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US rejects United Airlines bid for loan guarantee

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US rejects United Airlines bid for loan guarantee

Old 5th Dec 2002, 08:16
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US rejects United Airlines bid for loan guarantee

Reuters

US rejects United Airlines bid for loan guarantee
Thu December 5, 2002 12:57 AM ET
(Updates with mechanics union canceling vote)
By Kathy Fieweger

CHICAGO, Dec 4 (Reuters) - United Airlines failed on Wednesday to secure a $1.8 billion U.S. government loan guarantee, pushing the world's No. 2 airline to the brink of filing for bankruptcy.

United was prepared to file for Chapter 11 bankruptcy protection as soon as it can line up about $1.5 billion in financing needed to keep flying in Chapter 11, sources familiar with the matter told Reuters late on Wednesday.

United officials were said to have met with bankers in New York on Wednesday to line up the so-called debtor-in-possession financing. The amount United needs is not yet final.

The Air Transportation Stabilization Board, voted 2 to 1 to reject United's loan guarantee bid despite a huge lobbying campaign by employees, Wall Street advisors and high-ranking politicians.

"The board believes that the business plan submitted by the company is not financially sound," the federal board said in a statement. "This plan does not support the conclusion that there is a reasonable assurance of repayment and would pose an unacceptably high risk to U.S. taxpayers."

United's chairman Glenn Tilton said in a statement the airline would continue to fly as he consults with union leaders and other parties on what to do next. He stopped short of saying United would file for bankruptcy, but he also did not say the airline would amend its application again, as the government said it could.

The late afternoon decision in Washington pushed the airline's stock price down 50 percent in after-hours trading. Union leaders denounced the decision by the federal board set up to help airlines struggling financially after the Sept. 11, 2001, attacks.

"We are extremely disappointed ... and do not agree with the Board's analysis of United's business plan nor the timing of its announcement," Capt. Paul Whiteford, head of the United's pilots union, said in a statement.

But the board's vote drew praise from rival Continental AirlinesCAL.N , which is also struggling to cope with a severe business travel slump.

INDUSTRY CRISIS ONGOING

The U.S. airline industry has been stuck in its worst financial crisis ever since the Sept. 11, 2001, hijack attacks on New York and Washington. Carriers lost an estimated $10 billion in 2001 and are on track for another round of massive losses this year. US Airways GroupUAWGQ.OB , based in Arlington, Virginia, filed for bankruptcy in August.

United, a unit of UAL Corp.UAL.N , had counted on the federal guarantee to support 90 percent of $2 billion in loans it hoped to get from its banks. The company planned to use some of that money to repay debt and avoid filing for bankruptcy protection.

United can still change its business plan and ask the board to reconsider a loan, a federal official said. But the plan that was rejected had been hammered out after months of negotiations with United's labor unions.

The board concluded that United's revenue projections were unreasonably optimistic and its costs, still too high. It also expressed "substantial concern" with underfunded pensions and how much assets were worth.

The board would consider giving United exit financing upon its emergence from bankruptcy, Daniel Montgomery, executive director of the board, told reporters in a conference call.

Elk Grove Village, Illinois-based United, with about 83,000 employees, had fought a difficult battle for months to win concessions from workers, vendors and suppliers, it has repeatedly warned it would be forced to seek court protection without the federal loan backing.

HARD DECISIONS

Board members Federal Reserve Gov. Edward Gramlich and Peter Fisher, treasury undersecretary for domestic finances, voted to reject United's application. An assistant transportation secretary voted to defer a decision until Dec. 9 to give the airline more time to submit information.

"These are hard decisions, and I certainly feel for the affected employees," Gramlich said in a statement. "At the same time, the loan board has a responsibility to taxpayers, and to fostering the long-term health of the airline industry."

Fisher said United flat out failed to meet the loan guarantee criteria. "This is not just about costs, it's about a business plan that is fundamentally flawed."

Several airline analysts said they saw no way United could escape a bankruptcy filing, even though the agency told reporters United could submit a new plan.

