UAL announces higher fuel cost blow
By Caroline Daniel in Chicago
Published: May 23 2004 20:44 | Last Updated: May 23 2004 20:44
United Airlines has warned that its fuel costs this year will be $750m higher than it had first estimated and has downgraded an earnings forecast made only five months ago, casting doubt on the airline's chances of securing a critical US government loan guarantee.
The deteriorating financial situation, which includes reducing its operating earnings for 2004 by $776m, was disclosed in a filing with the bankruptcy court late on Friday. The revisions contrast with the upbeat impression executives at the world's second-largest airline have sought to convey in recent weeks of steady restructuring progress.
The filing instead suggests that higher fuel prices have eroded the limited financial cushions United had built into its plan, and that it is failing critical coverage ratio tests that providers of exit financing usually demand as a condition of providing funds.
The fuel crisis comes as the Air Transportation Stabilization Board, the federal body set up after September 11 to aid the airline industry, is preparing to decide on whether to grant United a $1.6bn loan guarantee.
If the ATSB says no, United faces an uncertain future as it has few other sources of financing available to help it come out of bankruptcy.
The ATSB is expected to make a decision by the end of June.
According to the filing, United updated its business plan at the end of April to include higher fuel costs and pension relief.
Although the airline has hit revenue forecasts, the new plan, dubbed Gershwin 4.1, forecasts United will generate $606m less in net cashflow and $776m less in operating earnings in 2004 than it had forecast in December.
United also said it was failing to meet important coverage ratios - the ratio of its free cashflow divided by fixed cash obligations, mainly pension funding and servicing debt.
It said lenders typically want a ratio of 1.3 before they provide financing. "Skyrocketing fuel costs have reduced United's projected coverage ratio in 2004 from 1.29 to just 0.68. United now satisfies the 1.3 coverage ratio requirement in 2005, 2006 and 2007 by only the thinnest of margins," the filing said.
Moreover, it added that a 1.3 ratio is usually acceptable to lenders only at the start of a loan.
"The steadily increasing coverage ratio that lenders expect to see, as was the case in Gershwin 4.0 (albeit minimally), does not surface in Gershwin 4.1 at all until 2008."
United said its financial situation underlined the need for cuts to its retiree welfare benefits, which remain the highest in the airline industry.
It asked the court to agree to impose retiree cuts to help it save $57m of cash a year.
By Caroline Daniel in Chicago
Published: May 23 2004 20:44 | Last Updated: May 23 2004 20:44
United Airlines has warned that its fuel costs this year will be $750m higher than it had first estimated and has downgraded an earnings forecast made only five months ago, casting doubt on the airline's chances of securing a critical US government loan guarantee.
The deteriorating financial situation, which includes reducing its operating earnings for 2004 by $776m, was disclosed in a filing with the bankruptcy court late on Friday. The revisions contrast with the upbeat impression executives at the world's second-largest airline have sought to convey in recent weeks of steady restructuring progress.
The filing instead suggests that higher fuel prices have eroded the limited financial cushions United had built into its plan, and that it is failing critical coverage ratio tests that providers of exit financing usually demand as a condition of providing funds.
The fuel crisis comes as the Air Transportation Stabilization Board, the federal body set up after September 11 to aid the airline industry, is preparing to decide on whether to grant United a $1.6bn loan guarantee.
If the ATSB says no, United faces an uncertain future as it has few other sources of financing available to help it come out of bankruptcy.
The ATSB is expected to make a decision by the end of June.
According to the filing, United updated its business plan at the end of April to include higher fuel costs and pension relief.
Although the airline has hit revenue forecasts, the new plan, dubbed Gershwin 4.1, forecasts United will generate $606m less in net cashflow and $776m less in operating earnings in 2004 than it had forecast in December.
United also said it was failing to meet important coverage ratios - the ratio of its free cashflow divided by fixed cash obligations, mainly pension funding and servicing debt.
It said lenders typically want a ratio of 1.3 before they provide financing. "Skyrocketing fuel costs have reduced United's projected coverage ratio in 2004 from 1.29 to just 0.68. United now satisfies the 1.3 coverage ratio requirement in 2005, 2006 and 2007 by only the thinnest of margins," the filing said.
Moreover, it added that a 1.3 ratio is usually acceptable to lenders only at the start of a loan.
"The steadily increasing coverage ratio that lenders expect to see, as was the case in Gershwin 4.0 (albeit minimally), does not surface in Gershwin 4.1 at all until 2008."
United said its financial situation underlined the need for cuts to its retiree welfare benefits, which remain the highest in the airline industry.
It asked the court to agree to impose retiree cuts to help it save $57m of cash a year.
