United Airlines

2004 : Pulling Out of Bankruptcy

Andreas Schulz
Hazik
Mohamed
 Overview

 The Airline Industry & United Airlines

 Bankruptcy

 United’s Challenges

 Pension Fund

 Restructuring United

Andreas Schulz
Slide - 2
(v3)
Hazik Mohamed
 The Airline Industry
 Economics
– Major Revenue: Ticket Sales
• Airlines often merge and form alliances and act as price discriminating cartels
– High level of fixed and operating costs:
• Labor, fuel, airplanes, maintenance, insurance, etc.
– Partnerships increase volume and available destinations and reduce fixed
costs
 Industry Trends
– Pattern of ownership has been privatized in recent years after being highly
regulated
• 1950-1970: 15%+ annual growth rates
• 1980-2000: 5% annual growth rates
• 2000-2010: bankruptcy
– Consolidation is a trend, business is hard
• In the U.S. alone over 200 airlines have merged, been taken over, or gone out of
business since 1978
Industry Is Undergoing A Permanent Structural Change !
Andreas Schulz
Slide - 3
(v3)
Hazik Mohamed
 Pre-1978:
– Large scale federal regulation by Civil Aeronautics Board restricting
routes and passenger fares. Air fares were based on airline cost rather
than by competitive market economy.
– Market has been dominated by established airlines such as Pan Am,
Delta Airlines, Braniff Airways, American Airlines, United Airlines
(originally a division of Boeing), Trans World Airlines and Northwest
Airlines
 Post-1978:
– Airline Deregulation Act regulation allowing entry of new airlines competing
on price basis.
 1980’s:
– Economic recession, increased competition and contractual obligations
reducing profitability, especially for the (pre-1978) established airlines, as
a result a number of airlines went into bankruptcy.
 1990 – 2004:
– Gulf War, 9/11 Terror Attacks, Afghanistan and Iraq War, SARS etc.
put additional pressure onto the (established) airlines.
 Airline Performance 1990 - 2003

Kuwait Invasion
11th September 2001

Andreas Schulz
Slide - 5
(v3)
Hazik Mohamed
 United Airlines
 The world’s second largest airline
 Largest US based international carrier
 Second largest Frequent Flyer Program with more than 40 million
members
 Provides 14% of U.S. domestic industry capacity
 Hubs in Los Angeles, San Francisco, Denver, Chicago, Washington,
D.C. and Tokyo
 Has global air rights in the Asia-Pacific region, Europe and Latin America
 United is a founding member of the Star Alliance, and offers
connections to over 1,000 destinations in over 170 countries
worldwide
 More than 3,500 flights a day on a route network that spans the globe
 Fleet age averages among the youngest in the industry at 10 years

Andreas Schulz
Slide - 6
(v3)
Hazik Mohamed
 Vulnerable to economic turbulences due to its cost structure
 Especially labor cost and pension commitments make United
less competitive to efficient competition such as Southwest
Airlines
 Bankruptcy
 United avoided bankruptcy in 1994 by restructuring :

Andreas Schulz
Slide - 8
(v3)
Hazik Mohamed
 Into Bankruptcy
 September 2001 – Terror attacks involving two United planes
bringing the airline industry under severe pressure

 June 2002 United plans $2 billion debt financing package contingent

to receiving a $ 1.8 billion loan guarantee from the Air Transportation
Stabilization Board ATSB.

 December 2002 ATSB rejected United‘s application on grounds

of inadequate concessions due to extremely low credit rating
and unacceptable high risk to U.S. taxpayers.

 On December 9th 2002, United filed for Chapter 11 :

– Breathing space to continue operations and sell off expendable assets
– Arrange DIP financing while it reorganizes

Andreas Schulz
Slide - 9
(v3)
Hazik Mohamed
 During Bankruptcy
 United negotiated $5 billion annual cash savings including labor
cost reductions.

 United launched new budget carrier (TED)

 United applied for federal loan guarantees from ATSB.

 In 2004 United secured $2 billion in Exit Financing contingent to

receiving $1.6 billion ATSB loan guarantees.

