WatchThis!

UAL board looking at asset sales

Spinning off units could raise $16 billion

By Julie Johnsson
Tribune staff reporter
September 26, 2007


The board of United Airlines parent UAL Corp. is mulling spinning off several key assets, including the airline's popular frequent-flier program, as directors contemplate shrinking the carrier while substantially increasing its cash stash, United sources said Tuesday.

Among the options that United may consider, according to analysts, are shrinking its real estate portfolio, which includes the 66 acres that its former headquarters in Elk Grove Township sits on, and selling or leasing overseas routes, landing slots and airport gates. The Chicago-based airline also is exploring divesting much of its maintenance unit, known as United Services, as part of an effort to convert assets into cash, the Tribune previously reported.

Whether or not firm decisions will be made when the directors meet this week in San Francisco is not clear. United's directors meet each September to survey the airline's business environment, study its operations and discuss strategy. The three-day session this year, however, also is expected to include debate on large-scale spinoffs that would pare down the airline and at the same time build up its cash reserves.

A United spokeswoman said the company doesn't comment on board matters.

United Chief Executive Glenn Tilton told analysts during an earnings call in July that the airline was looking into strategic options for Mileage Plus, United's 45 million-member frequent-flier program.

And United last month confirmed to the Tribune that it was mulling a sale or joint venture of its giant maintenance facility at San Francisco International Airport. The airline has set up a detailed analysis of that business for potential partners seeking to do due diligence, says a source with knowledge of the company's plans.

Both moves represent a change in course for the second-largest U.S. airline, which until recently has seemed focused on building its business by pursuing a merger or acquisition. Tilton, a former oil industry executive, has been a vocal advocate of airline industry consolidation.

But mergers have been tough to pull off in the unpredictable airline industry. With few options to consolidate, Tilton may look to Plan B, analysts say.

"If you can't sell the company lock, stock and barrel, then maybe you look to sell it in parts," said Robert Mann, a consultant and principal with R.W. Mann & Co., based in Port Washington, N.Y.

Frank Boroch, an analyst with investment bank Bear Stearns, calculated in a July report that United could raise about $16 billion if it sought buyers or business partners for units that weren't integral to its core flight operations.

In the report, circulated widely within United as well as the airline industry, Boroch estimated that Mileage Plus, the second-largest frequent-flier program in the world, could attract about $7.5 billion from potential buyers, and United Services about $330 million.

He also valued the real estate portfolio at about $200 million and its international routes, domestic landing slots and airport gates at $2.2 billion.

"Now is the time when these units have a value that will decline at the end of the business cycle," said Mann. If United waits, he said, "it won't have an opportunity to do this again until when the next upswing occurs."

Doing so now would enable the highly leveraged airline to pay down debt and repair its balance sheet, pay shareholders a special dividend, build cash to help fund merger activity or perhaps attract a private-equity buyer, analysts say.

However, United's directors also will have to weigh potential benefits against the cost of losing direct control over divisions that long have supported its operations. Mileage Plus, for example, generated $600 million in revenue for the airline in 2006; United Services brought in about $280 million, Boroch said.

In a recent briefing to analysts, United's management deemed Mileage Plus "a greater challenge to spin off," wrote Credit Suisse analyst Daniel McKenzie in a Sept. 19 note.

United executives admitted to analysts that they have run the maintenance division poorly as a business, according to McKenzie. He said he believes an outside partner could rapidly build up the business.

greedyairlineexec

they could be doing a pre-emptive sale of assets: sell the routes and gates that overlap that of your "future merger parter" to get max $$ now instead of doing a fire sale when the DOT mandates it. The sale of the frequent flier is something a lot of airlines have done and the partnership on the maintenance facility to avoid costly upgrades and find outside customers is nothing new either.

Seems like a way of raising cash and positioning themselves properly from a DOT legal standpoint for buying a competitor, not "the end of United".

It's also a great way to increase cash on hand and reduce future liabilities therefore improving short term stock performance and making lots of $$$ for upper management stock option program.

MikeB525

Question: How exactly is a frequent flier program a tangible comodity? How does someone else "own" an airline's frequent flier program? What happens to the people holding miles? Does this new "owner" then control how many miles it takes to fly SFO-IAD, etc?

jsled

UAL selling assets - the gutting begins >>>>

Oh come now Watch This....we get it, ok? We know you are bitter. You were furloughed from UAL, you got yourself a good freight job and decided not to come back. Just be happy because UAL is here to stay. This article is nothing new. UAL still has routes/gates/authority that it has not used in years. It's not like they are selling the pacific routes. And just look how Air Canada benefited from selling its FF program. Good luck in your new career.

newKnow

jsled,

You're killing me!! (ahh, and probably right) Some people have to validate their decision by looking for the crash in the rear view mirrior. I see a lot of that on the NWA posts. I think it's just pre-merger activity. Good luck.

RobLAX

I agree with you jsled. UAL is not going anywhere.

HSLD

Any idea which routes UA is looking to sell?

I've often wondered about the value of a route that's not being used, most carriers don't fly unused authority because they are not profitable. Just curious if you had any insight as to which routes would yield enough at auction to cause the airline to sell (and why a buyer would want an unprofitable route).

One asset that wasn't mentioned in the article was the Pilot Flight Training Center in Denver. Word is that (most) all contract training has ended and the facility is under capacity. There appear to be parallels in the operation of the SF maintenance facility and the pilot training center, any ideas there?

Lambourne

Watch This,

I am not familiar with you but sounds like you are former UAL. Looks like not having you here is a good thing. You might want to rethink the "gutting" comment. Have you heard of Lufthansa Technik? Look it up. You will see parallels to what is happening with the MOC. Also, selling MP would be good thing also. As for gates/slots. Do you know we still have a large amount of route authority left over from the Pan Am Europe slots and some unused Pacific routes. If there is value in UNUSED assets then why not get that value from them? Also, the property by EXO was said to be on the block months ago as a result of the move of the offices to Whacker Dr.

Putting 16billion in the bank would make UAL a shopper for pretty much any company in the world. Combine the 16billion to the continued increase in the bank balance of cash on hand and you have some formidable figures to buy another carrier. So don't be surprised if the merger that takes place still has the tulip flying the flag versus the other carriers name.

Maybe it is the late nights and starting over that are hurting your ability to think clearly. It is OK to be a miserable git. Not sure if you are at FedEx but I know the last FDX crew I got to listen to on the bus in NRT and at the "Bon" were far from happy. In fact they were two of the most miserable, loud and obnoxious people I have ever had to endure sitting in the same bus/room with. From the moaning and groaning they were doing you would think things were not so rosy on the Freight Front.

FlyByCable

Yeah, they where probably *****ing about having to get their lazy rear ends in gear and do something with all the money they make vs. just having it sit in their checking accounts.

luv757

Not to hijack the thread but how is the hiring going at UA? any word on what the new guys are getting for equip/domicile? future plans? just curious, I have some buddies that are looking and with everyone starting to hire again I'd like to give them some info. Thanks!