United agrees to pay extortionate interest rates on exit financing

[NewHampshire Black Bears]

Cosmos If UniTEDS reorganization plan is really set up with fuel prices at $50 to $55 a barrel, and oil is still well above the $60 range. How can YOU predict that UniTED will become profitable in 2006????? It will still be a VERY challenging year for UniTED after they're CH11 exit.

=========================================================

"Fish",

I agree. For UA to make a serious comeback WILL be a BIG challenge !!

With that said, Lets give them a chance to try.

I for one, wish them well !!!


NH/BB's

 

[767jetz]

Cosmos If UniTEDS reorganization plan is really set up with fuel prices at $50 to $55 a barrel, and oil is still well above the $60 range. How can YOU predict that UniTED will become profitable in 2006????? It will still be a VERY challenging year for UniTED after they're CH11 exit.

Because UA's assumtion of AVERAGE $50 oil was many months ago when the plan was formulated. It was a best guess at the time with room for error. Since then oil has hovered closer to $60, but revenue (RASM) has also increased to offset the difference. So UA's plan is still sound, as evidenced by the support of the financial community.

When will you people learn that this is a fluid environment and adjusting a plan accordingly is normal ops.

 

[Cosmo]

Cosmos If UniTEDS reorganization plan is really set up with fuel prices at $50 to $55 a barrel, and oil is still well above the $60 range. How can YOU predict that UniTED will become profitable in 2006????? It will still be a VERY challenging year for UniTED after they're CH11 exit.

Wow, it didn't take long for one of the "know-nothings" to show up!

Fish, it's clear that reading comprehension is not one of your strong suits. If you re-read my previous post, you will see that I was talking about United almost certainly recording a huge NET profit for 2006, for the reasons discussed. I also said that the carrier would need to continue to reduce expenses and increase revenues (as they have been doing in recent months) in order to make sure that they record an operating profit for the year. What part of that do you not understand?

You really do need to learn to stop opening your mouth if all you're going to do is stick your foot in it!

 

[FWAAA]

Excellent points, Cosmo. USAir recorded a net profit in excess of $1 billion when it emerged from its first bankruptcy for exactly the same reasons as you mentioned. I'm not a CPA either but I agree completely with your executive summary. Essentially, it's a reversal of many of those noncash "restructuring" charges taken over the past 3+ years that have amplified/exaggerated the actual operating losses - which have been small and getting smaller (and are even operating profits in recent times, pre-interest expense).

 

[BoeingBoy]

Actually, United will record a massive multi-billion dollar net profit in the first quarter of 2006 as it emerges from Chapter 11.

Presumably so, Cosmo. I know that we (US) recorded a $1 Billion net profit when we emerged from BK1, for the very reason you gave - vanishing liabilities from all those unsecured claims, pension terminations, etc, show up as "income".

Jim

[sorry FWAAA - I should have read your post before responding to Cosmo - Jim]

Because UA's assumtion of AVERAGE $50 oil was many months ago when the plan was formulated.

Something I've wondered about since UA unveiled their POR - since your CEO is a former oil industry exec, was the $50 forecast for oil a NYMEX futures contract price forecast (essentially the price of WTI), a domestic average price forecast, a world average price forecast, or even a refinery crude average cost?

Anyone have any idea?

Jim

 

[FWAAA]

No need to apologize, BoeingBoy. I'm just glad to see the "knows-what-they're-talking-about" crowd weigh in, instead of the "know-nothings." B)

 

[ualdriver]

Something I've wondered about since UA unveiled their POR - since your CEO is a former oil industry exec, was the $50 forecast for oil a NYMEX futures contract price forecast (essentially the price of WTI), a domestic average price forecast, a world average price forecast, or even a refinery crude average cost?

Doesn't matter. It was probably the lowest WAG (wild a$$ guess) the banks providing the exit financing would accept! And I think many people got really wrapped around the axle when the $50 forecast was initially revealed.

The point is that UAL management, and more importantly, our good friends at Citigroup and JP Morgan (have you hugged a Citigroup or JP Morgan banker today?) agreed that they would base their projection over the up and coming years at around 50 bucks a barrel. If crude oil (or really Jet A) averages go below the forecast levels, all the better. If they don't, they probably feel that fare increases or airlines going away (due to not being able to cover their costs) will make up the difference and air fares will rise to cover this higher cost.

