United Airlines, struggling to exit bankruptcy, is counting on government-backed loans from the Air Transporation Stabilization Board, which was set up after 9/11 to overcome (perceived) temporary financial market disruption.
Somehow the ATSB still exists. United says they can’t access funds in the private market, which they judge to be a market failure but may really be a reflection of United’s prospects for profitability.
The Financial Times (sorry, no link handy) carries a piece suggesting United’s financial planning is in disarray.
- “We have got to get out of model land,” a stunned Jake Brace, finance
director at United, told a team of business planners last July in his
conference room at the airlines’ headquarters on the outskirts of O’Hare airport.
Mr Brace had just been told that a mistake had been found in the companies’ forecasting model, dubbed Gershwin. Somehow, one-off annual savings of $275m in 2003 had been included in the forecasts for 2004-2007. Worse, it destroyed forecasts Mr Brace had given just days earlier to United’s executive council, of $200m pre-tax income for 2004.
According to an Examiners report relating these events, filed with the
Illinois bankruptcy court at the end of March, Mr Brace then told his team to “fill the $300m hole.” They did. Yet on December 13th more problems emerged. There was a new $456m hole.
A presentation slide from a meeting two days later called for further
“Possible Hole Filling” measures to resolve “the $456m budget gap to enable bankruptcy exit.”
At its worst the report paints an unsettling picture of a stretched
executive team veering from crisis to crisis, struggling with the demands of bankruptcy restructuring, and raising questions about whether the airline is ready to exit the protections of chapter 11.
It also revealed a corporate governance breach. Key parts of a business plan were redacted from the version sent to the executive board without their knowledge amid fears they would be leaked by union members on the board. “In retrospect would I have done it in the way that we did? No,” says Mr Brace, referring to the handling of the document.
Perhaps the worst thing that could happen to United would be a government-backed loan. The biggest problem the major airlines face is their labor costs. If United gets the loan they’ll exit bankruptcy and lose their leverage to reduce costs.
Maybe that’s what private capital markets understand, and why United has a hard time raising funds without the government indemnifying lenders against loss.
