Why Chapter 7 is highly probable
 

By way of background, this is my initial post and I am a 1K with slightly more than 200,000 miles in my account.
I hope I am incorrect about the ultimate fate of UA, however, I calls um like I sees um. The major problem is that UA will run out of cash sometime in the next few months unless there are draconian wage cuts. I am not quite sure how the daily cash burn morphed from 5-7 million into 20-22 million. Now we are hearing that they should be able to reduce that to about 15 million per day in the next few months.
The DIP financing of 1.5 billion will be contingent on major cuts in costs and greater productivity. As I understand it, $800 million is being held back pending substantial (and believable) cost reductions.
The messy part is coming up shortly. That would be dealing with the unions. Labor is still being paid their industry leading wages. They have not actually taken the first pay cut. Trying to reach agreement with these fractious unions - particularly the IAM - could be a drawn out process. I would not be surprised to see them go into the "four corners" offense and attempt to postpone the inevitable. My opinion is that the bankruptcy judge will void the union contracts and will impose pay cuts that will make these unions collectively rue the day that they attempted to take their own carrier hostage.
At any rate, there are some unhappy campers among the ranks of employees. I am afraid they will fight the wage cuts tooth and nail - even if it costs them their jobs and forces Chapter 7 liquidation. We are dealing with emotions here and rationale will be relegated to the back seat.
I would certainly feel better if someone could present a logical argument that I am incorrect in my assessments.

Don't try to confuse 'em "Highest Pay 'til the Last Day" dudes with Economics 101.

At the same time UA announced they were burning $20-$22 million per month in December, they also said they would burn $10-$15 million per day in January, so they've already achieved that level for the future ... but it's going to take a heck of a lot more than that to save them.

I don't know that I agree with you simply because it isn't as predictable as you say it is.

The US domestic airlines are in terrible shape. I think the workers may accept large wage cuts, especially the pilots who make the most money. They must realize they have no choice, that these could be their last jobs in the airline business.

The mechanics are another story, if only because apparently they are in greater demand and harder to replace. But it may not matter.

The other unions might bend more and let the mechanics skate with few cuts. This is the market talking -- if mechanics are worth more, then they will end up getting paid more or accepting fewer reductions.

Can UA survive if the pilots accept a 40% cut and most other workers accept cuts? And the airline cuts routes? I don't know, but I would expect that it could. Coupled with renegotiated leases, UA's fixed costs could plummet rapidly.

Here are the targets UAL must meet:

Timetable for United to become profitable

Date (2003) Target cash flow

Feb. 28 -$964 million

March 31 -$881 million

April 30 -$849 million

May 31 -$738 million

June 30 -$585 million

July 31 -$448 million

Aug. 31 -$219 million

Sept. 30 -$98 million

Oct. 31 +$46 million

Nov. 30 +$112 million

If UAL fails to meet any of these targets, they are in violation of the loan covenants and the banks can force them into CH 7. It will be a tough road ahead...good luck to all at UAL!

I have two basic thoughts on this - naturally they are in conflict with each other http://www.flyertalk.com/forum/smile.gif

1) Given the depressed state of the industry in general, it would be a very bad time for the creditors to force a 7 since the liquidation values of the assets would be at an all time low. Plus, careers play better when you have a potential to recover your loss rather than just take the write-off.

2) We need one less full service domestic airline. Limited service airlines will continue to gain marketshare until some intermediate stabilization point is reached - if you believe this argument then either US or UA is the obvious target for elimination. Strangely, US may be more valuable given the duplication of UA's route network for other majors

Remember that the DIP dudes are in this deal to make money, it's a gamble, but at some point if UA ain't making progress they'll take the loss and look for something else to pillage.

I've avoided jumping into the CH11 discussions because, honestly, I enjoy the good old days of exchanging tips and experiences more. But this post hit a nerve because of a recent personal experience like UA but on a micro scale.
I was managing a manufacturing business with 250 employees represented by 4 unions. We had high energy, environmental, and labor costs at an old plant in New Jersey. Because the business inherited labor contracts from its previous parent company, worker wages were 30-40% higher than even other unionized plants in the area. We were facing new competition from a producer in Alabama with lower costs and no unions. For 4 years I shared the same monthly financial information (losses) with the employees as with our owners and tried to make modest changes in benefits and work rules. Even with no particular ill will or credibility issues, 3 of the 4 unions refused to make any concessions, the business was sold, the production moved off-shore, and the plant closed. It wasn't until I ran into several ex-employees at the unemployment office that they acknowledged any of the long-obvious realities.
No value judgements regarding unions, no direct applicability to UAL, but a personal testimony to how strong the group dynamics of denial can be.

