What’s the plan? UAL can’t seem to say

Jan 6, 2003  •  Post A Comment

When UAL Corp. appears before U.S. Bankruptcy Court Chief Judge Eugene Wedoff in Chicago next week, the airline company will have to present a solid business plan and establish financial credibility as it attempts to reorganize.

UAL’s United Airlines-the world’s second-largest air carrier-has struggled for a year with little success to convince lenders, its unions and the federal airline bailout authority that it has a viable plan for survival. Now, the bankruptcy judge overseeing its reorganization has taken the airline to task for being too vague in explaining how it reaches essential financial conclusions.

In UAL’s first public appearance in Bankruptcy Court on Dec. 30, Judge Wedoff chastised the company’s managers for failing to “engage in even the roughest” financial analysis as it starts to make its case.

“Frankly, the judge said to management in so many words, `Get real,’ ” says bankruptcy expert William Brandt, president and CEO at Development Specialists Inc., a Chicago-based corporate restructuring firm. “It appears that they don’t have a good handle on the numbers. This whole case will turn on financial credibility.”

The Elk Grove Township-based airline, which filed for Chapter 11 bankruptcy protection on Dec. 9, has been criticized repeatedly for a business plan that is either unrealistic or short on specifics.

Analysts lay much of the blame on UAL Chairman and CEO Glenn Tilton, an oilman with no airline industry experience who was hired in September to save United. While Mr. Tilton has been praised for initially easing the carrier’s contentious labor relations, the former ChevronTexaco Corp. vice-chairman has failed to surround himself with advisers needed to build a credible financial plan, analysts say.

“Nobody believed their numbers, including the (Air Transportation Stabilization Board)” says Raymond Neidl, an airline analyst at New York-based Blaylock & Partners L.P. “The time for fun and games is past. This company is in deep trouble. They have one shot, and if it doesn’t work, the ball game is over.”

`Unreasonable’ projections

The Air Transportation Stabilization Board (ATSB), the federal body established to help airlines recover in the wake of the Sept. 11 terrorist attacks, last month rejected UAL’s application for $1.8 billion in loan guarantees-which it needed to avert a bankruptcy filing-saying its revenue projections were “unreasonable,” according to the initial brief the airline filed with the Bankruptcy Court.

When it filed for Chapter 11, UAL lowered its revenue projections and increased projected cost cuts. But it has yet to convince the International Assn. of Machinists (IAM), United’s largest and most militant union, that its numbers will add up.

United is trying to persuade its powerful unions to make wage-cut concessions immediately so it can meet financial targets set by its debtor-in-possession (DIP) lenders -including Chicago’s Bank One Corp.; Livingston, N.J.-based CIT Group Inc., and New York’s J. P. Morgan Securities Inc. and Citigroup Inc.-which provided loans to enable the airline to continue operating while it reorganizes.

In addition, UAL intends to cut jobs.

Last year, the airline eliminated 20,000 jobs and announced plans in November to cut more. Last Friday, it announced that 1,500 non-union personnel will be laid off, effective Jan. 19.

The airline has already tapped $800 million of the total $1.5 billion in DIP loans, but it needs to make more cost cuts by Feb. 15 to get access to the remaining $700 million. Emergency wage cuts United is seeking from its unions would save the company $70 million a month, UAL says.

If the company fails to make the necessary cuts, it could be in default on the loans and the lenders would have the right to take control of UAL and liquidate it, the company said in its initial brief.

The carrier is seeking the court’s permission to void its labor contracts if concessions aren’t reached, but the airline first must prove that it has negotiated in “good faith” with its unions.

The IAM, which represents 37,000 United mechanics, ramp workers and customer service agents, rejected the 13% emergency temporary wage cuts the airline says it needs to operate, contending that United hasn’t given the union enough financial information to get its “arms around the process,” IAM lawyer Sharon Levine of New Jersey-based Lowenstein Sandler told the judge in Bankruptcy Court last week.

Leaders of United’s other unions have agreed to the temporary cuts, pending their members’ approval. The pilots have tentatively agreed to a 29% pay cut, flight attendants to 9% and flight dispatchers and meteorologists to 13%. Ratification votes are scheduled for Wednesday.

Judge Wedoff plans to rule this Thursday or Friday whether to impose the emergency cuts on United’s IAM workers or send the union and the company back to the negotiating table.

And on Jan. 15, the judge is scheduled to decide whether State Street Bank & Trust Co., the Boston-based trustee for UAL’s employee stock ownership plan (ESOP), can continue to sell shares owned by United employees-a move UAL and its creditors are attempting to block.

State Street sold about 24 million UAL shares between September and Dec. 10, when the court ordered it to stop. The trustee has filed its intention to sell the remaining 32.5 million shares-which closed last Friday at $1.30-as soon as possible. In most bankruptcies, shares are worth nothing when the company emerges from Chapter 11.

Seeking explanation

At stake is UAL’s ability to use its net operating loss-a major asset that the company and its creditors committee value at $1 billion to $3 billion-to reduce taxes once the company returns to profitability. Chief Financial Officer Frederic Brace testified in court that United expects to generate a net profit again in 2005.

If State Street sells the rest of the ESOP shares, employee ownership in UAL will drop below 20% and wipe out the company’s future tax benefit.

A host of other variables could diminish the asset’s value even if State Street holds onto the ESOP shares. Judge Wedoff told UAL officials to return to court on Jan. 15 with a more thorough explanation of how much the net operating losses could be worth to the company, when and if it emerges from Chapter 11.

“(Mr. Brace) can tell me that there’s going to be a minimum of $3 billion in (net operating losses) available at the time of a plan of reorganization,” Judge Wedoff told UAL’s lawyer during the hearing. “That belief has to have some basis.”

Meanwhile, the court is pressing UAL to present a more detailed business plan. Ultimately, UAL will have to move beyond its earlier pronouncements that it seeks to become more of a low-cost carrier domestically, one that can compete with Southwest Airlines and other discount carriers while remaining a global transportation force.

“This is one of the most complicated bankruptcy cases I’ve seen in 42 years of practice,” says Gerald Munitz, principal at Goldberg Kohn Bell Black Rosenbloom & Moritz Ltd., a Chicago-based law firm that is representing State Street Bank’s interest in United’s aircraft. “The enormity of the problem is just coming to light.”