Reposted from the blog:
Enplaned
Well worth a visit and a subscription.
***********************************************
Look up "chutzpah" in the dictionary and you'll see the beady eyes of United Airlines' CEO Glenn Tilton staring back at you. United proposes to give management a 15% stake (currently valued at $285mm) in the airline as it exits bankruptcy.
It's not unusual for management to get an equity stake in a reorganized company. However, as this
article says, United proposes to give an unusually large stake to management. We'd argue that they deserve an unusually small stake:
- Much of United management are the same guys who rode the airline into Chapter 11 (e.g. Hacker, Brace, McDonald). You'll recall that United filed after management lost its bet that it could get a government loan in return for a mere 9% reduction in employee wages. Government stiff-armed United, at which point there was no way out for United other than filing bankruptcy. It was management's plan that failed, it was management who were to blame for United's Ch 11 filing.
- American Airlines management kept its company out of bankruptcy and has done a far better job at stripping out costs. American management isn't getting 15% of that company. Why should United management get a penny for screwing up where American has succeeded?
- Tilton should presumably reimburse United for needing on-the-job training. He had no airline experience whatsoever before coming to United only months before the filing. Did Tilton's inexperience contribute to the filing? It can't have helped.
- Management's initial Ch 11 plan failed utterly, wasting a year and a half. You'll recall that management initially hung its hat on getting the same government loan it couldn't get before Ch 11. Turns out it couldn't get the loan afterwards either, with the government finally turning down United flat in the summer of 2004. We're now 36 months into this bankruptcy. United is one of the poster children for the bankruptcy reform that was recently implemented (under the new law, United management would have lost control of the reorganization after 18 months -- if only).
- United management blew it when reducing its aircraft payments in Ch 11. United angered its aircraft financiers to the point where they joined together in a cartel. United came to an agreement with the cartel but then tried to weasel out, claiming the cartel violated antitrust rules. The bankruptcy judge agreed with United, but on appeal both United and the bankruptcy judge were spanked. In the meantime the aircraft market got stronger. By the time United came to a new agreement, terms were worse than if it had just signed the original agreement.
- United's wasted time and energy on the Ted subsidiary. Yes, we know they believe it's the greatest thing since sliced bread. Airlines always believe their new shiny low-cost brand is the greatest thing since sliced bread. United once thought the same about Shuttle, US Airways about Metrojet, Delta about Delta Express and then Song. There's never any way to independently verify how such an operation is doing so we're just supposed to take their word for it.
- If United management had put into place some innovative new business plan that had made the airline more profitable, perhaps they'd deserve a greater slice of the pie. But the reality is that value creation in this case is coming almost entirely because of crushing vendors and most of all labor, rather than management inspiraton. If there's a spare $285mm available, split it between the long-suffering unsecured creditors and the Pension Benefit Guarantee Corp. Don't give it to United management.
Luckily United creditors are objecting. The bankruptcy judge has a long history of doing precisely what United management wants, but perhaps even he will have trouble with this.