Death Row

November 12th, 2008

As the third quarter earnings season got under way, some of the results from a varying number of airlines was not  totally surprising given that most had to contend with much higher fuel prices than we’re seeing today.

What is surprising, however, is how United Airlines continues to bleed money and somehow miraculously stay afloat. Of particular concern is just how this carrier, with no orders for newer, fuel efficient airplanes like the 787 Dreamliner or A350XWB, can hope to continue to be a viable business without such investment.

Critically, just why are some financial institutions negotiating and re-negotiating outstanding finance obligations when its evident that since United left the safe embrace of Chapter 11, the carrier has still not managed to turn itself around.

Let’s be brutally honest - the third quarter numbers from United were abysmal.

Image copyright/owned by FleetBuzz Editorial.com

CEO Glenn Tilton is widely referred to as an oil industry man, yet his acumen for hedging United’s fuel bill leaves something to be desired. Given the financial woes sweeping across the globe, a $779m loss is simply shocking. What’s even more frightening is that $519m relates to hedging contracts for fuel. Sure, oil prices have come down, but that’s no excuse for such an awful quarterly result.

After over six years at the helm of United, you could probably forgive Tilton about not knowing how to run an airline given that it took him some 30-odd years to establish his position at Texaco (known now as ChevronTexaco).

One pilot at a major US carrier spoke of his utter bemusement at such numbers.

“You gotta wonder what they were doing with their hedging program that could result in their losing such an enormous sum.“

And you know what, he’s dead right.

Just who are these institutions that are essentially bankrolling a business that turns in a loss for the year  (so far) of $940m and still expects to pay off its debts now that its not in Chapter 11?

The recent buzzwords of “irresponsible lending” springs to mind, particularly when carriers would have died had they operated anywhere else in the world where the likes of Chapter 11 bankruptcy protection doesn’t exist.

The extent of United’s woes are deeper than the company will let on or admit.

Pilots have even started their own campaign to get CEO Tilton removed (although I’ll argue forever and a day why this move wasn’t started sooner).

Click here to see their website.

“How is it that an oil man such as Glenn Tilton can’t figure out how to stem losses from hedging jet fuel?” asks Captain Steve Wallach who is chairman of United’s Chapter of the Air Line Pilots Association.

The most crucial aspect of the pilots campaign to remove Tilton can be found on the aforementioned site on by two entries posted here and here.

• Instead of holding himself accountable, Glenn Tilton continues to blame external factors while creating additional wealth for himself.
  

• Were you or I forced to declare bankruptcy, there’d be little to celebrate. Not so for the Tilton regime at United. Glenn Tilton alone received almost $40 million in bonus money. Senior managers protected the enhanced income of other senior managers, while telling us that the airline had to remain revenue neutral, and that our customers needed to bring $5 for a sandwich on a six hour flight. It’s amazing they could say it without blushing. By the way, most other airlines leaving bankruptcy managed to do so without writing big bonus checks to their senior managers.

With system capacity being cut across the board in the United States, older mainline jets leaving the national fleet being replaced by newer Airbus A320’s and Boeing 737’s, United has nothing to offset its capacity cuts or to lower its fuel bill by utilising newer airplanes, given that its remaining Airbus orders will be nullified.

In reporting its third quarter results, US Airways too had an astonishing loss of $865m, of which an eye-watering $488m consisted of badly hedged fuel costs. As oil prices climbed over the $100 a barrel mark in April 2008 and continued to rise to its peak of around $147 in July, quite why the likes of United and US Airways failed to hedge their bets more accurately is a testimony as to why the US airline industry doesn’t just need capacity cuts to survive - it needs casualties, and legacy carriers such as these inefficient two are justifiably prime candidates to bite the dust sooner, rather than later.

“We do think that the airline industry has been given a significant reprieve from the dangerously high oil prices, and the recent declines likely mean the airlines won’t lose an astronomical amount of money in this downturn,” said analyst Robert Stallard in a recent research note.

Image courtesy of Airbus

Clearly, United is the exception to this rule and certainly, the pilots at the carrier are validated when they say that management overhaul is now necessary for survival.

US Airways itself has committed to a partial fleet renewal with a dubious A350XWB order to replace the ageing A330 fleet, but whether it can ride the storm until late next decade to take delivery of those jets is anyone’s guess given that it recently deferred delivery of the first example until 2015 (p56).

Take note of the ambiguous wording relating to Airbus effectively paying US Airways to commit to the A320/A330/A350XWB order, knowing full well this ailing carrier can’t afford it.

“In exchange for US Airways’ agreement to enter into these amendments, Airbus advanced US Airways $200 million earned in consideration of aircraft deliveries under the various related purchase agreements. “

(Makes you wonder why United can’t then salvage its soon-to-be-cancelled order with Airbus for its A319’s/A320’s…)

OPEC’s recent production cut means that in the effort to bolster prices back up towards, if not beyond the $100 a barrel mark, it will almost certainly guarantee another round of quarterly losses for inept run airlines like United and US Airways.

Neither carrier has anything to be proud of.

In fact, these legacy carriers highlight perfectly just why the industry needs a wide-ranging fallout of big names to further enhance the drive for efficiency and prudence - two key attributes neither Tilton or Parker know much, if anything about.

Both carriers have been on death row for too long and quite frankly, they both need to be put out of their (and passengers) misery.

If woeful fuel hedging policies don’t kill off United, then Tilton’s “strategy” at turning the airline around certainly will.

Take note, Parker.

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