Motley Fool
United: Cleared for Takeoff?
Thursday January 5, 3:36 pm ET
By Tim Beyers

Not often do I find news that truly surprises me. Count yesterday as an exception. That's when Reuters published its interviews with several analysts and consultants who believe UAL Corp.'s (OTC BB: UALAQ.OB - News) United Airlines will exit bankruptcy next month in relatively good condition. One even told the news agency that United is "obscenely strong" and that the future belongs to legacy carriers.
Really?

The investor in me would love to believe that, so I did a little digging. I wanted to find out just how well United's core cash flow -- its owner earnings -- was progressing as it prepares to re-enter the public markets. Here's what I found:

Metric Trailing 12 months 4 qtrs. prior 
Net loss  ($5,013)  ($1,456) 
ADD 
Depreciation and amortization  $833  $824 
Reorganization items  $4,216  $682 
One-time operating items  ($31)  $43 
SUBTRACT 
Capital expenditures  $299  $284 
OWNER EARNINGS  ($294)  ($191) 

Data provided by UAL filings with the Securities and Exchange Commission

As far as I can tell, United isn't improving -- its ability to crank out cash is actually worsening. Naturally, sky-high oil prices are to blame. Total spending on aircraft fuel equaled more than $3.7 billion over the trailing 12 months, up nearly 41% from the four quarters prior. Yeeeowch.

Look, I'll be the first to admit that this isn't a perfect analysis. Maybe analysts know something we don't, but the numbers suggest that United still has work to do before it sees a steady stream of positive earnings. And that means investors seeking profits in the reemerging airline ought to have a clear understanding of the attendant risks. Among them: labor strife, energy prices, and, as of this week, computer glitches. Every one of them is capable of delivering a bitter case of frostbite to an overexposed portfolio.

New UAL Has Rocky Start

By Ted Reed
TheStreet.com Staff Reporter
2/2/2006 11:48 AM EST
Click here for more stories by Ted Reed

Updated from 7:47 a.m. EST
The new shares of United Airlines parent UAL (UAUA:Nasdaq - commentary - research - Cramer's Take) were off to a rough start on their first day of Nasdaq trading, dropping 8% in the first two hours.

After opening at $40 Thursday, the airline's new stock was lately at $36.71, down $3.29 from the first quote. Nearly 2 million shares traded by around 11:30 a.m. EST.

United's three-year stay in bankruptcy ended Wednesday. The company's old shares, previously listed on the New York Stock Exchange and relocated to the over-the-counter Bulletin Board when United went into Chapter 11, no longer have any value.

What's unclear is whether buying an airline stock is anything more than a bet that fuel costs will decline. Most experts agree that United came a long way during its bankruptcy. After all, the carrier secured $3 billion in financing and cut $7 billion in annual costs, pared nearly 28,000 jobs and retired 107 mostly elderly aircraft.

Experts also agree that United has the best system on the planet, featuring an expansive mix of great domestic hubs, near-priceless access to London's Heathrow Airport and Tokyo's Narita and a worldwide route system second to none.

And if brand recognition is still worth anything, United has one of the best-known names in the world, even if there was the ill-fated 1987 effort to replace it with "Allegis."

Airlines typically thrive on growth, but there haven't been spectacular gains at United since Stephen Wolf was forced out as chief executive in 1994. Current CEO Glenn Tilton will likely be remembered as the next great UAL chief, since until he came along, no one really had much success in reducing UAL's costs.

For that, and for an upbeat approach that helped carry the airline through some dark times, Tilton is widely, but not universally, applauded.

"The empty suits at UAL world headquarters are dropping their bags of money only long enough to pat themselves on the back for a job well done," said Randy Canale, who heads the United chapter of the International Association of Machinists. "The fact is that United survived in spite of its current leadership, not because of it. The true heroes of this shameful bankruptcy ordeal are the IAM members and other front-line employees who work every day at reduced rates while delivering a first-rate product."

