Record Profits?

[usair_begins_with_u]

The answer?

Liquidation.

 

[mweiss]

Liquidation.

That's the answer for whom? Who benefits from US's liquidation ?

 

[funguy2]

Liquidation, prior to p*ssing away the value left at the company, is the best answer for the shareholders, who actually own the airline. However, this has never been done by an airline, and I don't think UAIR will be the first.

You see this happen at mom-n-pop businesses all the time... Mom-n-pop cannot afford to throw away millions of dollars at a time, so as soon as they see sustained operating losses, they close up and/or sell, and recoup the value of the assets that are left at the end of the day... all this, usually, without BK. But its never been done in the airlines... voluntarily shut down and give the investors their cash back...

Of course, this is a horrible result for the employees, but if the company is going there anyway, the result is no different, just the timing.

 

[mweiss]

Liquidation, prior to p*ssing away the value left at the company, is the best answer for the shareholders, who actually own the airline.

Not always. Haven't we been through this before?

Yes, US assets as of 12/31/03 were $3.3B greater than US liabilities. Liquidating at that time would have garnered $3.3B to shareholders.

However, on 12/31/02, assets were about $2.5B less than liabilities. At that point, had the company liquidated, shareholders would have received nothing.

How much are US assets worth now?

 

[funguy2]

Not always. Haven't we been through this before?

Yes, US assets as of 12/31/03 were $3.3B greater than US liabilities. Liquidating at that time would have garnered $3.3B to shareholders.

However, on 12/31/02, assets were about $2.5B less than liabilities. At that point, had the company liquidated, shareholders would have received nothing.

How much are US assets worth now?

Yes... we have been through this before...

So lets try again, using your numbers...

On 12/31/03, according to you, assets were $3.3B greater than liabilities... (Ok, I couldn't resist... I checked... $8.5B assets - $5.8B in liabilities is actually $2.7B generated to shareholders).

Since US Airways is continuing to operate in the red, the company has mounting liabilities, more encombered assets, etc. Since 'everyone' seems to think that at least a Chapter 11 BK filing is coming, that means that 'everyone' would have to agree that soon, Liabilities will be Greater than Assets...

Since, Liabilities will soon be greater than Assets, and assuming continued losses (gee, what did Lakefield say the other day?) then it makes sense to voluntarily liquidate today, before additional liabilies are incurred to force bankruptcy. Assuming some additional liabilities have already mounted, lets say an extra $1B, and assume the assets have not declined in value, that means that $8.5B Assets -$6.8B Liabilities = $1.7B to shareholders in a liquidation. Under these assumptions (and I am just making up numbers), the shareholders have collectively lost $1B to see where things were going.

If we wait until BK, then presumably we have something like $8.5B Assets - $8.6B in Liabilities = $0 to Shareholders...

Assuming RSA plans to recoup its investment... $240Mil @38% of the outstanding shares... This means when Assets-Liabilities = $630Mil, then RSA will cash out. (Their $240Mil would be about 38% of $630Mil.)

All this assumes that US Airways is no longer a going concern, something already expressed by Auditors in the ATSB loan covenents.

This would be the 'ideal' outcome for the shareholders, assuming the shareholders do not hold other interests in the company i.e. aircraft leases, private loans, etc. Obviously, since RSA does hold aircraft leases and loans, it may serve RSA to allow the company to continue to operate and cover the lease and debt payments, assuming it can. RSA's "other non-shareholder" interest in US Airways may end up keeping UAIR alive, as a shut-down causes RSA to lose their UAIR investment, as well as taking losses on the leased aircraft, loans, etc.

 

[mweiss]

On 12/31/03, according to you, assets were $3.3B greater than liabilities... (Ok, I couldn't resist... I checked... $8.5B assets - $5.8B in liabilities is actually $2.7B generated to shareholders).

I did the math in my head and somehow subtracted both fives from both eights. $2.7B is absolutely right.

And the rest of your point is correct as well. If US were to have liquidated on 12/31/03, it would have generated $2.7B for the shareholders. Whether now it would is unknown to most of us.

In any case, my point was only that it is not always true that liquidation is the right move in a losing business. 12/31/01 was an example where it would have been the wrong move.

But it is quite possible that, right now, liquidation is the best move for shareholders.

 

[TomBascom]

TomBascom:

Interersting view. The traditional view in the industry, and one to which I subscribe, is that airline seats are perishable, the following manner...

Seat 15B on AA Flt 123 from JFK to LAX today. If this seat is not sold before departure, it cannot be "stored" for future sale. The seats can be viewed as "inventory" prior to departure, but at departure time, if the seat is not sold, it has "spoiled," sitting in the warehouse... Compare that to an orange picked in Florida today... If that Orange does not make it to a supermarket relatively quickly, it will "spoil," thus the effort in producing it has been wasted... Just like the unsold airline seats... Both industries include "spoilage" as a cost (indirectly), passed on the the consumers who do buy the product...

I cannot disagree that in some respects the "value" in traveling has declined... But, if most companies producing the lowered value product cannot do so profitably, one of two things will happen:

1. Unprofitable producers fail. Remaining producers increase prices to increase profit margin in an industry with less competition. The price increase does not HAVE to happen, but does most of the time. (Much like farmers who swictch crops or livestock as prices change over time.)
2. Prices rise such that unprofitable producers lessen losses and/or eventually reach profit/break-even.
3. Unprofitable firms lower costs in order to become profitable (although in a commodity market, you must have the lowest costs to survive).

One of these two things have to happen.

Now, while I believe the airline seats are a commodity-like market, I believe they will never be a true commodity because, unlike Oranges, there are some slight product differentiations which can be implemented and be successful. (I cannot tell the difference between California and Florida Oranges, but I can tell the difference between a seat on Midwest and a seat on ATA.)

I understand that. The flaw, in my opinion, is that the airline isn't selling the seat. It's selling a position on a list. In fact the aim is to sell more positions on that list than there are seats. If someone doesn't show up the "seat" isn't wasted. Nothing is wasted unless you stopped selling tickets for that flight at some point and someone that would have bought a ticket therefore did not and the plane goes out with an empty seat.

The seat is still there for the flight from LAX back to JFK -- only the tickets that mapped onto that seat have perished... And those may very well have morphed into tickets on another flight -- which is a good thing.

 

[usair_begins_with_u]

That's the answer for whom? Who benefits from US's liquidation ?

The stock holders & employees. No one wins working for a company that cannot produce profits with out forcing it's employees into the poor house. Its like a dysfunctional family.. Some times divorce is the best option. Im sure Uair could go on for years barley scraping by, scavenging cash, borrowing from the govt, maybe breaking even in an occasional quarter. Thats no way to live, and its a waste of capital.

No company the age and size of Uair can make a transformation to an LCC model in time to save the countless millions that will lost in the process. Lakefield and Bronner know this. Im sure they are in the process of lining up suitors to buy the pieces now.. if not they have big troubles.