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Is United Facing a Return to Bankruptcy?

The Chicago Tribune has joined the chorus of articles examining United Airlines’ financial situation and not liking what it sees.  I’m fairly certain that most of these pieces stem from a June deal United made to pay 17% on $175 million in debt it issued (that’s a high rate of interest, for those of you keeping track at home).  The other major concern is that American Express will begin to require cash payments from the carrier if United’s cash reserves fall below $2.4 billion (Chase has a penalty that kicks in at $2.5 billion beginning in 2010) – the airline actually fell below that level in May.

In addition, United doesn’t own much that it can sell off to generate cash quickly, should demand not recover in the next 6-12 months.  If you can’t sell your assets, how do you quickly generate cash?  By slashing prices.  Which is exactly what we saw last week with Southwest’s $30/60/90 sale, and what we’re seeing going into the fall and winter ($450 round trips to Moscow, anyone?).  As FareCompare’s Rick Seaney recently wrote (Tweeted?) “Reality Check! Nov to May airfare prices in a free fall, airlines have popped their chutes, just don’t know if their is a hole in the canopy.”  I’m not sure anyone knows more about airfare than him – if he’s saying airfares continue to reach new lows, we’re in historic territory.

But how low can you drop fares – at some point you’re not even covering the high fixed costs of running the airline.  And the old days of using business class to make up for low coach fares are over for now.  Sure, airlines have cut back significantly on capacity and that could help if business turns around.  But it may not – at least not for the next 9-12 months.  And if that happens, it’s desperation time, especially for United.

I can’t believe I’m saying this, but I think the only way out is a merger with Continental.  It makes me sick just thinking about that.  But the reality is that most industries have 2 major competitors, with a 3rd much smaller competitor, then extremely high fragmentation from there (Coke/Pepsi/Dr Pepper; McDonald’s/Burger King/Wendy’s).  Sure, there are exceptions.  But we don’t need AA, UA, Continental, Delta, US Airways, and Southwest (and JetBlue and Alaska?) as national carriers.   A UA/CO matchup would help consolidate some of the competition.  It’s not crazy that Delta could suck up US Airways once their NW merger is completed (assuming they’re able to ride out the next year’s downturn), and a JetBlue/Alaska matchup isn’t insane either.  Which, in this pretend scenario, would leave AA, CO, Delta and Southwest as major national carriers, with Alaska Blue as Dr. Pepper in this scenario.  It’s not crazy, and it would help to drive fares up (no one likes that – but no one likes airlines closing down either.  And driving from New York to LA is a loooooong trip).

Like many others, I had pooh-poohed consolidation as a way out of trouble, and on some level I still do.  It’s not a cure-all.  But these are times like we’ve never seen, and airlines need to use this opportunity to right-size the market.  4 major carriers sounds about right to me.  Sorry, United.

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10 Comments.

  1. I don’t know all that much about UA’s finances — I think it’s a perpetual basketcase, so I don’t follow it closely. That said, I am certain that a lot of the recent talk about airline bankruptcies is just that — talk. Mike Boyd, who also knows something about airline finances, agrees with me.

    http://www.aviationplanning.com/asrc1.htm

    That said, it’s been obvious for years that there are too many US airlines. As you say, for stability, we probably should have around 4. I think that, eventually, we’ll get there.

    In the meantime, I have a hunch that the domestic fare environment won’t be as bleak as some pundits say. Why? The law of supply and demand. I haven’t fact-checked it myself, but the NYTimes said this week that, after the announced fall cuts, there will be the fewest number of domestic seats in the market since 1984. That is an amazing statistic to me. Does anyone even remember what air travel was like 25 years ago? It certainly wasn’t as prevalent as today. I find it very hard to believe that we need more capacity reduction than 25 years worth. At that level of capacity, my hunch is that fares start going up, even in a recession.

  2. I thought the airfare turnaround started about 6 weeks ago – the crazy cheap airfares to everywhere (Hawaii and Europe, especially) were disappearing and fares seemed to be at a level we haven’t seen in ages. Then they started discounting heavily again. I felt like the airlines tried to use their reduction in capacity as a lever to raise prices. But they couldn’t. And that was a surprise to me…that’s why I wonder how long this lack of demand will go on for — and how long every airline can ride it out.

  3. I don’t know about the discounting. There’s only been 1 really good fare sale — Southwest’s 30/60/90 offer. And those fares weren’t really cheaper than what they’ve been periodically offering for off-peak travel in most markets (what was extraordinary about the deal was that it was one-stop shopping throughout their system). And the sale was only good for some of the slowest leiure travel weeks of the year.

    Also remember that, overall, leisure travel has held up very well in this recession. What is hurting the airlines is the drop off in business travel. You get a lot of stories about “reduced demand” for airline travel, but that’s not entirely true. The problem the airlines have is that they can sell almost all their seats at customary leisure rates, but if you lose 5 business travellers on a flight, it often becomes unprofitable. The huge networks we have are mainly designed to snare business travellers — leisure travellers just fill up the planes.