Still, if fuel prices are favorable, and if United manages to distinguish itself with a top-notch product to complement its top-notch route network, Tilton and his employees will be entitled to plenty of applause.

In a recent research report, Goldman Sachs airline analyst Glenn Engel wrote that the airline's leading positions "in powerful hubs (54% of passengers in Chicago O'Hare, 62% in Denver, 58% in San Francisco, and 69% in Washington Dulles), coupled with its strong international franchise and broad/deep alliance partnerships, enable United to generate a significant revenue premium to the industry, but inconsistent service has prevented United from maximizing its advantage."

Engel said United's service has improved and noted that its revenue premium over low-fare carriers climbed from 36% in 2002 to 43% in 2005. But he says United still has unit costs that are too high and that it's likely to underperform peers such as AMR's (AMR:NYSE - commentary - research - Cramer's Take) American Airlines and Continental Airlines (CAL:NYSE - commentary - research - Cramer's Take). Goldman Sachs has an investment-banking relationship with UAL.

However, Helene Becker of Benchmark Capital wrote Wednesday that "United Airlines is actually well positioned compared to its peer group for growth, although we are concerned that the company's costs are still on the high side of the industry average." Becker initiated coverage of UAL with a buy rating. Benchmark has no business relationships with United.

Meanwhile, Standard & Poor's raised its corporate credit ratings on UAL and United to B from D after their reorganization plan was confirmed by a court. S&P analyst Philip Baggaley said the rating reflects the difficult conditions of the airline industry, including harsh competition and volatile fuel prices, as well as United's high leverage.

"These weaknesses are mitigated to some extent by United's extensive and well-positioned route system, which provides good revenue potential, especially on international routes, and by reductions in labor costs and financial obligations achieved in bankruptcy," Baggaley said.

"UAL should report gradually improving earnings and credit measures, but the extent of improvement will depend significantly on general airline industry conditions, in particular on fuel prices and the degree of price competition in the U.S. domestic market."

Motley Fool
Why I'm Not Buying United
Thursday February 2, 1:55 pm ET
By Tim Beyers

By now you've probably heard that UAL (Nasdaq: UAUA - News) has officially emerged from bankruptcy, with a new stock and a pressurized cabin full of hope. But exactly no one on the Street is buying it.
 
And I mean that literally. The shares are down more than 8% as I write this morning. Analyst sentiment probably isn't helping. Briefing.com says that two firms, Bear Stearns (NYSE: BSC - News) and Calyon, have initiated coverage with ratings of "underperform" and "sell," respectively.

Normally, such petulant pessimism would have me thinking "buy." Not today. When United first announced its exit strategy in September, a spokesperson told me that the company would raise close to $1.9 billion in capital, and that its shares were likely to be priced at or near $15 per stub. Today's opening price was -- wait for it -- $41 a share.

And I say: What?!?

United has done exactly nothing to justify a 173% premium on its shares. To the contrary; investors ought to be demanding a huge discount. Why, you ask? When I checked under the hood last month, I found that owner earnings had declined over the trailing 12 months. Don't expect a fast turnaround, either. After all, United made it clear that it needs oil to be at $50 per barrel to sustain profitability. Oil remains at roughly $66 a barrel as I write today.

But the story gets worse. The Pension Benefit Guaranty Corporation, which absorbed UAL's failing pensions, now owns about 20% of the restructured company. It has already signaled its intent to sell half that position to raise cash to cover obligations. That should lead to additional selling pressure, which, naturally, would drive the stock price down even more.

Add it all up, and I can only conclude that United's stock is a pure loser at current levels. When it drops a lot more, I might consider getting in. That's assuming United can find a profitable means to manage the careful balance between fuel prices and low-cost competition, which may not happen soon. Buckle your seat belts, United investors. You're in for a bumpy ride.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication, but he has family who are retired from United Airlines. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.

