if it is to survive," says Jon Ash of consultant Global Aviation Associates in Washington, D.C.
"But it also needs to say things to the public to keep its frequent fliers and others from worrying" and bolting to rival airlines.
CEO Glenn Tilton spent part of the day Monday in Chicago, United's hometown, touting his airline's best-of-industry on-time performance and reassuring fliers that schedules, onboard services and flights throughout the world will go on.
But bankruptcy lawyer James Sprayregen drew audible gasps in a crowded Chicago courtroom when he revealed the size of United's daily cash losses. He said the cash burn is expected to slow to $15 million a day in January.
Sprayregen said the new number is figured differently than the $7 million-a-day number that United officials reported in October. He conceded that the drain accelerated significantly as United moved into the typically slow winter months and closer to a bankruptcy protection filing.
Vendors usually start requiring companies approaching Chapter 11 to pay cash up front for services and goods.
The fact that the cash burn number came as a surprise isn't unusual in corporate bankruptcy filings, especially among airlines. The financial situation often is worse than what management has acknowledged publicly.
That was true in all but two of 10 previous bankruptcy filings by major U.S. airlines since deregulation in 1978, says David LeMay, an attorney who worked on Continental Airlines' 1990 bankruptcy filing.
The exceptions: Continental and America West, he says. The others "thought the situation wasn't as bad as it turned out to be. They all eventually failed."
Qantas seen benefitting from United woes
10 December, 2002 17:16 GMT+08:00
By Sophie Hares
SYDNEY (Reuters) - United Airlines' bankruptcy filing may prove a short-term boon for trans-Pacific competitor Qantas Airways Ltd, but could add uncertainty to its planned tie-up with Air New Zealand, Australian analysts said on Tuesday.
Struggling to reorganise under U.S. bankruptcy court protection, UAL Corp's United UAL could emerge as a leaner, more efficient trans-Pacific competitor to Qantas, which controls over 55 percent of Australia-United States air traffic.
But if United, the world's second biggest carrier, was forced to slash profitable trans-Pacific services or failed to emerge from bankruptcy protection, analysts say Qantas could find it harder to convince anti-monopolies officials of the benefits to travellers of its plan to buy 22.5 percent of rival Air NZ AIR .
"They'll be a much stronger fighting force assuming they do come out of Chapter 11," Peter Harbison, managing director of Centre for Asia Pacific Aviation, said of United Airlines.
"They have two choices with a profitable route like this one, they keep it because it's profitable or they sell it because it's profitable."
Star Alliance member United carries around 32 percent of passengers between the United States and Australia, with Air NZ AIR transporting less than 10 percent and Air Canada AC under five percent.
Qantas shares outperformed on Tuesday, adding two cents or 0.5 percent to end at A$3.75 in a wider market down 1.1 percent.
Analysts say oneworld member Qantas may grab more passengers in the near term if travellers shy away from flying on United between Australia and the U.S.
But cash-strapped United, which has stressed it would be "business as usual" for customers worldwide, was likely to trim fares in a bid to maintain market share
"Qantas may well have a bit of a windfall out of this as people try and switch, then things will no doubt settle down," said an aviation analyst who declined to be named.
Qantas said it was too early to comment on the impact of the United bankruptcy filing on its business.
"United Airlines said they will continue operations to and from Australia so they will continue to be a strong competitor," said Qantas spokesman Michael Sharp.
United, which expects to lose $20-22 million a day through December after grappling with high costs and low fares, is now certain to shrink.
Should United disappear from the tran-Pacific routes, a combined Qantas and Air NZ would wield almost total control of the trans-Pacific corridor, along with 80 percent of the Australian and nearly 100 percent of the New Zealand market.
"If you believe United's presence is going to be diluted, it's going to make you think twice about Qantas/Air NZ (going into an alliance)," said an analyst who declined to be named.
Australia's Competition and Consumer Commission (ACCC) said it would consider the impact of the NZ$550 million ($276 million) Qantas/Air NZ tie-up on air travel both within Australia and from the vast island continent to the United States and Europe.
"We see (United) as one of the major players on the Pacific route. They're providing some competition in the market and we'd like to see that continue," said ACCC spokeswoman Lin Enright.
Analysts said another U.S. airline such as Northwest Airlines Corp NWAC or Continental CAL could fill the void if United pulled out of the trans-Pacific route.
American Airlines AMR , the world's largest carrier, already codeshares with Qantas.
The prospect of an open skies agreement between Australia and Singapore could also pave the way for Star Alliance member Singapore Airlines Ltd SIAL to start flying the route or codeshare with United.
Just out of interest, as the majority of SLF on UA aircraft would be US citizens, just as Aussies prefer what they know and to fly with an airline that gives their domestic frequent flyer program a boost, UA have the advantage of much higher yield on a larger percentage of passengers.
Take for instance, a passenger departing LAX for Oz.
That passenger has no access to Aussie fares as he is originating in the US market, and must buy at USD rates.
Generally speaking, the USD fares are around double the AUD fares, so a passenger departing the LAX for SYD could expect to pay USD1900.00 for instance, where his Aussie counterpart departing SYD for LAX would be paying AUD1900.00 over the reversed port pair.
This is oversimplified, but rings true in most cases. It is all related to strength of economies and currencies, and even though yield control makes it easier to buy a seat at the USD bottom fare as it pays more, unless loadings are desperately high one could assume that a United flight with full passenger load SYDLAX would be returning at least 50% more in dollars converted into whichever currency you wish.
In the reverse, it is generally much cheaper to buy a return fare JNBSYD than it is SYDJNB due to the weak Rand. Therefore QF would generally be turning a better dollar figure than SA on a similar flight, again due to the loyalty of locals to the home team carrier.
Then we take into account local wages for crews and ground staff, and the water is muddy again.
Just thought I would throw this in to further clarify, or confuse the matter.