USA320Pilot
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- May 18, 2003
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United Airlines released its third quarter financial results and the bankrupt airline continues to lose money, although its finances remain weak heading into the traditionally weak fall and winter season that is just under way. United is showing signs of progress, but five major challenges remain: the ACA/Dulles issue, EETC renegotiations, municipal bond litigation between the airline and the cities of San Francisco, Los Angeles, Denver, Chicago, and Newark/New York, the underfunded pension, and exit financing.
Today Rueters had an interesting quote from Fitch Rating airline analyst William Warlick. As you know, Fitch Rating will audit United's loan guarantee application and will provide a recommendation to the ATSB on whether or not the business plan will meet loan guarantee requirements.
"The takeaway here would be, yes, clear progress but they still lost money in the quarter...I think there's still room for caution here," Warlick said. At around 9.5 to 9.7 cents per mile, UAL's unit costs are not that different from other bigger, older airlines, Warlick noted. "They still have a lot of work to do if they're going to achieve a sustainable competitive advantage over the other network carriers."
The challenge for United, in addition to the five points listed above, is that the company's unit costs are still too high to successfully compete with the LCC's. In that sense, US Airways and United are in the same boat.
Interestingly, Dave Siegel hinted in a speech to the Washington Aero Club last Tuesday that there may be corporate combinations between network airlines when he said, "Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations."
I would like to know what he means by increased cooperation and coordination and what he "senses".
The issue for United is the same for US Airways – a rapidly changing industry where RASM is being ratcheted down by LCC's. As I have said on countless occasions, I believe United will emerge from bankruptcy, but it may have to sell assets to emerge.
The company has been and continues to be in discussion with US Airways about the transfer of United assets into US Airways, which could be a means to make both companies survive. In addition to providing exit financing, a deal between RSA and United to shift assets to US Airways could cut United’s costs, improve US Airways revenue, and help United meet the ATSB requirement of a 7% profit margin in 7 years.
Meanwhile, I’m sure the ATSB and its consultants are watching closely the effects that LCC expansion will have on United’s loan guarantee application and revenue forecasts. This LCC problem is going to haunt both companies forever and either they collectively find a way to regain profitability, or both companies could fail.
United Airlines (UA)
UA’s third quarter net loss was $367 million
Break even load factor – 81.2%
Actual passenger load factor – 80.2% (up 4.8 points year-over-year)
RASM – 8.83 cents (up 95 cents year-over year)
CASM – 9.88 cents with special charges and 9.63 cents without special charges(down $1.02 cents year-over-year)
US Airways (US)
US’s third quarter net loss was $90 million, which included a non-cash charge of $24 million for the employee stock distribution plan
Break even load factor – not reported
Actual passenger load factor – 73.5% (up 1.5 points year-over-year)
RASM – 10.56 cents (up 76 cents year-over-year)
CASM – 10.98 cents (down $1.01 year-over-year)
Chip comments: The US – UA operating statistics indicate both companies cut their expenses by about $1.00 per ASM. US maintained a RASM premium of 68 cents over UA, while UA had a higher load factor than US by 6.7 points. UA reported a break even load factor of 81.2%, however, US did not report this statistic.
As you know, US Airways and United have held corporate combination discussions since the last merger attempt was terminated, however, these discussions have focused on the fragmentation of United assets into US Airways. But, due to the rapidly changing industry I wonder if a true merger may be the new option? Siegel’s comments above are suspect and during the past 18 months we have witnessed his communication pattern. This pattern is to provide employees with third-party comments via the news media, recorded messages, in the terminal, on the jump seat, or via email. Siegel’s comment that “there may be corporate combinations between network airlines when he said, "Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations," was intentional and deliberately put into his speech.
There is no question from this perch that today’s network carrier earnings problem is due to a fundamental change in industry economics due to the explosive LCC expansion. The industry is undergoing a dramatic change and network carriers must adapt or they will go bankrupt. To adapt the major airlines must lower their unit costs in light of depressed revenue, but in an industry with high fixed costs that is not easy. In fact, today Philip Baggaley, analyst at Standard & Poor's, told Rueters the good news was that labor costs were way down. On the flip side, September results looked weak, he said, with an operating loss of $120 million.
Considering that labor would likely vigorously fight any attempt to further lower pay and benefits, could the only way to lower unit costs be through a traditional merger between US Airways and United?