"This is the final nail in the coffin," said Standard and Poor's analyst Phil Baggaley. "United will have to file for bankruptcy very quickly. The timing will probably be driven by when they have debtor-in-possession financing credit facility lined up."

United's mechanics union said it has canceled a re-vote on a package of wage concessions that had been set for Thursday, calling a vote at this juncture "pointless," according to a statement on its Web site. Union members had been expected to vote again on $700 million in concessions that are part of a $5.2 billion giveback package.

UAL shares fell 50 percent in after-hours trading to $1.54 a share from a close of $3.12 on the New York Stock Exchange.

Chicago-based United posted a record $2.1 billion loss in 2001, and has lost another $1.7 billion so far this year. It is burning through about $8 million in cash daily and must keep a certain minimum level of cash to function.

The airline has been working with Chicago-based Kirkland and Ellis as its bankruptcy counsel.
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Old 5th Dec 2002, 20:00
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A little bit of extra info, UAL Shares have been suspended during trading today in New York after losing 60% of their original value.
It's still to hit rock bottom in the US Aviation scene. Where I am in the Caribbean at the moment, a few of collegues are ex US Mainline Pilots from varied companies, now on Turbo Props after years of Jet time in the US. Sad days for UNITED lets hope it gets through without ending up like, Eastern, and PanAm.

I watched US CBS news last night, they said that a United Pilot costs the company about $860.00/flight hour where at Southwest or JET BLUE for eg, it costs the company $460.00/ flight hour per Pilot, I think they are refering to Captains. Thats USD as well by the way.The new low cost carriers and new pay scales seem to be winning in this toppsy tervy environment.

Layoffs in the US Industry stood at around 100,000 Christmas last year, this year it looks to double or even treble.

My condolences to all our collegues in the US affected by this.

Regards
Sheep
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Old 6th Dec 2002, 03:06
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to compare 737 pay would be interesting. I believe the UA captains get about 230k p.a. and for 800 hours that's 287.5 per hour!!!!!!!Seems like "statistics" to me.
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Old 6th Dec 2002, 04:05
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$860 per hour sounds more like the entire flight crew costs.

In any case, $860 vs $460 is hard to compete with.

As a matter of interest; Any guesstimates of QF & DJ flight crew costs for 737?
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Old 6th Dec 2002, 12:49
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Thank God for Chapter 11...wish we had this in Australia!!...
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Old 6th Dec 2002, 20:01
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United's labour costs have been unreasonably high for years and with less than adequate management this has severly compounded their problems to the point of possible extinction.
Plying unprofitable routes with huge running costs is always fraught with danger for any airline.

This airline was in deep trouble even before 9/11 and the Air Transportation Stabilisation board knows this damned well.
So what now?
Pump in money that will evaporate or let them fall into Chapter 11 Bankruptcy protection by denying them the cash injection.

The possibilities?
In Chapter 11 expect to see a 40% reduction of staff, routes, aircraft etc and hope for the best.
If it emerges from CH11 it will be a fraction of its former size but alot more competitive.
If bankrupted this will at least stabilise American, Delta and Northwest primarily as thats probably to be expected.

The problem deepens because staff have alot of their own super invested as a proponent of UAL shares thanks to the staff buy-out some years back.
Not only will these people be out of a job but have their nest-eggs severly slashed by owning what could potentially be a worthless stock.

Remember a few years ago a certain Ansett Captain touting that the AN staff (at the time) should attempt a company buy-out by securing their super as Ansett stock to buy out Newscorps share and using the same finance and trading organisation that United used?

What a recipe for disaster that would have been!

The even bigger disaster would be if some 10,000 odd United pilots were dumped on the world market!
Judging by what happened in Oz after the An collapse about 35-40% would secure work in the USA leaving some 6000 pilots without work.

Those already unemployed pilots should really hope this doesnt come to bare as the competition will really get strong and the companies will try to recruit at lesser rates because of a glut of pilots on the world market.