In these darken days, let us not forget to WELCOME GoldenGoose to FT and thanks for a thought provoking first post.

I also wonder how the daily burn was cranked up over the holiday month from 5-7 to the 15-20,M/day. If looking closer, would we see some nice year end kickers in a few checks? That might explain things dropping in January? http://www.flyertalk.com/forum/wink.gif

Welcome GoldenGoose,
You articulated a feeling that I have had for several years regarding UA and it's relations with its unionized workers. It just seems to me that you couldn't get those guys to agree on a place to have lunch on a given day. So how would you conduct negotiations that could/would lead to some groups losing 30% to 50% of their members and additionally 15-30% of their pay, not to mention pensions?

I fear they will try to play "gotcha" with each other as they are padlocking the facilities

Goldengoose, welcome to FlyerTalk and thanks for your thoughts. It's not always so gloomy around here... stick around for brighter days to come.

Like you, however, I don't see how UA arrests that terrible cash burn rate. The unions couldn't be persuaded to act in the airline's best interest in order to MAKE money. Will they persuaded to do so when the reward is smaller paychecks and narrower benefits?

Welcome to FT. http://www.flyertalk.com/forum/smile.gif

From what I have read, the cash burn is much higher in December than other months because of these factors, most of which make sense:

Not many high-fare business travelers buy tickets (last minute purchases) between turkey day and Jan 1;

Most tickets for December holiday travel were paid for weeks/months ago (advance purchase fares);

Many vendors are now requiring Cash up front rather than extending trade credit;

and some others.

The factors listed above look like one-time hits to cash and cash burn should lessen in January (unless BK discourages travelers from buying tickets).

But this is a decision many VC's are having to face now. Throw more money down the sinkhole in the hopes of recovering your original investment, or simply bite the bullet and liquidate.

I've seen estimates that not counting common shareholders, the current exposure by debtors is on the order of $2B. If they pour another $1.5B into UA and UA continues to lose money, the losses could snowball from $2B to $3.5B.

It is actually not that cut and dry Plato90s

First, the VC analogy is flawed since in that situation you generally have no real liquidation value to assets. If the IP was worth anything, liquidation would not be in the cards but rather an exit would be achieved via an M&A transaction, albeit at fire sale prices. The assets usually consist of office furniture, computers, etc of which there is a rather robust supply in the secondary market at the moment.

I come from this world and I will in no way support the insane investment decisions made by several prominent VC funds, but remember that the whole game is to create moon shots and the vast majority of your deals will blow up on the pad.

Now - re the good money after bad situation for the creditors - DIP financing is NOT risk capital. It historically provides an excellent risk adjusted return. Remember that the DIP lenders are in a first out scenario in-terms of priorities in a liquidation. By virtue of this their greatest exposure is either fraud on the part of the company in the representation of its assets or bad underwriting of those asset values. This being said, GE pulling out is rather interesting since they have been a prominent DIP lender for the past 15 years.

Keep in mind that DIP facilities are over the Chinese wall from the people who originally got in these debt securities. These are viewed as new deals and stand on their own. That is why you will often see a lender who already has exposure to a credit taking part of a DIP facility.

So the issue lies with the unsecured creditors, which is back to my original argument. If the residual assets of the bankrupt estate are at very depressed levels, as is the case do 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 message has been edited by B Watson (edited 12-12-2002).]

I was actually thinking of telecom, not the dot-com, VC's. The telecom industry is full of startups who spent $10 to build networks which are worth $1 today.

Given the massive depreciation, overcapacity, etc..., the general trends has been for debtors and VC's to pull the plug. Multiple telecoms worth billions at their peak are now in bankruptcy and facing liquidation.

If it can happen to telecom, it can happen to UA.

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While I agree DIP financing is generally safe, it first requires that the existing creditors of UA agree to DIP. Bank One may become the lead investor for DIP financing, but the plan must first pass muster with other creditors holding UA debt.

If the other creditors aren't satisfied, they can try to force UA into Ch. 7, regardless of what management and Bank One wants.

Once the creditors agree to restructureing, then the DIP lead investor is in firm control. UA isn't there yet, as far as I know.