United’s predicament is even a little more complicated. Tilton slashed jobs and dumped planes. Even so, United has way too much infrastructure (gates, hangers, ground-support equipment) as it exits bankruptcy.
Adjusting for stage length or miles flown, United’s unit costs are 50% higher than low-cost carriers and 10% above other bankrupt legacy airlines, writes Goldman Sachs analyst Glenn Engel in a recent report. “Labor can no longer be blamed for United’s cost disadvantage,” says Engel.
The problem, Engel says, is that the unit revenue isn’t available to support this cost structure. Growing into the existing infrastructure would be the easiest way out of this jam. But that will be difficult given Tilton has no existing aircraft on order.
United is projected to spend $500 million to $600 million annually through 2008 on capital expenditures. At that spending level, United is spending at roughly two-thirds the rate that the fleet is depreciating or wearing out.
Buying new planes would require United to plow $2 billion annually into capex--money it doesn’t have and probably won’t have until 2008 or beyond. At the same time, low-cost carriers are taking delivery on 94 new planes in 2006 alone, according to Back Aviation Solutions, an aviation consulting firm. Unless several competitors quickly vanish, United is going to run into some problems.
Of course, that’s if Tilton’s game plane is to run United as a long-term player. Wall Street wags are already speculating that Tilton will merge UAL with the first partner that comes along with a wad of cash. That could explain why management took 8%, or 10 million, of the new UAL shares that begin trading Thursday.
I know there are several threads running about UAL coming out of bk but now that they are out, how are they going to stay there given the conditions listed above? Seems to me that it will be a herculean task to avoid another trip to bk court or is the article right that the big wigs have positioned the airline for one of two scenerio's merger or liquidation? Given that oil is at 65 a barrel, with all the tensions surrounding oil producing nations, I don't see 50 dollar a barrel oil anytime in the future. Can they sell those gates, hangars and such to buy some time? Thoughts?