skippy

2.
Right now, United’s most pressing concerns are liquidity and compliance with the Company’s financial covenants. As explained in a recent Straight and Level, there are two different triggers. The first is credit card holdbacks with American Express (AmEx) and JPMorgan Chase (JPM). The Straight and Level explains credit card holdbacks. Credit card cash holdbacks are based on United’s unrestricted cash balances each quarter. If unrestricted cash drops below $2.5 billion, then JPM may hold back up to 15% of United’s advance ticket sales processed by JPM. If unrestricted cash drops below $2.4 billion, then AmEx may holdback 15% of advance ticket sales processed by AmEx. If United’s unrestricted cash drops below $2.0 billion, then each credit card company may hold back 25% of advance ticket sales. The percentages increase as the unrestricted cash falls further below $2 billion. Given United’s current liquidity and large operating losses (when excluding non-cash hedge accounting gains), it is not difficult to envision a scenario where our two primary processors could, absent modification, require large amounts of cash collateral under the terms of the agreements.
There are also financial covenants associated with United’s bankruptcy exit financing. United’s fixed-charge coverage ratio test (again, as explained in the recent Straight and Level) measures adjusted EBITDAR against the sum of cash interest expense and aircraft operating rent expense. The required minimum ratios are different depending on the quarter. Additionally, there is a minimum unrestricted cash requirement of $1 billion. United was in compliance with all of its financing covenants at the end of the second quarterThe interplay between credit card holdbacks and the minimum unrestricted cash covenant could cause a downward spiral. As more cash is held back by the credit card processors, unrestricted cash continues to fall and could trigger a covenant default under the exit financing credit facility. This could result in another United bankruptcy, or at a minimum, an expensive covenant waiver request. However, United ended the second quarter with $2.6 billion in unrestricted cash and with restricted cash of $281 million. And United has the ability to pledge collateral in lieu of cash with both JPM and AmEx (this ability is currently set to expire in January 2010 with JPMAs United exits the busy summer travel season, it will start to burn some of the cash it has built up with advance ticket sales. Absent a quick recovery in revenues (which no one is expecting) United must raise additional financing or renegotiate its holdback provisions. United currently has $1.1 billion in unencumbered hard assets which it could pledge as collateral for more financing (how much can be raised and at what cost would be determined by the capital markets). Other options could include the sale of a stake of the Mileage Plus program, additional advance mile purchases by our credit card partners, the sale of the training center or maintenance bases, or even further equity offerings. These options, however, will eventually run out and we ultimately will need to generate profits and cash flow from operations. Does the MEC condone this burning of United’s furniture? Certainly not. Nonetheless, it is not over until it is over, so we must believe and act on the premise that United will prosperLet’s address specifically United’s second quarter results. Bottom line result was a loss of $323 million excluding non-cash hedge gains and other charges. This was driven by several factors. First, consolidated passenger revenues for the second quarter are down 25% from the same period last year, and passenger revenue per available seat mile (PRASM) was down 17%. This is a much greater decline than the 9% decline in consolidated ASMs for the quarter. What’s most disappointing about this result is that United has cut capacity further than its peers, yet its PRASM performance is not holding up better than the average. Year-to-date through June, industry PRASM as reported by the Air Transport Association is down approximately 12%, while United’s PRASM is down over 14%. The Company continues to tout its progress generating ancillary revenues (over $275 million in the second quarter), and while these efforts are helping, they aren’t enough to overcome the Company’s continued focus on the premium passenger at the expense of those visiting friends and relatives. For now, United’s management has left the Company awaiting the return of the premium passenger. Second, consolidated cost per available seat mile (CASM) excluding special items and non-cash fuel hedge gains was down nearly 16%. CASM excluding fuel and special items was down 0.2%, a fact which management has touted loudly to analysts, particularly given the significant capacity reductions. But to put this in context, year after year, both before and after bankruptcy, United has had among the highest unit costs in the industry, even though, post bankruptcy, its labor costs have been among the lowest in the industry. Until now, the Company has been able to offset its higher costs by having among the highest unit revenues in the industry. But with the recent dramatic decline in premium passengers, United’s historically high cost structure has left the Company playing catch up again. So while the published statistics are accurate about year-over-year cost containment, this result is possible because United had a lot of ground to make up. And our competitors have also done well containing costs with the end result that as of the second quarter, United's unit costs are expected to be higher than everyone except Continental and American when adjusted for the average length of flightsIt is important to emphasize that United’s current financial dilemma is not a reflection on the performance of the pilots and the employees of United Airlines. Simply stated, United’s management has overseen $902 million in losses for the first six months of this year, excluding non-cash hedge and other charges. That equates to $20,044 for each of United’s 45,000 full time employees in six months. Early last month, we wrote a “Focus on 5” that was sent to 14 of the most influential airline analysts. The report was well received and prompted calls to the Company. Lately, there have been newspaper articles asking the same question we have been posing for months: Why is Glenn Tilton still here? While other airlines have been operating in the same economic environment as United, why is United still in such a difficult financial position? Our “Focus on 5” will help answer that question.