In the case of the business partners, during the last merger attempt United’s EF&A department believed the failed merger would have increased United’s revenue by $1.6 to $1.9 billion, according to former US Airways chief executive officer Stephen Wolf. This revenue gain was pre-September 11, therefore, it’s likely this figure would be much lower, maybe by one-third due to the deteriorating economics. This revenue would not be new revenue, but a revenue shift from other network carriers. In addition, a merger would lower unit costs due to economies of scale, such as joint purchasing, joint advertising, common facility use, and greatly improved employee productivity. In addition, if US Airways was the surviving business entity, United could legally reject aircraft, office building, and airport facilities to dramatically lower unit costs of the combined business entity prior to leaving bankruptcy and absorbed by US Airways. This cost cut advantage is a strong argument for a merger to proceed, which could legally permit both companies to dramatically cut their unit costs – enough to compete with the LCC’s without further labor pay and benefit reductions.
In regard to antitrust, with United in bankruptcy, US Airways and its principal investor RSA could seek to acquire United and the legal team could use the “failing carrier†guidelines of the Justice Department code, just like AMR did with TWA, to pass regulatory scrutiny.
Also noteworthy, the ATSB could have a hand in helping finance the deal because the loan guarantee guidelines permit funds to be used for M&A activity. According to the OMB loan guarantee regulations, which discuss situations for which a loan guarantee can be applied, the rules say: “If loan funds are to be used to purchase an existing firm (or the substantial assets of an existing firm), the business plan of the combined entity shall contain a discussion of the way in which any required regulatory or judicial approvals will be obtained, including antitrust approval for any proposed acquisition.â€
It’s clear the ATSB has broad power and could shape the industry in the future as witnessed by the board’s decision to deny United’s previous application and to approve US Airways application. In addition, knowledgeable sources believe United’s loan guarantee application could be used by US airways and RSA to help fund an acquisition.
Finally, it appears management may have also “greased the skids†for employee integration issues, when United ALPA agreed to change their seniority integration from a pre-nuptial clause to ALPA Merger & Fragmentation Policy and the Flight Attendants/Ramp Personnel are covered by the same union integration policy. The only change would be for the mechanics because the United mechanics have recently changed from the IAM to AMFA.
Therefore, could the two companies really be planning a merger instead of some other type of corporate combination with US Airways the survivor due to United’s bankruptcy? Will this occur? I do not know, but what I do know is that senior US Airways executives have been spending a lot of time during the past few weeks with their United counterparts in Chicago, thus where there is smoke there could be fire?
Regards,
Chip
Today Rueters had an interesting quote from Fitch Rating airline analyst William Warlick. As you know, Fitch Rating will audit United's loan guarantee application and will provide a recommendation to the ATSB on whether or not the business plan will meet loan guarantee requirements.
"The takeaway here would be, yes, clear progress but they still lost money in the quarter...I think there's still room for caution here," Warlick said. At around 9.5 to 9.7 cents per mile, UAL's unit costs are not that different from other bigger, older airlines, Warlick noted. "They still have a lot of work to do if they're going to achieve a sustainable competitive advantage over the other network carriers."
The challenge for United, in addition to the five points listed above, is that the company's unit costs are still too high to successfully compete with the LCC's. In that sense, US Airways and United are in the same boat.
Interestingly, Dave Siegel hinted in a speech to the Washington Aero Club last Tuesday that there may be corporate combinations between network airlines when he said, "Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations."
I would like to know what he means by increased cooperation and coordination and what he "senses".
The issue for United is the same for US Airways – a rapidly changing industry where RASM is being ratcheted down by LCC's. As I have said on countless occasions, I believe United will emerge from bankruptcy, but it may have to sell assets to emerge.
The company has been and continues to be in discussion with US Airways about the transfer of United assets into US Airways, which could be a means to make both companies survive. In addition to providing exit financing, a deal between RSA and United to shift assets to US Airways could cut United’s costs, improve US Airways revenue, and help United meet the ATSB requirement of a 7% profit margin in 7 years.
Meanwhile, I’m sure the ATSB and its consultants are watching closely the effects that LCC expansion will have on United’s loan guarantee application and revenue forecasts. This LCC problem is going to haunt both companies forever and either they collectively find a way to regain profitability, or both companies could fail.
