777fan
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Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 2:14 am

http://www.chicagotribune.com/busine...896820.story?coll=chi-business-hed

Not surprisingly, pundits are speculating that the Goldman Sachs hiring could be the first step toward UA seeking private investors to foster a fleet revamp, merger, etc. Interesting to see the reference to good ol' AQ and Gordon Bethune. I for one don't care how UA does it (public or private) but would love to see some 787s in UA's new livery at some point! As much as I love them, those 757s are getting tired. Happy reading!

777fan
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roseflyer
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 3:13 am

A levereged buyout of United would be interesting. That is a lot of capital. But a private owner could do a whole lot for the airline. It would make the operation a lot more cohesive and stronger. Also United would no longer have to make everything about its finances and route structure public. That would help fight the competition since the FEC filings contain tons of information about the airline that management at other airlines reads as well.

Quoting 777fan (Thread starter):
As much as I love them, those 757s are getting tired

I'm not sure what you mean by that. UA's 757s aren't really worse than anyone else's except for Delta with the Song refit. UA's are comparable to CO, which are better than NW, US, or AA. UA is currently changing seat covers and put all new seats in its entire fleet 5-7 years ago.
If you have never designed an airplane part before, let the real designers do the work!
 
planecrazy2
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 3:17 am

Quoting 777fan (Thread starter):
As much as I love them, those 757s are getting tired.

I've always found the 757s to be fine, especially with the new interior. The 737s are the ones that look tired to me.
United Airlines - Worldwide Service
 
777fan
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 3:33 am

Quoting RoseFlyer (Reply 1):
I'm not sure what you mean by that. UA's 757s aren't really worse than anyone else's except for Delta with the Song refit. UA's are comparable to CO, which are better than NW, US, or AA. UA is currently changing seat covers and put all new seats in its entire fleet 5-7 years ago.



Quoting Planecrazy2 (Reply 2):
I've always found the 757s to be fine, especially with the new interior. The 737s are the ones that look tired to me.

I actually had the "pleasure" of flying SFO-JFK on a UA PS 757 (UA 16) two weeks ago and found the condition of the interior to be deplorable. Mrs. 777fan and I were relegated to E+ but were fortunate to have the bulkhead seat. The bulkhead wall was dented, with the carpet portion of the two-toned wall shredding. Even more noticeable was the ripped seam in the carpet in the aisle, in addition to a broken window shade. I've flown on dozens of UA 757 flights (it's easily my second fav airframe) and this was probably the secondmost tired one I've ever seen. I was shocked to see a PS bird in the condition that it was.

Conversely, we also flew a UA 733 from BWI-ORD (I was dreading that flight) and found it to be in really good shape. Despite the old paint scheme on the outside, we found that bird to be in really good (and clean!) shape on the interior.


777fan
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UAL777UK
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 5:16 am

Having flown PS, obviously on the 757 in F & J, I thought that all the aircraft were in great condition although i do concede that it as not long after PS was launched so they should have been!!
 
LAXintl
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 5:29 am

Already posted United's Future May Be Private (by KarlB737 Nov 12 2006 in Civil Aviation)
From the desert to the sea, to all of Southern California
 
gigneil
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 5:32 am

Quoting Laxintl (Reply 5):
Already posted

This is the first thread.

NS
 
777fan
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 5:41 am

Quoting Gigneil (Reply 6):
This is the first thread.

Yeah! I beat him by like three hours!

Back on point: I don't see how UA would be able to raise enough capital to purchase new aircraft. The stock is hanging around in the mid $30 range for some time and that's been with somewhat stable fuel prices and holiday-affected revenues. Perhaps Boeing would consider stepping in ala Airbus in the US-WP merge.

777fan
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Gnomon
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 11:35 am

If there's any basis for the Tribune story, this is an interesting possibility -- interesting because of what it says about UAL's long-term strategy.

My question is whether such an LBO would be envisaged strictly as a way to raise capital for aircraft acquisitions or whether it would be the first step through the back door into consolidation.

[That said, I must say that I still don't understand why Tilton is so enamored with consolidation rather than focusing, as DL and CO seem to be doing (well, at that), on the core strategy of improving the airline to long-term sustainability. Grinstein has been quoted saying as much recently -- that consolidation is a non-starter.]

