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No Angels on Wall Street
Posted by: vaughn Cordle | June 21, 2004 06:31 AM
There are no angels on Wall Street when it comes to investing in airlines. However, there are several
devils waiting to take the soul of the once mighty United Airlines.
The only reason United should continue as a going concern is if the post-bankruptcy value exceeds
the liquidation value. Remember, the value of any asset is the discounted present value of the free
cash flow available to the owners. The new owners will demand a rate of return that compensates
them for the risk they are taking on. The higher the risk, the higher the discount rate, which results in
a lower present value. It is this calculated value that equity providers care about.
The critical problem with United's current plan is that the unions' claim (DB deficits and concession
claim) exceeds any potential post-bankruptcy value by several magnitudes. No equity provider in their
right mind would invest in United with these outstanding claims. More importantly, United's current
plan does not go far enough in terms of cost reduction.
United will not get exit financing until these claims are reduced to a level that makes investment
sense. This will require a termination of the DB plans AND it will take further concessions by labor.
The tradeoff is between jobs and lower costs.
The unions and labor will decide United's fate. Plan A should be to preserve the airline in its current
form. Unfortunately, the company will have to be facing liquidation (plan B) if they are to meet the
criteria for distressed termination of the DB plans. In other words, it takes a plan B to achieve plan A.
If United does what it must to survive, the other legacy airlines will quickly follow down the same path.
Posted by: vaughn Cordle | June 21, 2004 06:31 AM
There are no angels on Wall Street when it comes to investing in airlines. However, there are several
devils waiting to take the soul of the once mighty United Airlines.
The only reason United should continue as a going concern is if the post-bankruptcy value exceeds
the liquidation value. Remember, the value of any asset is the discounted present value of the free
cash flow available to the owners. The new owners will demand a rate of return that compensates
them for the risk they are taking on. The higher the risk, the higher the discount rate, which results in
a lower present value. It is this calculated value that equity providers care about.
The critical problem with United's current plan is that the unions' claim (DB deficits and concession
claim) exceeds any potential post-bankruptcy value by several magnitudes. No equity provider in their
right mind would invest in United with these outstanding claims. More importantly, United's current
plan does not go far enough in terms of cost reduction.
United will not get exit financing until these claims are reduced to a level that makes investment
sense. This will require a termination of the DB plans AND it will take further concessions by labor.
The tradeoff is between jobs and lower costs.
The unions and labor will decide United's fate. Plan A should be to preserve the airline in its current
form. Unfortunately, the company will have to be facing liquidation (plan B) if they are to meet the
criteria for distressed termination of the DB plans. In other words, it takes a plan B to achieve plan A.
If United does what it must to survive, the other legacy airlines will quickly follow down the same path.
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