In previous posts I said that UA received a reprieve from meeting its stringent EBITDAR, revenue, and cash flow requirements until the fall because the company received about $365 million in April from a tax refund and about $300 million in May from the second federal bailout. Without these monies, UA’s financial position would be much worse considering the airline continues to financially bleed during the strongest financial period of the year.
The challenge for the Chicago-based company will occur after Labor Day when the industry experiences seasonal traffic declines and the significant drop off in bookings the ATA is experiencing due to continued passenger fear surrounding the September 11 anniversary. The DIP financing requirements could be violated in October when J.P. Morgan, CIT Group, Citigroup, and Bank One’s covenants say UA must be cash flow positive, which according to May numbers is $155 million per month away.
What will occur then and what will the DIP financing lenders do? Furthermore, the fourth and first quarters are the industry's worst performing time of the year and if UA cannot make money now and has posted over $1.8 billion in the first five months of 2003, what's in store for the fall and winter?
Avek is correct, certain UA employees are cheering a $155 million operating loss in May, but that seems curious at best and maybe even scary. UA posted a significant NOL with the entire industry experiencing extremely high load factors, the month saw a $10 industry wide round-trip ticket price increase, the government provided relaxed war risk insurance premiums, there were lower fuel prices, and UA benefited from an additional 10,000 passengers per day due to the US code share agreement. In comparison, AA said it was cash flow positive versus having a $155 NOL while the FT. Worth-based company is paying all of its bills, unlike UA who has a bankruptcy reprieve from paying all of its debt, which is something to think about.
Also noteworthy, in the company's monthly filing with the U.S. Bankruptcy Court, UA reported an increase in cash of about $456 million for May, but that's $209 million less than the $665 million provided by the government in April and May. At today's cash burn rate, this money could be gone before Labor Day at a time revenues will dramatically drop off, according to the ATA. Moreover, UA must continue to reduce its NOL and be cash flow positive in the fall, when summer traffic is gone, seasonal bookings fall off, and passengers are now booking away from the entire industry due to the September 11 anniversary.
Ohcaptainron, can you explain to me how my comments above are the "weakest link"? By the way – why don’t you ask ALPA National EF&A about their opinion of UA’s chances of remaining intact as a viable on-going concern? In addition, according to the Chicago Tribune UA continues to "face a difficult economic environment," said Jake Brace, UA's chief financial officer. John Tague, UA's executive vice president in charge of customers, added, "Improving revenue is our foremost priority." Ohcaptainron, what's your opinion of the UA senior management comments to the Tribune?
In conclusion, I agree UA has made some progress in several areas during the last month and UA has received a reprieve with the significant federal government one-time gains. But, it's way, way to early for UA employees to cheer May's numbers or to believe the company is out of the woods. October's EBITDAR requirements are only three months away, the maximum cumulative loss gets smaller each month until the fall, when UA must show a positive cumulative cash flow. In my opinion, UA's public spin is not convincing the financial community that the carrier can meet the DIP financing covenants in just a few months, without financial waivers.
Best regards,
Chip