UPDATE 2-UAL stock falls from lofty initial value
Thu Feb 2, 2006 1:33 PM ET
(Recasts. Adds background, analyst comment, updated share price)

By Kyle Peterson

CHICAGO, Feb 2 (Reuters) - A reorganized UAL Corp. (UAUA.O: Quote, Profile, Research) made its stock market debut on Thursday, falling from a weighty initial value of nearly $5 billion on the day after the airline emerged from bankruptcy.

Stock in the parent of United Airlines, the No. 2 U.S. carrier, began trading at $40.83 but had shed more than $4 by early afternoon, leaving the carrier with the industry's second-highest market capitalization at about $4.5 billion.

UAL, which formally exited protection under bankruptcy laws on Wednesday, issued about 125 million shares, most of them to former unsecured creditors, including employees. Its old shares were canceled and no longer trade.

"At these prices, it's substantially overvalued," said Morningstar equity analyst Chris Lozier, who said he has not yet published his own valuation of the company.

"It doesn't surprise me that people are buying it as high as it is now. But it's not something I would advise. I do expect it to come down substantially," Lozier said.

He noted the persistent industry challenges of soaring fuel costs and low-fare competition. And despite significant cost reductions, UAL's competitive stance in the market is threatened by other major carriers which also are restructuring in bankruptcy, Lozier said.

Both Delta Air Lines Inc. and Northwest Airlines Corp. are in Chapter 11, hoping to follow in UAL's footsteps. UAL managed to slash costs by $7 billion a year, cut its work force by 25 percent and dump its underfunded pensions on government pension insurers.

"I know there's a lot of investor interest in United," said Jim Corridore, an equity analyst at Standard & Poor's. "They've done a lot of hard work in bankruptcy. It remains to be seen whether their costs are low enough."

With restructuring out of the way, UAL now must reassure its employees who sacrificed parts of their wages and benefits to keep the carrier alive. UAL's labor unions have criticized the airline for a provision in its reorganization plan that grants the top 400 managers an 8 percent equity stake in the airline.

Management compensation of that amount contradicts the notion that UAL employees shared the burden of labor cost cuts, Mark Bathurst, Chairman of the United Master Executive Council of the Air Line Pilots Association told reporters on Wednesday.

"It's hard to imagine a situation where one would look at this as a shared sacrifice," he said.

UAL contends it is appropriate and common to tie management compensation to the airline's stock performance to insure that it can attract and retain top management talent.

Chief Executive Glenn Tilton has countered attacks on the management incentive plan by noting that non-management employees will receive shares valued at more than $2 billion that can be monetized immediately.

The 8 percent management stake, which would have been worth about $408 million at the start of trade on Thursday, will not be fully vested for years.

Shares of UAL were at $36.25, down 11.2 percent from its opening price, on Nasdaq in afternoon dealings, even as the sectoral Amex Airline index <.XAL> rose 1.39 percent. (Additional reporting by Christian Plumb in New York)

© Reuters 2006. All Rights Reserved.

AP
Judge Approves United Exit From Bankruptcy
Friday January 20, 11:48 pm ET
By Dave Carpenter, AP Business Writer 
United Airlines Receives Judge's Approval to Leave Bankruptcy After Three-Year Stay

CHICAGO (AP) -- United Airlines got a judge's final go-ahead Friday to leave bankruptcy after a record three-year stay -- a smaller and more efficient carrier than when it began its overhaul but challenged more than ever by near-record fuel costs.
 
The approval of its reorganization plan by U.S. Bankruptcy Judge Eugene Wedoff removed the final obstacle to its targeted exit from Chapter 11 on Feb. 1 after the largest and longest airline bankruptcy ever.

Once free of bankruptcy, UAL Corp.'s United intends to be more competitive with its rivals while working its way back toward profitability, which has eluded it since 2000. It also plans to improve its operations, spending $400 million this year on refurbished airplane cabins, more check-in kiosks, upgraded computer systems and new ground equipment.

The latest surge in oil prices back toward $70 a barrel, far above the $50 average that management is counting on to get into the black this year, underscored how difficult it will be for even a restructured United to make money. The company has net losses of over $15 billion since mid-2000.

