The long-awaited United Airlines reorganisation plan is set to free the carrier from bankruptcy in February, 38 months since parent UAL sought Chapter 11 protection from creditors in the largest airline bankruptcy on record.
The carrier hopes to raise $2.5-3 billion to repay its interim loan and to provide liquidity. Chief executive Glenn Tilton told employees in a message that UAL has “proposals for up to $3 billion in exit financing from four of the most prestigious financial institutions in the world”. It may raise more capital through a rights offering or by offering $500 million in new stock to unsecured creditors.
The plan, which must withstand creditor objections and a bankruptcy court examination, would have it earning an operating profit of $916 million next year. The airline has turned operating profits in some months, but projects an operating loss of $295 million for 2005, an improvement over 2004 losses of $854 million. Because reorganisation distorts bottom-line results, it sees a net loss of $3.6 billion in 2005 but a large one-time gain next year.
The business plan outlined in court documents assumes that oil prices, its second-largest expense, will fall to $50 per barrel, bringing its 2006 fuel bill down by almost 10% to $3.4 billion compared with $3.8 billion this year. UAL says its estimate “represents a historically high fuel cost” until 2010. Bill Brandt of Development Specialists, a Chicago-based corporate workout expert, speaks of “self-delusion in their thinking about oil prices”. However, UAL says: “If long-term oil prices are significantly higher than are contemplated today, they will drive industry fare increases or structural changes such as capacity reductions.”
In addition to its hopeful predictions on costs between this year and 2010, United may be vulnerable in its revenue assumptions. It believes that “core passenger revenue” will increase by about 2.1%, a rate similar to growth between 1990 and 2000, it says, calling that decade “representative of the industry”. Consultants Michael Roach and Alan Sbarra say that decade of ups and downs is probably not representative, but note that United yields increased by a nominal 4.5% over the period, or about 0.4% a year, but in real terms fell, with strength only on Pacific and Latin growth. United’s assumption of a “benign competitive environment” in international markets is questionable, they say, concluding that the plan, which does not assume any recession or steep downward cycle, “is not so much a plan as a hope”.
United is not so upbeat about the likely outcome for creditors. Unsecured creditors probably will receive just 4-7¢ on each dollar, while those who have held on to United common and preferred stock will get nothing. Brandt, who has consulted in other airline cases and has criticised the lengthy UAL reorganisation, says: “The plan borders on the acceptable threshold; it’s hope-chest basics.”
A hearing on United’s plan is set for October. If creditors agree to it, the judge would set a January hearing on finalising it. The industry’s dire situation, in which Delta and Northwest have entered bankruptcy protection, may force the creditors to accept, Brandt says.
DAVID FIELD/WASHINGTON
Source: Airline Business
