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United seems headed for bankruptcy=09
By Caroline Daniel in Chicago=09
Published: October 15 2002 20:58 | Last Updated: October 15 2002 20:58=09
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A year ago this week Jim Goodwin, the former chief executive of United
<http://mwprices.ft.com/custom/ft-com/quotechartnews.asp?vsc_appId=3Dts&s=
y
mb=3DUAL&ftsite=3DFTCOM&searchtype=3Dequity&vsc_query=3DUAL&searchOption=3D=
equity&
x=3D12&y=3D7> Airlines, wrote a letter to employees warning that "we are =
in
nothing less than a fight for our life".
"Clearly this bleeding has to be stopped - and soon - or United will
perish sometime next year," he said. The thanks he got for this letter
was to be marched swiftly out of the company.
The message outraged union leaders, who dubbed it the "Chicken Little
letter" for its alarmist tone, and caused UAL's stock price to drop 10
per cent to about $17 at the time.
Looking back, Mr Goodwin could be forgiven for feeling an element of
Schadenfreude. While wrong about the timing of United's meltdown, the
rest of his critique has proved spot on. United's shares have since
plunged to $1.72, valuing the 76-year-old company at $98m,
one-fourteenth the size of Jet Blue, an airline start-up founded three
years ago.
Unfortunately for United, some employees, who hold 55 per cent of the
company, remain unwilling to embrace financial reality. Last week, after
a period of lengthy talks on wage cuts as part of a coalition of
United's unions, the International Association of Machinists broke away
and said it would negotiate any deal separately.
For investors there is a worrying element of d=E9j=E0 vu in the
recalcitrance of the machinists union, which has long had a record for
militancy. It was the IAM's rejection of pay cuts of $261m that forced
US Airway's decision to file for bankruptcy in August.
Many expect United to follow suit. Michael E Levine, a law professor at
Yale and a former senior airline executive, says: "The short answer is
they must file for bankruptcy. The only question is whether they can
manage the politics of a bankruptcy well enough to avoid liquidation.
There is no way they can negotiate the set of costs they need to,
outside bankruptcy."
Bankruptcy carries its own risks. It destroys any equity value and
damages investments by unsecured debtors. It also raises a warning flag
to consumers about bookings and forces management to hand over some of
their decision making to a judicial process.
At United, however, many of these events have already happened. It has
little equity value left. Its management is already hamstrung by its
ownership structure, which grants two board seats to the unions and
limits its ability to restructure and gain access to capital markets.
Bankruptcy is perhaps the only way to resolve such governance questions.
As US Airways has shown, Chapter 11 also offers a way to force wage
cuts: the IAM eventually agreed cuts after the bankruptcy court voided
its contract. The airline has also moved to abandon aircraft contracts,
cut capacity and reduce jobs.
Some of these changes should have been possible outside bankruptcy.
American Airlines and Delta, for example, have been able to cut capacity
and re-write deals with suppliers.
However, United is in a worse position. It wasted valuable time over the
summer by not acting swiftly enough on costs. Instead, Jack Creighton,
then chief executive, played down bankruptcy talk, failing to convince
workers of the urgency for them. Only belatedly did he demand more
brutal cuts after United's application for a $1.8bn federal loan was
turned down in August.
Under Glenn Tilton, its new chief executive, management has already
missed one deadline to agree a new business plan. Moreover, United is
running out of cash and time to agree a wage deal.
Although it closed the last quarter with $2.4bn of available cash,
Merrill Lynch forecasts a daily cash burn of $4.7m for the September
quarter. United also has $300m debt due on November 17 and $575m on
December 2, and a $70m retro payment to the machinists.
In July United warned its cash burn would be worse in the third quarter
and would further deteriorate in the fourth quarter due to seasonal
trends.
Merrill is forecasting losses of $1.4bn for the second half, and third
quarter losses of $438m on Friday, when the company expects - but has
not confirmed - it will report its results.
"Given its daily cash burn, which we feel has worsened since the
September quarter, it is highly probable that in the event of a
non-agreement with its unions, United will have no alternative but to
file for bankruptcy," says Michael Linenberg, analyst at Merrill.
That prospect has panicked United's other unions, who have urged the IAM
to participate. Such concern makes sense as workers have most to lose
from bankruptcy if their equity stakes are largely wiped out.
Bankruptcy, however, carries its own dangers, says Mr Levine. "Employees
have enormous discretionary power. . . if they are disgruntled they
could make life miserable for management and customers. Going into
Chapter 11 with a labour-owned airline increases the risk of liquidation
instead of re-organisation."
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