One way or another, the industry will have to cover their costs as they can't go on losing billions forever. Since we probably won't be the first to go away if fuel prices keep rising or something really bad happens, they figure whoever goes first will decrease supply enough to give everyone else the power to raise airfares. So I guess one could say that it really doesn't matter if they're "exactly" right with their crude oil estimates.


P.S. When I was talking NET profits before, I'm talking no #### real NET profits that cover non-cash items (like depreciation) as well as operational and interest expenses for 2006. To me, that's when you're really making money!

 

[BoeingBoy]

And I think many people got really wrapped around the axle when the $50 forecast was initially revealed.

Which is why I asked. When the "$40 dollar forecast" was revealed, it was well below the popularly quoted price at the time (basically the price of WTI or NYMEX options). However, it was not far at all from either the world average crude price or the average price domestic refineries actually pay for crude - as I recall, world prices wers about $51-$52 and refinery average crude cost was below $50 at the time.

Jim

 

[ualdriver]

Which is why I asked. When the "$40 dollar forecast" was revealed, it was well below the popularly quoted price at the time (basically the price of WTI or NYMEX options). However, it was not far at all from either the world average crude price or the average price domestic refineries actually pay for crude - as I recall, world prices wers about $51-$52 and refinery average crude cost was below $50 at the time.

Jim

Jim-

I asked that very same question to those supposedly "in the know" within the union. I was told that it was consistent with "Wall Street" analysts. Whatever that means They're very tight lipped with the details unfortunately. For a while, as you probably know, there was a pretty huge disconnect between Jet A prices and crude oil prices anyway. I think their forecasts for $50 oil probably correlate to some Jet A price per gallon or barrel (or whatever metric) and they hope Jet A stays close to that "guess." I imagine that guess is probably pretty much way off right now.

 

[BoeingBoy]

Thanks - I don't know what that means either.

And obviously I fat-fingered the "$50 forecast" and turned it into "$40".

Jim

 

[Bulscu]

:blink: wow :blink:

 

[dc3fanatic]

Cosmos If UniTEDS reorganization plan is really set up with fuel prices at $50 to $55 a barrel, and oil is still well above the $60 range. How can YOU predict that UniTED will become profitable in 2006????? It will still be a VERY challenging year for UniTED after they're CH11 exit.

Because $55 / barrel isn't the 'break even' point. duh.

 

[767jetz]

Because $55 / barrel isn't the 'break even' point. duh.

EXACTLY RIGHT!

That's about as simple as one can put it. If people like Fishy can't grasp that idea, there's no sense in even discussing it with them.

 

[whatkindoffreshhell]

Interest rates, debt loads, balances etc -- it all doesn't matter.

UA is just pulling a re-fi (similar to all those homeowners who just keep rolling over debt) until they can sell and cash out.

C'mon, why on God's earth would anybody believe anything concocted by Jake Brace? The CFO of a bankrupt company who still has his job?

Jake should (and probably will) write a book about his UA career.

Spin awaaaaayyyyy.....

 

[WorldTraveler]

Jumping back a few posts, yes, UA will post a large net profit due to accounting changes but remember that they also posted huge net losses during bankruptcy as they posted charges as leases were renegotiated. The two do have to be viewed together. The real barometer is operating profit/loss. UA has made very significant progress but it is still not consistently profitable on an operating basis (even given the cyclicality that is part of the airline industry) which means UA will have to generate higher peak profits than they are in order to return to profitability. And UA probably has a higher domestic revenue dilution exposure than does other carriers due to competition - Virgin America in SFO, WN in DEN, and somebody else (me thinks B6) at IAD.

As for interest rates, the exit financing will be secured, just as DIP financing is - for DL and UA. The reason UA's DIP rates are lower is because they filed BK during a lower trough in the business cycle. Given DL's estimate of being out of BK in 18 months (which would be going into the summer of '07), they will spend much less on DIP interest than UA has. And while interest isn't the largest item on an airline's expense statement, it is very significant; any airline that doesn't radically deal with all of its costs is setting itself up for future failure. Not saying UA is in that position but interest costs have be lower post-BK than before. DL's certainly will be since they are "losing" $4B in unsecured debt - the highest in the industry.

As for oil assumptions, it is notable that DL is using $60 crude assumptions in its plan along w/ a crack spread that is higher than the historical average. Even $60 may be too low given that there is a pretty high likelihood that the Gulf will get ripped up again this summer - did you notice the last 2005 hurricane just dissipated making 2005 the longest lasting hurricane season ever? Ocean temps are not cooling off real quickly.