Core issues
- Pension obligation: In order to remain in compliance with IRS and ERISA2 rules, UAL would be required to contribute over $72 million to the pension on July 15 and over $500 million by the end of the year. (Exhibit 1 summarizes UAL’s balance sheet, and Exhibit 2 summarizes the company’s financial performance.)
Took near term cost savings while attempting new low cost carrier for future
Tilton and UAL’s management had responded to the company’s challenges by negotiating annual cash savings of $5 billion, including annual labor cost reductions of $2.5 billion, and $900 million in annual cost savings from the rejection and renegotiation of UAL’s aircraft leases.3 Even while addressing UAL’s cost structure, Tilton was also thinking about positioning UAL for the future. In February of 2004, UAL had launched a new low-fare carrier, called Ted, designed to compete with low-cost competitors such as Southwest Airlines, JetBlue, and Frontier Airlines.
Post 9/11 stability measure: (gov rejected their plea for a loan)
The Air Transportation Safety and System Stabilization Act was created on September 22, 2001 (Public Law 107-42). The act established the Air Transportation Stabilization Board. The board may issue up to $10 billion in federal credit instruments, such as loan guarantees, to the airline industry.
History
Market went from highly regulated to deregulation in 78 first under carter then more under reagan… gulf war brought more bankruptcies…strong union effects (porter)… 9/11 black swan…
Benefits of bankruptcy
Bankruptcy protection gave Tilton and UAL some breathing space to continue operating while trying to restructure its claims and sell off expendable assets. For one thing, bankruptcy protection gave United the ability to revoke some aircraft leases. In bankruptcy, a company can abrogate a lease, and the damages incurred by the lessor become a general unsecured claim on the company. In addition, bankruptcy protection gave UAL the right to abrogate agreements that it had made with its workers, increasing the leverage that UAL enjoyed in bringing its cost structures in line with the lowcost competitors.16 Finally, bankruptcy protection gave UAL time to restructure its operations, potentially raising cash by selling off some of its fleet of aircraft.
In addition, once in bankruptcy, UAL was able to arrange debtor-in-possession (DIP) financing. Since lenders providing credit to a business operating under Chapter 11 protection have claims on the firm that are senior to existing unsecured creditors, new lenders have an incentive to provide capital so that the company can continue operations while it reorganizes. DIP lenders must be repaid as a precondition for exiting bankruptcy.
Costs of bankruptcy
- $10m month in fees
- oil fluctuations also stressed the bottom line
- sold distressed assets for a loss at a steep discount b/c couldn’t hold out
- Deteriorates relationships
TED
Tilton concluded that a new airline brand could tap into the growing leisure market and improve United’s competitiveness on some of the 70% of its routes where it competed with low-cost carriers.