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Airlines

United Airlines Sees Opportunity Amid Industry Turmoil

Strategic Insights

— 2 min read

As Hurricane Katrina devastates the Gulf Coast, disrupting oil production and air transportation, airlines Delta Air Lines Inc. and Northwest Airlines Corp. are facing a cash crisis. However, this misfortune may benefit United Airlines, which is emerging from its three-year bankruptcy reorganization with a strong financial position. United's low labor costs, new aircraft financing deal, and committed exit financing give it a competitive advantage over its rivals. The airline is optimistic about its restructuring plan and expects to submit it soon.

Key Takeaways:

  • Delta and Northwest face a cash crisis due to disruptions to oil production and air transportation, with Delta running low on cash and Northwest potentially unable to gain $1.1 billion in labor concessions.
  • United Airlines is in a strong financial position, with low labor costs, a new aircraft financing deal that will trim costs by $2.9 billion over five years, and committed exit financing of $3 billion.
  • United's restructuring plan is expected to be submitted soon, and the airline is optimistic about its chances of emerging from bankruptcy with all-debt financing.
  • The airline industry is facing a liquidity crisis, with fuel costs increasing by 50% from 2004, and the 10 largest U.S. airlines projected to spend $25.8 billion on fuel this year.
  • Consolidation and major restructuring in the airline industry are likely, with some portion of the network potentially going away.
  • United has a positive operating cash flow, while Delta and Northwest are burning through about $4 million a day.

Statistics:

  • The 10 largest U.S. airlines are projected to spend $25.8 billion on fuel this year, a 50% jump from 2004.
  • Fuel costs account for 27% of the revenue of the 10 largest U.S. airlines this year.
  • United Airlines has $1.87 billion in unrestricted cash and will increase its cash reserve by about $1.4 billion with exit financing.
  • Delta Air Lines Inc. will have $1.19 billion in cash by yearend, while Northwest Airlines Corp. will have $1.23 billion.
  • United's new aircraft financing deal will trim costs by $2.9 billion over five years.
  • The airline industry is facing a significant increase in oil costs, with prices reaching $65 a barrel or more.

Sources:

  • AirlineForecasts LLC, "US Airline Fuel Spending Up 27%" (no date)
  • R. W. Mann & Co., "Consolidation in the Airline Industry" (no date)
  • Securities and Exchange Commission filing (Northwest Airlines Corp., September 1)
  • AirlineForecasts LLC, "Fuel Costs: An Industry-Transforming Phenomenon" (no date)
  • United Airlines, "United Airlines Restructuring Plan" (no date)
  • Crain's Chicago Business, "United Airlines' Turnaround Plan" (no date)

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