Careful not to confuse market cap with worth -- they have nothing to do with each other.

Now, when you ARE talking market cap, you are referring to public companies -- please don't think for a moment that there is any VC component left in the capital structure of these public telecoms -- the IPO is the exit strategy for the VC -- that is their business.


First of all, you are referring to creditors as one group -- this is an error. There are secured and unsecured creditors and their rights, as well as their agenda, are drastically different. Also, the statement that the creditors are involved in "agreeing" to the DIP facility is simply misinformed. In fact, unsecured creditors are seeing assets that might otherwise be used to satisfy them hypothecated to the DIP lenders.

I am really not trying to be difficult here, but I have done this for a living for 20 years.

In the end, it is still a crap shoot at this stage whether we are talking about Continental or PanAm here -- I have 2M miles that says I hope it is CO, but I did just book my in-laws and their kids to LAS in F using miles -- and I don't even like them (the in-laws I mean - I LOVE the miles )


[This message has been edited by B Watson (edited 12-12-2002).]

What is/are VC's?

VC = Venture Capitalist

Very clever professional gamblers :-)

B., some interesting points. The one that struck me as particularly interesting was the comment,

"If the residual assets of the bankrupt estate are at very depressed levels, as is the case due to the market circumstances, they have little incentive to pull the plug if there is a rational chance that they can recover more from a conversion to equity."

This is something I have had a question about since sitting through the first Economics lecture way back when. Is this a fertile environment for creditors to act rationally? And as such can we expect rational behavior? The premise, I believe in your statement is that people act rationally.

I believe UA will continue to exist and provide a service I will happily pay for, but.........

would not analysis show that perhaps this is not, and for quite a while has not been, the best strategy as a shareholder? If we could take an impartial snapshot of today, what would be the best course of action?

(this post is not intended as criticism of any viewpoint, but rather the pursuit of an interesting case study in economics)

Mike

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Thanks mjm.

Without the prospect of being able to operate United Airlines profitably, to put further cash into this airline is really contrary to the interests of creditors.

For UA to operate profitably, I believe that they need some sort of a labor-management consensus. I don't think that's forthcoming.

I also think UA needs to shrink its network. Profitable carriers like Southwest and Alaska operate routes that make money. UA and other majors operate routes because they can. If JFK-LAX is profitable for 1 airline, 3 others try to jump in. The route isn't profitable for 4 airlines at once, but none of the 4 will bow out.

There's a sense of the pursuit of revenue instead of profits, which was the same attitude that drove lots of dot-com's and telecoms out of business. I've never worked at an airline, but I saw enough of that kind of "revenue at all costs" attitude first-hand at the other 2 categories described above.

With these 2 premises as the basis of my thinking, I don't see a way for UA to be restructured into a profitable enterprise. It'll continue to be a money-burning machine and pouring more cash into it isn't really the most rational thing.

If I were a tin-hearted bean-counter, cold calculation would lead me to liquidate UAL. Unsecured creditors, including shareholders, as well as UA employees would be screwed, but there's enough value in UA's corpse to pay off its secured creditors.

Very good point. But the problem is that the airline business should be divided into two categories: niche airlines and full service airlines. The niche airlines try to operate profitably by hand-picking the desirable routes. The full service airlines try to operate profitably by having full coverage.

Clearly, Southwest, JetBlue, and others have been profitable serving carefully selected routes. If United is to contract to strictly profitable routes, fine. What would be a problem for United is to be neither a niche nor a full coverage airline, a position similar to TWA or US Airways. This would put them on a course for disaster. My $0.02.

[This message has been edited by gglockner (edited 12-13-2002).]

Seems like any talk of the Unions future positions would be best looked at by the recent past.

The Pilots agreed to "serious" cuts, not only to save their jobs but the value of their stock if UA could stay out of bankr.

The FA agreed to "serious" cuts, they do not have the stock, but to keep their jobs.

Apparently the mechanics are represented in more that one group. At least one voted for cuts for the same reason as the pilots. As to the other group, they just received a raise early in 2002, causing major business losses to UA in the negotiations. They too, are material stockholders. Seems like they play chicken until death does them out. The value of their shares is gone. The outcome of their pay status will be greatly reduced, or they will no longer have a job. If they think that it will be easy to get a job at there pay level elsewhere, then the drugs they are taking should exclude them from employment anyway.

That's how I see it, but then I am an airline user, not employee.

While I know you are not part of this group Mike, these is a collection of people on this board who think that all investment bankers and commercial bankers are just big egotistical idiots. Having been an MD at a major bracket firm and can tell you these were the smartest and most pragmatic group of people (as a single group) I have ever had the pleasure to associate with in my entire life.

My experience tends to show that the irrational behavior that does occur comes during the origination and underwriting of the deal � the workout people are very cold, deliberate and rational.


Who would be the buyers of the assets at this point? By way of illustration, look at Houston during the real estate and banking bust of the 80�s lenders ended up with REO properties with 15% occupancies � in many cases they bought off the existing tenants, moved them out and mothballed the properties. This was cheaper than operating them and necessary to wait out the depressed market and sell into a recovery. Much the same may be the outcome here � it just would be a lousy time to liquidate airline assets.


[This message has been edited by B Watson (edited 12-13-2002).]

I echo the response of gglockner above, but I would also point out that if you think the labor negotiations have been fun up until now, just wait to see how a significant shrinkage of the network will play.

I think the point you are making is market share at all cost, not necessarily revenue at all cost � equally perilous of course, but that was the argument of the .coms and telecoms as well as part of the rationale for an integrated airline network. Remember, forget profit, it is all about eyeballs!!!!!


If this is really true, then AA, DL and company also have fatally flawed business plans � here we come Greyhound

Since when are shareholders unsecured creditors? At this stage in the process the existing shareholders are treated by the court as a life form just slightly below pond scum.

Re the secured creditors � they do not get paid off � they get their collateral back. I doubt rather strongly there are any UCC filings out there for UA that are blanket in nature (other than the DIP facility of course!!) These obligations are non-recourse and your collateral is your security � if that collateral is worth less today than when you lent against it � OOPS � SORRY.

For what it is worth, I really do believe that a �full service� integrated network carrier in the US will liquidate in the next 5 years � it may even be UA but I think it will take another trip to the bankruptcy alter for that to happen.

A lot depends also on the developments of the economy and business travel in general and "Uncle Saddam's next hattrick".

Reflecting: Wow, what a week! Spent more time on FT than ever before. Now it's off to a few well-deserved beers with a couple of FT friends, and I guess..... more FF opinions, questions, guesses etc., etc., etc.

You forgot one trait of the "workout" crew!

RUTHLESS