 The ATSB rejected United’s loan guarantee application based on a

sufficient likelihood for United to be successful in obtaining
funding without loan guarantee.

Andreas Schulz
Slide - 10
(v3)
Hazik Mohamed
 United’s Challenges
 Under bankruptcy protection, United faced several challenges :
– Professional fees are huge at US10 million a month
– Skyrocketing fuel prices were hurting bottom line,
• Chapter 11 affected their fuel hedge strategies
• Forced to terminate swap contracts, exposed to fuel hikes
– Forced selling of aircrafts
• Lacked flexibility to wait for best offers
• Sold at 30-50% less
– Jeopardized long-standing relationships with important partners
• Atlantic Coast Airlines (ACA) terminated relationship with United

 At the time, United was also launching TED, a new low-cost carrier
(LCC) to tap into the leisure market and compete with other LCCs
on 70% of its routes

Andreas Schulz
Slide - 11
(v3)
Hazik Mohamed
 Key Structural Problems Exiting Bankruptcy
 Short term liquidity financing - $500 million immediate requirement
 Current Cash-Burn-Rate is $1 billion per annum

 One of the largest liabilities for United was its pension plan
– Shortfall of $7.6 billion
– Needed $567 million by October 15th 2004 and $3.7 billion for 2005-2008
– Short & Long-term obligations could prevent United from exiting Chap 11

 United’s Options :
– Make contributions required by law
– Seek immediate termination of pension plans
– Refrain from making contributions and continue negotiations with employees

Andreas Schulz
Slide - 12
(v3)
Hazik Mohamed
Restructuring United
 Key Structural Problems Exiting Bankruptcy
 Short term liquidity financing - $500 million immediate requirement
 Current Cash-Burn-Rate is $1 billion per annum

 Pension liabilities estimated at $14.5 billion with only $6.9 billion in

pension assets.
 Short term pension contributions at $567 million by end of the year.
 Medium term pension contributions at $3.7 billion in the next 4 years.

Andreas Schulz
Slide - 14
(v3)
Hazik Mohamed
 Tough Choices
 United faces three main options:

1. Continue contributing to pensions as required under law.

2. Immediately terminate pension plans.

3. Stop contributing to pension plans and negotiate with employees.

Andreas Schulz
Slide - 15
(v3)
Hazik Mohamed
 Tough Choices & A Balanced Approach

Running the Company

Focus on the Airline & Customers
Operational Excellence
Rebuild the Company – Employee Relationship
Re-engage Leadership
Enhanced Accountability at all Levels

Restructuring Office BTO

Focus on Bankruptcy Affairs Business Transformation Office
OCUC – Creditors Committee Reinventing Business Processes
DIP Financing Cost Savings Initiatives
Court Hearings Revenue Generation Initiatives
Coordination Across Company Line Items in Business Plan

Andreas Schulz
Slide - 16
(v3)
Hazik Mohamed
 Significant Savings Achieved
 New Labor Agreements Reduced Costs 32%

 Reduced Workforce by 38%, Productivity Increased 25%

 Renegotiated Aircraft Leases Reduced Costs Over $900M

 Business Transformation Office Initiatives Reduced Costs $508M

 Over $600M in Pension Costs Eliminated

 TOTAL Annual Savings of $7B

Andreas Schulz
Slide - 17
(v3)
Hazik Mohamed
 Key Achievements in Exiting Bankruptcy
 Competitive cost structure in place

 Balance sheet de-leveraged

 Excess capacity eliminated

 Assets refocused on strongest markets

 Portfolio of products diversified

 Complex governance eliminated

 Management and labor focused on the customer and the bottom line

Andreas Schulz
Slide - 18
(v3)
Hazik Mohamed
 Profitable & More Adept Portfolio
 The evolution of the portfolio has allowed United to adapt its
product offering to capture untapped revenue sources in the
marketplace

United Express TED

United Express

Int’l Domestic

Domestic Int’l

2001 2005
Andreas Schulz
Slide - 19
(v3)
Hazik Mohamed
 United in 2010

Andreas Schulz
Slide - 20
(v3)
Hazik Mohamed