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US Airways – Summary
LCC's new aircraft expenditures toward new aircraft are assumed at $770 million for 2008 and $800 million for 2009. We assume the company will raise 85% debt to fund these new aircraft. Somewhat unique to LCC's story is the minimal principle payments on debt and cap leases that are scheduled for the next couple of years ($236 for 2008, and $145 for 2009). We are not anticipating any asset sales. As of 1Q08, the company held auction rate securities with a fair value of $295 million, which are not included in unrestricted cash. In 1Q09, we have assumed that the company will be able to sell these securities at fair value, and we add this amount back to the unrestricted cash balance.
LCC's credit facility requires the company to maintain consolidated unrestricted cash and cash equivalents of no less than $1.25 billion, with not less than $750 million held in a control account, which would become restricted for use if certain adverse events occur. LCC's term loan does not currently contain a periodic fixed charge covenant. However, if LCC engages in certain merger activity, there is a springing test that would come into effect. Based on our projections, but excluding any incremental capital raising (a rather unrealistic scenario as management will likely raise capital in some form), LCC will fail to meet the minimum cash covenant in 4Q08.
LCC owns 25 unencumbered E190s worth approximately $500 million dollars which it has said it could sell or refinance to bolster liquidity. Additionally, LCC has valuable DCA slots (worth <$75 million, $2 million per slot) and also could reap the rewards of its strong vendor relationships with GECAS (a large lessor to LCC), Airbus (a top customer in order book terms), and others. A sale to United is much discussed and seemingly likely (please see our recent note, United-US Airways: 3rd Time’s the Charm?, published April 28, for details). LCC has the option, as do others, to engage in a forward mileage sale. The company also has the option to finance aircraft deposits through a PDP facility. Given LCC's relative absence of material liquidity levers, we actually ascribe a slightly higher Ch11 probability to LCC than to AMR and UAUA in this scenario (mirroring our thoughts on NWA).
UAL – Summary
For both 2008 and 2009, we are assuming $0 new aircraft capex for United. We do assume aircraft maintenance capex of $225 million and $150 million for 2008 and 2009, respectively, but recall that we assume the company will not debt finance such expenditures. We assume no pension cash adjustment and no asset sales. As of 1Q08, the company had $153 million available on its revolving credit facility, and we assume that in 1Q09 UAUA will fully utilize its revolver capacity.
As for credit facility covenants, UAUA recently amended its credit agreement, allowing the company to suspend the fixed charge covenant for four quarters, kicking back in for 2Q09. When the fixed charge covenant test returns in 2009, it will at first be a 3 months rolling test (2Q09), then 6 months, 9 months, and will revert to a full LTM test by 1Q10. An important change here, in addition to the change in the number of months covered, is that the definition of fixed charges has also changed. Previously, UAUA’s fixed charges included scheduled principal payments on its debt and capital leases. When the test is reintroduced in 2Q09, fixed charges will no longer include these scheduled principal payments in the calculation.
Also, it is important to note that there are material fresh start and other adjustments that need to be made to the covenant EBITDAR in order to properly perform the calculation. Although some information is available in public documents, UAUA management has made clear that the actual calculation (for both pre and post-amendment definitions) cannot be made using only publicly available documents. In our analysis, we assume an annual $325 million of fresh start addbacks ($81 million per quarter). There is also a minimum unrestricted cash balance covenant with a required minimum balance of $1 billion (this test remains in place even though the fixed charge has been temporarily suspended). Based on our projections, UAUA will not exceed the required 1.0x fixed charge coverage test in 2Q09 and will fall shy of the minimum $1 billion in unrestricted cash even before that in 1Q09.
UAUA has passionately advertised the fact that it has approximately $3 billion in unencumbered assets. The company has significant untapped value in its pool of unencumbered aircraft (110 in total, worth perhaps $2 billion) and spare parts/engines (could be worth another <$1 billion). UAUA's slots at LHR and NRT are quite valuable. LHR alone could be worth up to an estimated $500 million. UAUA's MRO has $280 million in annual revenues, yet a divestiture could only take place with labor approval. Then there is the much anticipated LCC purchase and potential outside equity infusion. UAUA has the option, as do others, to do a forward mileage sale. In the end, we do not believe that management will simply watch its cash balance decline. Rather, we believe management is likely to look to bolster cash by mortgaging or selling unencumbered aircraft assets and/or borrowing against the frequent flyer program.