But back to the topic, it's interesting that this comes up. Seems this was Plan B after what was apparently a lukewarm reception among competitors to Tilton's merger pillowtalk.

Quoting RoseFlyer (Reply 1):
But a private owner could do a whole lot for the airline. It would make the operation a lot more cohesive and stronger.

I agree. But the experience of the 1980s and early '90s tell us that LBOs and these types of transactions rarely ended up so "rosy" (sorry, RoseFlyer...).

I guess my thoughts on this largely depend on what the end game is...

[Edited 2006-11-13 03:49:57]
 
atlaaron
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 11:54 am

Very interesting find and article 777fan. When they brought in GS I immediately thought merger but I never through about the possibility of an LBO and going private. However, I think it could be a very good "route" for UA to take . . . I like it!
 
srbmod
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 12:06 pm

I can understand why the big name private investor groups would choose long established carriers as potential targets. There is less risk in buying out UA than in bankrolling a startup (exception to that rule, JetBlue). Some smaller carriers have in recent years been bought by private groups. Sun Country and Spirit immediately come to mind.

Whether this turns out to be the beginning of an 80s flashback or not, the recent trend of investment groups buying up major companies is bound to hit the the larger players in the airline industry eventually. A few questions come to mind. If this trend does start to happen within the major airlines, what other airlines may become targets of LBOs? And would things be deja vu all over again in the industry? Will the leader of some of these groups be the next Lorenzo or Icahn (I honestly would be surprised if Icahn rejoins the fray.)?
 
atlaaron
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 12:09 pm

Quoting Srbmod (Reply 10):
If this trend does start to happen within the major airlines, what other airlines may become targets of LBOs?

I would think DL would be toward the top of that list.
 
777fan
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 12:20 pm

The way I see it, UA could be bought by a private group, only to have the valuable parts sold or merged into an existing carrier (CO?). As has been discussed ad nauseum, it's looking less and less like UA could actually facilitate a merger with another carrier.


777fan
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 1:05 pm

The only problem with this scenario is that the best time for a buyout might have been during the exit from Chapter 11. Fewer stakeholders (creditors) to negotiate with.
When they call the roll in the Senate, the Senators do not know whether to answer 'Present' or 'Not guilty.' -Theodore Roosevelt
 
centrair
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 1:39 pm

So if I understand this. Instead of merging, another possibility is that an investment group or other private group buys the airline or a part of it. Sounds like the Swire Group in HK. They have their hands in lots of pots not just aviation (Cathay, Dragonair, Drink Bottling, Harbor tugs, catering, Haeco) and seem to be doing just fine.
Yes...I am not a KIX fan. Let's Japanese Aviation!
 
hz747300
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RE: Will UA Go Private To Rebuild Itself?

Mon Nov 13, 2006 6:10 pm

When do they start receiving the 787s?  Smile
Keep on truckin'...
 
ChicagoFlyer
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RE: Will UA Go Private To Rebuild Itself?

Tue Nov 14, 2006 12:35 am

I am not running a private equity fund, so take this opinion for what it's worth, however I seriously doubt this article. Bottom line is, when a company is taken private, it takes on a lot of new debt. In order to service this debt you want to have several attributes.

1) A large base of unencumbered assets that can be sold if necessary
2) A stable and predictable cash flow
3) A relatively low equity value, and conversely, possibilities in the 'new' company to increase that value

Let's go through this one by one. 1)United is mortgaged like crazy. Its main assets are either leased or are collateral to existing senior debt. In fact the company said during the recent earnings release that they are planning to reduce their debt loads. 2) One adverse event (economy slowdown, plane crash, oil hike) and the cash flow evaporates--it's anything but stable.

3) Best LBO candidates are subsidiaries of large companies where management is constrained by the parent company to act in value-increasing manner. Successful recapitalization removes this constraint. Alternatively, when current management is destroying value, LBO brings in new owners and installs new management. These days United has an excellent management team (opinion of this forum notwithstanding), its equity value is high (remember when they were exiting Ch11, $15/share was the prediction) and their operating constraints are coming much more from the current debt or lease holders than the equity holders; furthermore, the airline operates in a union environment. An LBO will not help resolve any of these issues.

