LarryJ

What would be an "acceptable" profit margin?

Over the past year, UAL's net profit margin has ranged between 5% and 6.96%.

UAL has $6,000,000,000 in cash with an additional $2,000,000,000 in recently obtained credit.

bocastephen

We can replace our transportation industry with better run companies - if that means United goes away to be replaced with something new, that's how the dice rolls.

jsloan

I have no desire to restart this conversation. It serves no purpose.

Overbooking is the best idea that the airlines have ever had; I'm fully in support of it; I'm angry that they don't do it as much as they used to.

Hard pass. EC.261 is a terrible piece of legislation that gets worse with every court decision expanding it to situations never actually covered in its text.

jupper

I seem to recall that a lot of their financing from banks have strings attached in regards to a minimum liquidity. I believe for UA I read ~2B$, drop below that and very large loans come due immediately.

In essence the liquidity helps to be able to borrow money when the going gets tough - thus I'd say only half of the mentioned 8B$ would be usable by UA without getting into a crunch to get the debt restructured or receive another financial injection.

EWR764

I struggle with the notion that the trouble airlines face currently is related to mismanagement... even almighty Delta finds itself in dire straits and it's universally held out as an example of a well-run company; certainly more so than its peers.

Can you point to another business, with similar exposure, that is expected to weather the storm better?

Apple could be running an airline right now and it still wouldn't be viable.

st3

Precisely. This isn't just affecting UA but all carriers foreign and domestic. The whole travel industry as a whole is reeling not to mention small businesses like restaurants and bars.

bocastephen

The issue here is how United prioritizes shareholders and how they burned through billions in cash to reward shareholders, which could be used today to support their limited operations and payroll. Yes, even WN made the same mistake, but there is an ongoing issue at United and its focus on shareholder value vs running a service business. Yes, I know many posters here feel that shareholders deserve to be rewarded first, even given that they add absolutely zero value to the business, but one only needs to understand the philosophy of Herb Kelleher and Colleen Barrett, and especially after reading Colleen's book, to understand why that approach is faulty.

Apple made a critical business mistake - they focused almost their entire supply chain in China, and bet the farm on retail sales growth there that never really happened. So, Apple is bad example, they are not run well at all.

The issue is really whether or not "United" deserves a bailout from the public purse - and in my opinion they do not because of how management chose to run the business. They really should consider declaring bankruptcy, zero'ing out shareholder value, and then coming to the government with a plan on how they will conduct their business going forward and apply for either a loan, or a preferred share arrangement where the public becomes the essential owner of the airline, and assumes a superior position to any shareholders that buy into a new issue.

HNLbasedFlyer

So, more consolidation - I just don't see how that is better.

Anyway - I don't see United going away unless they all go away

fastair

like the smaller ones in Europe that have already gone under, or the bigger ones that are on the brink? Same can be said for the other continents

was this hit on UA (and others) an act of free market forces? No, UA, was cut off from China by govt forces, then to Europe (minus Ireland/UK) then much of Latin America. Did the government ask people not to fly, take mass transit, move around the country, or was that free market? SFO, on lockdown, who is the biggest carrier by far there? Don’t blame poor mgmt policies for this, you’re not seeing the forest for the trees.

J.Edward

I think the larger issue here - and it's not JUST a FT issue - is the perception.

Airlines have been turning up the screws on their customers over the past decade and in doing so created resentment within the very group of [we the] people they are now seeking relief from.

It is true customers are relentless in demanding cheaper fares and I do not see how any carrier could not respond to that market pressure. But at the same time, I also fail to see how massive realignments in loyalty programs (excepting AS), playing cute with prior promises and commitments (lifetime UC members, silverwings, etc.) were done as a reaction to the market. Reacting to cheaper fares, slimlining seats, etc., strike me as an operational necessity, being belligerently arrogant on smaller points just strikes me as petty and mean. And UA management was petty and mean in the way they handled these niche matters when they otherwise did not need to be.

Furthermore, if UA management really wanted to return value to their shareholders why not use a dividend as that puts CASH into UA's owner's pockets. Propping up the stock price only creates the illusion of [paper] wealth. See the past three weeks on the market for a sad example of this lesson being learned.

I do think affected industries should be bailed out, as much as I hate to admit it and in the airlines' case specifically, I would require all treasury stock acquired with the share buybacks be sold before a dime of relief be tendered.

> But selling treasury stock in this market would just tank the price even more!

Yup. That's kinda the point here. Complacent owners and "smart" managers need a bit of pain to help commit the lesson of “if you actively try to goose the stock one way, you run the risk of it being goosed the other way if conditions change” to memory. No one wants to make the same mistake twice!

So yes, give back to management as management has given; pay them back double for what they have done. Pour management a double portion from their own cup and let them drink the full impact of their leadership or else they and the equity owners will never learn.

HNLbasedFlyer

I think it is a matter of when - not if they file for bankruptcy for all airlines. Bankruptcy will wipe out all the future plane orders - slash pay to union employees, etc. I can't imagine a single airline weathering this crisis whether it is small or large airline.

Manufacturers will be doing the same. Restaurants.

We will see the casino industry wiped out and on and on

fly18725

I don’t think United has minimum liquidity covenants. Other airlines do. Regardless, if United gets to $2B, the show is over. They’d need that much for an orderly shutdown.

fly18725

There’s another good reason besides taxes airlines have engaged in buybacks rather than instituting meaningful dividends.

Buybacks are flexible and can be erratic. If you have a bad quarter or enter a downturn you can immediately turn off a share repurchase program. It’s harder, and incredibly rare, to reduce or eliminate dividends.

I would also remind posters of what free cash flow is. This is cash flow after all the bills and capital investments are made. The only other use of cash, besides buying shares, is repaying debt. Since United’s average cost of debt is incredibly low, this made very little sense. Unless there’s a case that investments will improve the business (either growth or returns), the best use of free cash flow is generally to return to shareholders.

bocastephen

The best use of a free cash flow in a very cyclical business where downturns and risks are absolutely guaranteed, is to set a business plan that determines how the company can leverage its cash during a downturn to weather said downturn and take a competitive advantage position against weaker rivals who did not do so, and thus push them further aside when they are most vulnerable.

No different for John and Mary Jones making sure they have a one year supply of expenses in cash or liquid/price stable investments to tap should anything go wrong, vs ending up on food stamps or out on the street.

If these are so-called "extraordinary times" which require government intervention, then unfortunately the public's position must prevail over existing shareholders who will need to lose what's left of their equity - most of which has already been terminated by the stock market anyway.

EWR764

By that definition, not a single business in the entire transportation sector has deployed its FCF in a prudent way. "Ordinary" industry events, including epidemics of SARS/MERS/avian flu/Ebola, local/regional crises (Argentina, Hong Kong), major disruptive storms are the sort of things airlines can and effectively do plan for. A cataclysmic shock like this, exacerbated by government-imposed restrictions on demand/revenue, are another thing entirely.

Realistically, to weather this storm, United would need to be sitting on at least $20b of liquidity (I'm not sure what unencumbered aircraft would be worth as collateral in this market) to reasonably anticipate coming out on the other side of this without needing to undertake radical changes to its business. Without government guarantees, my understanding is airlines are approaching borrowing limits with major banks.

I agree with the observation that criticism of cash deployment strategies seems conflated with general disfavor of airline business practices. Still, I think it's a narrative better applicable to a company that does not/cannot effectively manage a more "ordinary" upset (even a really bad one, like the 1997 Asian financial meltdown) rather than this event.

A more helpful debate would be over the mechanism of assistance we know is coming, rather than the merits of such government intervention in the first instance.