A disaster either way.
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Old 7th Dec 2002, 01:08
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CNBC

THE AIRLINE BUSINESS DOESN'T WORK..................

The surprise in United Airlines’ likely bankruptcy drama isn’t that it faces such unpleasant options — it’s that it didn’t face them sooner. The airline’s business plan, dismissed by the government’s Air Transportation Stabilization Board, is not much worse than any of its competitors. Almost every major U.S. carrier faces the same dire choices.

EVEN AS United struggles to avoid what appears to be an ever more certain bankruptcy filing, it and other full-service carriers around the globe have begun to feel a crisis burgeoning.

It’s not just a sluggish economy or a tepid moment in the business cycle. Executives confront an industry model that, as Air Canada’s CEO Robert Milton said last month, “just doesn’t work anymore.”

Many industry executives place the blame on the Sept. 11 attacks and Americans’ persistent fear of flying afterwards, but analysts suggest the breakdown was well underway before then — in United’s case, stretching back to the partial ownership deal between management and employees struck in 1994.

For United, but also for most other major operators — including US Airways, which is operating under Chapter 11 bankruptcy protection — the competitive pressure to keep prices low and still provide full service has prompted a management dilemma.

“The market is splitting. The low-cost, low-fare group of airlines both here and in Europe … have grown to a point where they have achieved a critical mass,” says Edmund S. Greenslet, who tracks aviation trends for ESG Aviation Services. “The providers are not fly-by-night outfits that are trying to do business on the cheap with a handful of old, obsolete airplanes. They’re quality companies and they’re quality products.”

The low-cost realm has captivated travelers. Southwest Airlines’ strategies have become the stuff of legend, while upstart JetBlue Airways has shown solid profits and growth in its short three years of operation.

The success hinges on capturing revenue per available seat mile (ASM), the profit benchmark for the industry. U.S. low-cost operators have wrangled ASM costs down to six or seven cents, while a major carrier like United pays over 10 cents per seat, per mile.

The phenomenon is a global one. As European flagship carriers like SwissAir and Belgium’s Sabena went belly-up in recent years, a growing posse of smaller, profit-minded competitors stepped in.

At last count, Britain had at least four low-cost airlines, with long-time regional carrier British European converting its fleet and its brand into low-cost flyBE. Dublin-based RyanAir just placed a record order with Boeing for 100 737-800s, with options for 50 more. Germany has at least two newly launched carriers, including Hapag-Lloyd Express, which offers dirt-cheap flights on its fleet of 737s, painted to look like yellow-and-black taxis.

Fares for these European upstarts sound more like bus tickets. Hapag recently offered 13-euro ($13) flights from London to Bonn; British carrier Buzz, owned by KLM, is flying between London and Amsterdam this month for five euros.

The phenomenon is spreading. Malaysia’s Air Asia offers cheap flights out of Kuala Lumpur, whose massive airport was designed as a regional hub. Richard Branson expanded his Virgin brand into Australia with Virgin Blue — which competes with Qantas’ Australian Airlines subsidiary and New Zealand’s Freedom Air. South Africa’s Kulula and Brazil’s Gol offer cheap alternatives on domestic routes.

The trend was spurred by many governments’ decisions to privatize national fleets — forcing airline managers to face the hard reality that they have chosen an industry that is rarely profitable even in good times. Though U.S. airlines were never government-owned, their track records after deregulation has been grim. Of the 14 major carriers from the half-century before 1978, only six remain — and several have faced multiple restructurings.
“What other industry can you think of in the U.S. economy where you’ve had a failure rate of eight out of 14?” asks Gritta.