But Friday, as the judge noted, was a time for exultation and relief for all involved with the nation's No. 2 airline that the costly reorganization is complete.

Despite the losses suffered by employees and UAL shareholders, Wedoff said there is "reason to feel good" about the confirmation of the plan, which settles the company's accounts with its creditors and sets out its new financing obligations.

"Three years ago United Airlines was, bluntly, in danger of dying, with all of its assets liquidated and all of its jobs lost," he said. Now, after restructuring its obligations, "once again it has the potential to be a profitable investment, a reliable business partner and a stable employer."

At 37 1/2 months and still counting, the restructuring has taken twice as long as the Elk Grove Village, Ill.-based company forecast. But the restructuring was extensive, covering all facets of the company.

United used the protection of federal bankruptcy law to trim $7 billion in annual costs, including two rounds of employee pay cuts; eliminate about 25,000 jobs; dump its defined-benefit pensions and reduce its cost structure. It also shed more than 100 airplanes from its fleet, cut some U.S. flights and expanded internationally.

Company executives were upbeat following the ruling but acknowledged the restructuring had been even more challenging than anticipated.

"It was every bit as difficult as we expected it to be and then some," said Chief Financial Officer Jake Brace.

CEO Glenn Tilton called Friday an important day.

"We are concluding our restructuring work and look forward to competing in the marketplace and focusing on our customers without distraction," he said in a recorded message. Because of all the changes United has made, he added, "Our competitors are likely concerned."

Tilton also thanked employees for their contributions, acknowledging that the last three years have been difficult because of the wage and benefit cuts and layoffs.

The airline's move to eliminate traditional pensions and replace them with less lucrative 401(k)-style ones prompted the biggest turmoil of its bankruptcy. That battle ended earlier this week when flight attendants ended a yearlong legal fight against the company and reached tentative agreement on a replacement retirement plan.

Some unions and industry experts say employee morale could still be an issue after United leaves bankruptcy, particularly with resentment still high over the stock plan that will award 8 percent of the 125 million new UAL shares to 400 top managers.

Airline consultant Robert Mann suggested there could be a "lighter tone" to United's customer service, however, now that the cost-slashing of bankruptcy is behind it.

"Employees absorbed quite a burden in the bankruptcy process," said Mann, based in Port Washington, N.Y. "They will now feel that phase of the company's history is over and they can move on."

United itself must immediately start producing better financial results, he said, because of steep requirements to pay off its $3 billion in exit financing.

"The pressure is hardly off," Mann said. "It's just as much pressure as it has been, it's just without the albatross of bankruptcy hanging over it."

United now is a candidate to take part in an expected industry consolidation that already has seen US Airways join forces with America West in recent months, with other alliances or mergers anticipated. United is second only to AMR Corp.'s American Airlines among U.S. carriers.

"Consolidation is inevitable," Brace told reporters after the hearing. "What our restructuring has done is give us the ability to participate in consolidation or not."

A company announcement on when its new stock will start trading and where is expected soon. Brace said both the New York Stock Exchange and the Nasdaq Stock Market had approved it.

http://www.united.com

Fuel prices cloud United's prospects
Oil costs higher than bankruptcy-exit plan envisioned 
By August Cole, MarketWatch
Last Update: 5:45 PM ET Jan. 20, 2006  [ Page 1 | 2 ] 
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SAN FRANCISCO (MarketWatch) -- United Airlines' parent company UAL Corp. received a federal judge's go-ahead Friday to exit Chapter 11 next month, ending more than three years in bankruptcy.

But stubbornly high oil prices, now topping $68 a barrel, raise a host of concerns for a company that based its restructuring on $50 crude.

United, the nation's No. 2 airline, filed for bankruptcy on Dec. 9, 2002, setting off an overhaul that produced thousands of layoffs, shook up its fleet and tossed out its once-generous pensions.

"I think this is a much, much different United Airlines than the one that existed in 2002," said Jake Brace, UAL Corp. chief financial officer.

