Honestly, these results look promising. They might even suggest that United is on the right track. Still, I remain non-commital about United's prospects for various reasons.
I've expounded on some of those reasons in various threads. Here are just some random thoughts about their 3rd Qtr. financial report.
Unit costs. First of all, United's mainline unit costs are still greater than AA
's, its closest network competitor, $9.88 compared to $9.43. How could that be? AA
's wage and work rule concessions supposedly totaled $1.8 billion, UA
's supposedly $2.5 or $2.6 billion. This doesn't make sense. With those kind of numbers, one would have expected UA
's unit costs to be below those of AA
by now. Now, I am beginning to see why Leo Mullin, Delta's CEO, keeps using AA
's pilot costs as the benchmark and not UA
's costs. Could Leo Mullin know that AA
negotiated more cost-effective contracts with its employees than United? Just something to think about.
Accounting for all Operational Expenses. I think someone is confusing the "Statements of Consolidated Financial Position" with the "Statements of Consolidated Operations." The former accounts for all of UAL's liabilities, pre- and post-petition, and any subsequent adjustments to those liabilities. The latter accounts for all of UA
's actual revenues and expenses for the current quarter and/or reporting period. UA
can meet the reporting standards, mentioned by StevenUhl777, by listing certain expenses as liabilities in their "Statements of Consolidated Financial Position." As long as it never actually incurred the expense in the current quarter, however, I don't see how a payment it never made, that United may in fact be contesting as an unsecured debt, would also appear in the expense accounting of their "Statements of Consolidated Operations." That just doesn't make sense, given the purported objectives of each "Statement." In that sense, MD90 may be closer to the truth than StevenUhl777.
What lends credence to MD90's claim that certain bills (e.g., payments on unsecured municipal bonds) are not being reflected in UA
's operational expenses is a note in UA
's own 3rd Qtr. financial report:
At September 30, 2003, there were approximately $1.7 billion in special facilities revenue bonds ("municipal bonds") outstanding that were issued on behalf of United to build or improve airport-related facilities. The Company leases facilities at airports pursuant to lease agreements where municipal bonds funded at least some of the airport-related projects. In connection with the financing agreements entered into by United with the issuance of these bonds, we are required to make payments in amounts sufficient to cover the interest semi-annually, with principal payable upon maturity.
Under the Bankruptcy Code, we are not permitted to make payments on unsecured pre-petition debt without first notifying our creditors and receiving the approval of the Bankruptcy Court. Since we have been advised that our municipal bonds may be unsecured (or in certain instances, partially secured) pre-petition debt, we cannot make payments on these bonds without first meeting the requirements outlined above. For this reason, we have classified all of the municipal bonds on our balance sheet as liabilities subject to compromise.
Section 365 of the Bankruptcy Code requires that we meet all of our post-petition obligations for unexpired leases of non-residential real property in a timely manner. We believe that we are in compliance with all payment obligations under our lease agreements relating to airports where we have not rejected our lease and have municipal bonds outstanding. However, we have not made and do not intend to make debt service payments or any other payment on account of any of the municipal bonds issued on behalf of the Company relating to domestic airport financings. As a result, under certain of our airport lease agreements, we may be considered in default due to non-payment of the debt and therefore subject to the default provisions of our lease agreements with the airports. Possible consequences could include loss of our status as a signatory airline (resulting in increased rents and landing fees) and loss of our exclusive space agreements.
We have taken a number of steps to reduce the risks associated with non-payment on the municipal bonds. On September 18, 2003, we filed a complaint for declaratory judgment for all seven municipal bond issues relating to our facilities at the Chicago O'Hare International Airport ("O'Hare"), seeking, among other things, a declaration that a certain cross-default provision in the O'Hare airport lease is unenforceable. At this time, the City of Chicago has not answered the complaint.
Previously, we filed four complaints for declaratory judgment and corresponding motions for temporary restraining order concerning municipal bonds issued for facilities at the Denver International Airport, the New York City - John F. Kennedy International Airport, the San Francisco International Airport, and the Los Angeles International Airport. In each case, we are seeking clarification of our obligations under the applicable municipal bonds, and the protection of our rights concerning related airport lease agreements at the applicable airport until the Bankruptcy Court decides the merits of the complaints.
Subsequently, the Bankruptcy Court entered an order that requires each of the defendants in these actions to give us a 15-day notice and cure period before taking any action to terminate any of our rights concerning these airport leases until such time as the Bankruptcy Court enters final orders on United's declaratory judgment actions. The Bankruptcy Court has conducted a hearing on motions for summary judgment filed by various parties.
Pending the Bankruptcy Court's ruling, we are unable to predict what, if any, action might be taken in the future by either the bondholders or the airport authorities as a result of UAL's failure to pay these obligations as contractually required. However, we believe that the Bankruptcy Court's orders substantially reduce the risk of any declared default by providing us an opportunity to make required payments and preserve our rights under the leases."
I quote this passage from UA
's financial report for two purposes. First of all, because it attests to what MD90 is saying in effect. Even though United is accounting for all liabilities in the pre/post-petition portions of its "Statements of Consolidated Financial Position," it does not follow that the payments on some of these liabilities are showing up as expenses in its "Statement of Consolidated Operations." Consequently, UA
's current operational expenses, especially for airport rental charges, may not be truly representative of its actual expenses upon emergence from bankruptcy.
Second of all, I mention this passage because in it United divulges one of its biggest threats at the moment, the possibility that it would be forced to give up its gates at key airports if it were found in default of its lease agreements. We know who would want some of those gates at Denver? Southwest keeps growing at LAX
. I wonder how many other LCC's are looking at these gates and smelling blood. More than one Asian carrier could use a new cargo facility at LAX
. At JFK
would be more than eager to replace UA
with one of its oneworld partners. Like the dispute with ACA
, this should be interesting to watch.