‘SOUTHWEST STRATEGY’
As their big brothers suffer, these aviation parvenus have largely thrived on a remarkably uniform set of economic principals, many emulating Southwest and the methods honed by the Dallas-based carrier in the years before deregulation when it was limited to a regional slot in the Texas market. As the sector has become more robust, what once seemed like quirky operational decisions have evolved into a new global model for the industry. Keys to the strategy include:

A unified fleet: Operators choose a single aircraft type for operations. Most have emulated Southwest’s model of a 737 fleet, in part because of Boeing’s efforts to increase the 737’s range and cut flight costs. Others, such as JetBlue, use Airbus’ versatile A320; some foreign carriers have turned to even smaller jets, such as the British Aerospace 146, which have quick turnaround times and usually lead to fewer empty seats. The growing popularity of smaller jets by such manufacturers as Bombardier and Embraer is likely to grow as carriers see value in building fleets with smaller, more flexible plane configurations.

Few frills: Details vary, but few low-cost carriers offer more than basic comforts on their flights. Many charge for food and drinks. JetBlue opted to lure customers with seat-back satellite TV, betting that passengers would rather bring their own food and be entertained.

One-class service: Those seeking a cushy seat and high-class victuals may be out of luck, but eliminating the extra equipment and crew needed for business- and first-class service chops away some serious fat. It also saves money at the gate by eliminating separate check-in lines — while soothing the egos of economy travelers who don’t feel as though they’re being treated like last week’s leftovers. Most carriers have also adopted an open seating strategy; it doesn’t help the specialty passenger who needs extra leg room or a window seat, but it rewards conscientious passengers who arrive early and travel often.

Direct routes: The original low-cost strategy hinged on scheduling flights from one point to another, assuming that passengers would book a single flight for their entire journey rather than be shuffled through major carriers’ intricate system of hubs and spokes. Increased congestion and a squeeze on gate space at massive hub airports such as Atlanta’s Hartsfield International and O’Hare in Chicago tear at that system’s seams, especially in bad weather, leading to dire predictions. (“Hub and spoke is dying,” says Gritta.) But even Southwest uses a modified hub system to connect passengers for trans-continental flights, and major carriers are likely to maintain hubs at least to connect passengers to longer domestic and international flights.

Quick turnaround: Full-service carriers have always been hampered by significant waits at the gate while crews hand off duties and caterers reload planes. No full meals means less turnaround, and direct routes mean there’s less time waiting for connecting passengers.

Airport location: Most low-costers skirt major airports and look for a secondary field — Midway Airport in Chicago; Burbank and Long Beach outside Los Angeles; London’s Stansted, Luton and Gatwick airports. JetBlue capitalized on unused gate space and departure times at New York’s John F. Kennedy Airport — allowing it to form its own hub at a major airport on the cheap. Smaller airports are often grateful for the business: Landing and gate fees are dramatically lower; fuel costs are often slashed and many suburban travelers find these smaller airports closer to home.

Direct bookings: No good news for travel agents, but upstarts have largely opted for direct bookings that save them commission fees and leverage the skills of Internet-savvy travelers eager to save a few dollars. AirAsia, for example, placed online kiosks next to check-in stands so passengers can book directly — even at the airport. This trend in particular has gained traction with major carriers, always eager to cut booking costs.

COST VS. COMFORT
Differences in strategy are profound, but frequent fliers have made stark decisions about value. Full-fare frills may be nice, but it’s a challenge to justify $100 or more on airline food and a more centrally located airport.

“I think that’s going to be critical for these folks to answer, ‘Why is somebody going to pay more money to be on my flight?’” says Tom Cauthen, of Accenture’s global aviation consulting practice.

The groggy economy has also sharpened the focus on value. For business travelers, managers are less willing to approve full fares that often are four times as expensive. Between Southwest’s expansion and the quick growth of JetBlue, U.S. businesses now have low-cost options. Europe’s exploding low-cost market make client visits on the continent almost as cheap as a London taxi ride.
“The business traveler has been the one that has been subsidizing the big airlines for years,” says Greenslet. “Finally, the business traveler has realized that those fares are egregiously large.”
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Old 7th Dec 2002, 01:55
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Repeat after me...

SHORTHAUL AVIATION IS A COST DRIVEN MARKET


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