But the high fuel costs that have dogged the industry have not gone away. In fact, they are higher now than they were three years ago and continue to pose a major hurdle to United's return to profitability.

United's plan to exit bankruptcy rests on forecasts of $50 for a barrel of crude oil through 2010 and jet fuel costs averaging $1.48 a gallon.

"We didn't think it would be $50 every year of the business plan. Clearly, in 2006 it's not going to be $50," said Brace.

More revenue through higher airfares would resolve some of the problem. But raising fares without losing customers is tricky when low-cost carriers, better able to absorb high fuel prices, are unlikely to budge on pricing.

Volatile prices

Brace said Friday that the parent of United Airlines can meet the terms for its $3 billion in bankruptcy-exit financing even if fuel prices hold at their current lofty levels.

"Even at these levels, our financial performance fits within the envelope that is out there," said Brace.

"We have a lot of different dials we can turn to improve our margin in a backdrop of $65 oil," he said, explaining the company can make changes on both the revenue and cost side of its business.

But oil and fuel prices are still volatile and seem to be only going higher. That concerns some industry analysts watching United's takeoff.

Michael Roach of airline consultancy Roach and Sbarra said that United has not done enough to lower its unit costs and that the company's fuel assumptions, about $18 below Friday's New York per-barrel price of oil, are too optimistic.

"The real question is, is it even possible for a legacy carrier to achieve low costs? Or is it hopeless? No-one knows the answer to that," said Roach, a founding executive of America West Airlines.

Whether enough of the cost of higher fuel can be passed along to the flying public remains to be seen. Fare hikes throughout the industry in 2005 helped offset some of the rising expenses, but the tide of red ink at Continental Airlines and American Airlines reveals how hard it is to make consumers pick up the increased fuel tab.

"It's nice to hope for low fuel prices but to build a business plan on the assumption of lower fuel prices is nutty in my view," Roach said.

For the current quarter, rival Continental said it expects jet fuel to cost $1.91 a gallon, 32% higher than a year ago.

Tough competition

But fuel burden looks even heavier given that low-fare competitors in the U.S. such as Southwest Airlines
 
Faces In The News
Tilton's UAL Slated For Feb. 1 Renaissance
Greg Levine, 01.20.06, 2:34 PM ET

NEW YORK - Is the start of spring on Feb. 1? Maybe in Illinois.

UAL (otc: UALAQ - news - people ) Chief Executive Glenn Tilton's strategy is finally coming to fruition, as a judge Friday OK'd his plan for United Airlines.

A unit of Illinois-based UAL, the carrier has been in bankruptcy for 38 months--the longest period in the industry's history.

The CEO's reorganization plan included some "economic shock therapy," painful measures such as job cuts in the thousands and the dumping of its employee pensions (underfunded by $9.8 billion). That move followed in the torturous footsteps of the pre-merger US Airways Group (nyse: LCC - news - people ), which started a snowball of pension terminations in 2005.

But after final objections to United's revamp were resolved this week, U.S. Bankruptcy Judge Eugene Wedoff gave the nod to Tilton's program. Thus, UAL is slated to emerge from Chapter 11 protection on or around Feb. 1.

Meanwhile, trouble brews at another legacy carrier. AMR unit American Airlines on Wednesday announced a wider fourth-quarter loss, and CEO Gerard Arpey declared the firm "dissatisfied with our financial results."

Nonetheless, the carrier dished out bonuses for some 1,000 executives, which the CEO vigorously justified. (see: "Arpey Defends American Airlines Bonuses")

On Friday, leaders of the firm's pilots' union met with Arpey to see what gives. The CEO has up to now enjoyed a level of mutual trust and cooperation with his employees that seems rare in the air travel arena. What changes to that harmony might be in the works?

It's anyone's guess. Denis Breslin, a spokesman for the Allied Pilots Association, was quoted by the Dallas Business Journal as noting that, "We're not saying a whole lot right now. ...Right now, everything is on hold. The board is trying to decide what to do."