I will not dismiss the article outright as gas, for the simple reason that there's too much money chasing too few deals. But I have serious doubts and if I knew some fund wanted to use my $$ to invest in a UA LBO, I'd take my money out as soon as possible.
 
bobnwa
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RE: Will UA Go Private To Rebuild Itself?

Tue Nov 14, 2006 12:51 am

Northwest was purchased in a leveraged buyout in the early 90's by a group led by the Gary Wilson, Al Checchi and Fred Malec. This small group plus a few others owned all of Northwest. At the time, Northwest hadmade a profit for over twenty years in a row, had virtually zero debt and owned all its aircraft.
After the LBO, Northwest was deeply in debt and never recovered financially.
The LBO principals made hundreds of millions of dollars.
I would not recommend this as the way to go for UA.
 
Gnomon
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RE: Will UA Go Private To Rebuild Itself?

Tue Nov 14, 2006 1:45 am

Quoting ChicagoFlyer (Reply 16):
3) Best LBO candidates are subsidiaries of large companies where management is constrained by the parent company to act in value-increasing manner. Successful recapitalization removes this constraint.

This article, on the Hertz LBO earlier this year (which interestingly has popped up in several other threads on the UAL LBO prospect), illustrates your point very well. Hertz's parent, Ford, was unable to maximize value, and the recapitalization was very lucrative for the private equity investors. I agree in your assessment of UAL's lack of amenability to an LBO.

On balance, an LBO would be unfortunate. I agree with Bobnwa in this respect:

Quoting Bobnwa (Reply 17):
After the LBO, Northwest was deeply in debt and never recovered financially.
The LBO principals made hundreds of millions of dollars.

It's clear the only winners would be UAL management and the private equity investors.

Edit: I'd add that everyone is concerned with UAL's burdensome debt level, but an LBO would almost invariably involve UAL taking on more debt, and possibly spinning off some of its assets like MileagePlus, as the article mentions, since most of its owned assets (primarily aircraft) are encumbered as collateral to creditors, and as ChicagoFlyer mentioned, UAL is mortgaged to the hilt. There are too many ways in which this LBO could make things turn very, very sour for UAL employees. See the NWA experience.

Quoting ChicagoFlyer (Reply 16):
A relatively low equity value, and conversely, possibilities in the 'new' company to increase that value

The possibility strikes me that were an LBO to succeed, UAL's new owners might find ways to "increase value" by selling off parts of the company that individually might be worth a great deal to competitors, although it doesn't seem Tilton envisages the cannibalization of UAL. That said, though, it's difficult to understand what UAL's intent really is -- what sort of outcome they're trying to engineer here. Merger? Cannibalization? Or simply a way to recapitalize and drum up enough new financing to buy new planes and keep United flying as is?

[Edited 2006-11-13 17:57:34]

[Edited 2006-11-13 18:00:11]

[Edited 2006-11-13 18:16:19]
 
AADC10
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RE: Will UA Go Private To Rebuild Itself?

Tue Nov 14, 2006 3:58 am

Quoting 777fan (Thread starter):
those 757s are getting tired

I think the older 737s are actually worse. All of the planes are a bit worn due to deferred maintenance under Ch. 11.

One of the reasons most airlines are either publicly traded corporations or state owned is because they require huge amounts of capital and do not have a good history of profitability. The attempted LBO of United is sometimes considered the marker of the end of the 1980s junk bond buyouts because it seemed to be just the opposite of the type of company that was vulnerable to LBOs. The typical company was an old industry that was profitable and had assets but not growing.

Over the long term, most airlines do not grow either, but they have rapid boom and bust cycles, similar to railroads and semi-conductors. However, the financial markets seem to be awash in liquidity and investors are starting to get desperate to find a place to speculate. They might attempt taking UAL private, even though it does not make any sense.
 
bobnwa
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RE: Will UA Go Private To Rebuild Itself?

Tue Nov 14, 2006 4:32 am

Quoting AADC10 (Reply 19):
Over the long term, most airlines do not grow either

The top ten airlines in the US or the world for that matter, are a heck of a lot larger than 10, 15 or 20 years ago. I would call that long term growth.

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