United Airlines (UA)
UA’s third quarter net loss was $367 million
Break even load factor – 81.2%
Actual passenger load factor – 80.2% (up 4.8 points year-over-year)
RASM – 8.83 cents (up 95 cents year-over year)
CASM – 9.88 cents with special charges and 9.63 cents without special charges(down $1.02 cents year-over-year)
US Airways (US)
US’s third quarter net loss was $90 million, which included a non-cash charge of $24 million for the employee stock distribution plan
Break even load factor – not reported
Actual passenger load factor – 73.5% (up 1.5 points year-over-year)
RASM – 10.56 cents (up 76 cents year-over-year)
CASM – 10.98 cents (down $1.01 year-over-year)
Chip comments: The US – UA operating statistics indicate both companies cut their expenses by about $1.00 per ASM. US maintained a RASM premium of 68 cents over UA, while UA had a higher load factor than US by 6.7 points. UA reported a break even load factor of 81.2%, however, US did not report this statistic.
As you know, US Airways and United have held corporate combination discussions since the last merger attempt was terminated, however, these discussions have focused on the fragmentation of United assets into US Airways. But, due to the rapidly changing industry I wonder if a true merger may be the new option? Siegel’s comments above are suspect and during the past 18 months we have witnessed his communication pattern. This pattern is to provide employees with third-party comments via the news media, recorded messages, in the terminal, on the jump seat, or via email. Siegel’s comment that “there may be corporate combinations between network airlines when he said, "Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations," was intentional and deliberately put into his speech.
There is no question from this perch that today’s network carrier earnings problem is due to a fundamental change in industry economics due to the explosive LCC expansion. The industry is undergoing a dramatic change and network carriers must adapt or they will go bankrupt. To adapt the major airlines must lower their unit costs in light of depressed revenue, but in an industry with high fixed costs that is not easy. In fact, today Philip Baggaley, analyst at Standard & Poor's, told Rueters the good news was that labor costs were way down. On the flip side, September results looked weak, he said, with an operating loss of $120 million.
Considering that labor would likely vigorously fight any attempt to further lower pay and benefits, could the only way to lower unit costs be through a traditional merger between US Airways and United?
In the case of the business partners, during the last merger attempt United’s EF&A department believed the failed merger would have increased United’s revenue by $1.6 to $1.9 billion, according to former US Airways chief executive officer Stephen Wolf. This revenue gain was pre-September 11, therefore, it’s likely this figure would be much lower, maybe by one-third due to the deteriorating economics. This revenue would not be new revenue, but a revenue shift from other network carriers. In addition, a merger would lower unit costs due to economies of scale, such as joint purchasing, joint advertising, common facility use, and greatly improved employee productivity. In addition, if US Airways was the surviving business entity, United could legally reject aircraft, office building, and airport facilities to dramatically lower unit costs of the combined business entity prior to leaving bankruptcy and absorbed by US Airways. This cost cut advantage is a strong argument for a merger to proceed, which could legally permit both companies to dramatically cut their unit costs – enough to compete with the LCC’s without further labor pay and benefit reductions.
In regard to antitrust, with United in bankruptcy, US Airways and its principal investor RSA could seek to acquire United and the legal team could use the “failing carrier†guidelines of the Justice Department code, just like AMR did with TWA, to pass regulatory scrutiny.
Also noteworthy, the ATSB could have a hand in helping finance the deal because the loan guarantee guidelines permit funds to be used for M&A activity. According to the OMB loan guarantee regulations, which discuss situations for which a loan guarantee can be applied, the rules say: “If loan funds are to be used to purchase an existing firm (or the substantial assets of an existing firm), the business plan of the combined entity shall contain a discussion of the way in which any required regulatory or judicial approvals will be obtained, including antitrust approval for any proposed acquisition.â€
It’s clear the ATSB has broad power and could shape the industry in the future as witnessed by the board’s decision to deny United’s previous application and to approve US Airways application. In addition, knowledgeable sources believe United’s loan guarantee application could be used by US airways and RSA to help fund an acquisition.
Finally, it appears management may have also “greased the skids†for employee integration issues, when United ALPA agreed to change their seniority integration from a pre-nuptial clause to ALPA Merger & Fragmentation Policy and the Flight Attendants/Ramp Personnel are covered by the same union integration policy. The only change would be for the mechanics because the United mechanics have recently changed from the IAM to AMFA.
Therefore, could the two companies really be planning a merger instead of some other type of corporate combination with US Airways the survivor due to United’s bankruptcy? Will this occur? I do not know, but what I do know is that senior US Airways executives have been spending a lot of time during the past few weeks with their United counterparts in Chicago, thus where there is smoke there could be fire?
Regards,
Chip
