Lerxst:

I wasn't surprised to see you bring up that article. That would have been my response also to these wild cash on hand figures being thrown around in prior posts. 2009 was an ugly and unusual year with the credit markets barely functioning in the wake of the financial crisis. UAL was also weighed down by Tilton's blown fuel hedges. I completely agree with the quote you included from Arbitrator Eischen.


July 1, 2009



To: United Pilots



From: MEC Communications



Re: UAL Finances



There have been myriad questions and rumors surrounding United’s finances in the last week. These have been fueled by United’s 2nd Quarter guidance issued through SEC Form 8-K filed June 17. This filing was less than a model of clarity. Additionally, United recently raised $175 million from secured notes. Combining these with articles from analysts who are not airline competent, and wrongfully inferring that the pricing of the new secured notes indicates that liquidity and investor interest are drying up for United Airlines, make a recipe for panic.



Regarding 2nd Quarter guidance, until the actual quarterly report is filed in late July, we will not have a clear picture of where United stands with respect to the other carriers. There are two important items that are clear, however. First, United expects to be in full compliance with its credit facility covenants in the second quarter. The third and fourth quarters were unmentioned. Second, though United’s cash reserve may drop below $2.4 billion, triggering a requirement to post reserves with American Express, it is probable that AmEx will renegotiate the terms rather than allow UAL to default. Last year, United had $382 million held back but reached a deal with Paymentech and JPMorgan Chase Bank to cut that amount to $25 million. United expects to end this quarter with $2.5 billion of unrestricted cash.



As of March 31, United had $1.7 billion of unencumbered assets, including aircraft, engines, spare parts and other. United has encumbered some spare parts in a $175 million secured senior 3-year note. The notes were discounted nearly 10%, with a 12.75% interest rate yielding 17.1% effective interest. People have compared this to Continental Airlines’ recent debt offering of $390 million, which featured around 50% loan-to-value (LTV) and around 10% interest over seven years. The difference is United secured its debt with aircraft parts while Continental used aircraft as collateral – 17 aircraft. Aircraft are a better debt and hence yield lower interest rates. United’s use of spare aircraft parts resulted in a higher interest rate. And, while on the high side, the rate is completely within normal debt rates for the asset class and credit worthiness of the borrower.



Finally, don’t believe everything written in newspapers or online. Readers should always consider the source. This week, an article was written by someone who has no standing in the airline analyst community and who convincingly demonstrated his lack of understanding of the airline industry. Be suspect. We are involved in Section 6 negotiations, and it is in the Company’s interest to instill stories of gloom and doom. Don’t believe them. Is United doing great? No, but it is far from being underwater.