    I don’t think anybody knows yet whether some of those business travellers will be returning this fall. History says they will start trickling back, but nobody really knows. Until they do, the airlines will keep cutting capacity.

  4. As you say, the business travelers are gone. But worse, it seems that they are also trading down to lower fare buckets. And yes, leisure travel has held up, but that’s because fares were incredibly cheap for a while. And while there weren’t any announcements of major fare sales like the 30/60/90 deal, you could fly transcon on virtually no notice for under $300 for months. That’s the big problem. Those fares used to be at $1200 with no advance purchase (or higher…). When the few business travelers left are able to fly around for next to nothing, that’s going to hurt.

  5. You say that a UA/CO merger would make you ill, but as a Continetal Employee, the thought a over unionized, frustated, poor customer service based airline and its employees, being blended into our company is scary

  6. I’m agreeing with you….As a longtime Continental flyer, I fear what would happen to Continental, an extremely well-run airline, when you jam it together with United (the opposite of that).

  7. A couple thoughts:

    – what makes four major carriers the right number? Why not three or five? I fail to see the evidence.

    – where’s the evidence that business travelers won’t come back once the economy picks up? They did after the last economic downturn (dot-com flame-out). Everyone’s rehashing everyone else’s predictions, but I haven’t seen any arguments as to why premium travel is dead forever (I realize you said “for now”, so this is more of a generic question).

    – any merger of CO/UA will take a lot of time. By the time they get anywhere with it, will the economy have picked up?

    – will the likes of JetBlue/WN just back-fill the capacity cut if they see opportunities?

    – from what I read elsewhere, UA still has a lot of owned aircraft that they haven’t mortgaged yet.

    – why would CO want the major distraction of dealing with a merger if they could just wait for UA to fail (and then pick up the pieces they really want/need)? What has changed since last year when CO walked away from a proposed merger after seeing UA’s books?

  8. Your questions are legit. My thoughts:

    – what makes four major carriers the right number? Why not three or five? I fail to see the evidence.
    I don’t know if 4 is correct. But I know that 2 isn’t correct, because there are nearly always 3 competitors. I would’ve said 3, but because, to your point, new entrants often seem to enter when airlines disappear, I figured we’d need a 4th sizable carrier in there. In reality, I think 3 large carriers, a couple of lifestyle carriers (JetBlue, maybe Alaska), and a few budget (Allegiant, Spirit) would allow everyone to make money.

    – where’s the evidence that business travelers won’t come back once the economy picks up? They did after the last economic downturn (dot-com flame-out). Everyone’s rehashing everyone else’s predictions, but I haven’t seen any arguments as to why premium travel is dead forever (I realize you said “for now”, so this is more of a generic question).

    As you note, I think they will come back. All the nonsense we read about how consumers will never buy premium products again is all complete garbage.

    – any merger of CO/UA will take a lot of time. By the time they get anywhere with it, will the economy have picked up?
    The economy may have picked up by then, but the airline industry really hasn’t thrived since 1999. I’d almost suggest that “bust” is the normal state of the US airline industry since deregulation, with a handful of boomtimes thrown in.

    – will the likes of JetBlue/WN just back-fill the capacity cut if they see opportunities?
    As noted above, I agree – airlines tend to backfill capacity. But Southwest and JetBlue have been pretty smart about avoiding this trap, choosing instead to cherry-pick routes. I suspect this is what would happen.

    – from what I read elsewhere, UA still has a lot of owned aircraft that they haven’t mortgaged yet.
    As I understand it, it’s a bunch of older planes that aren’t worth much.

    – why would CO want the major distraction of dealing with a merger if they could just wait for UA to fail (and then pick up the pieces they really want/need)? What has changed since last year when CO walked away from a proposed merger after seeing UA’s books?
    I don’t think United will fail. I think they could conceivably go bankrupt again, but they won’t fail. Continental could grow their Asian business, and pick up a strong hub in Chicago. That may be worth something. Also, if the theory is that there are only going to be 4 network carriers, it’s probably a good idea to be the largest.

  9. The scary part is working for UAL for 21 years and having many CEO’s making millions from my paycheck. I wish CO would buy us up and maybe we could run like a real airline. This latest BOZO will have UAL out of buisiness soon if something does not change. Not to mention a terrible union (141) that is not fighting for job security.

  10. i once mentioned to one of the fraternity boys at UA’s ALPA that UA has really no need to exist. his reply is “that can be said about a lot of companies”. i told him to try and see it in the light that “maybe” some of the employees of UA might be able to see the need.
    the employees at UA are so tunneled vision that all that is in focus is “management”, not about having a job, which involves “work” in the future.
    best all the way round is for UA to go the way of Pan Am…sell the Pacific first. that is where the money is and then liquidate the rest later.
    UA helped me pay my bills for 35 years…dig in ALPA, IAM, AFA . you can bury yourself in your uniform…oh
    costume!
    i understand that China Eastern is hiring!

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