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UAL Fallout Ripples All the Way to Magic Kingdom

Many companies would feel the pinch from the airline's bust: Boeing, GE and, yes, Disney.
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No company is an island -- and if


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sinks, it will have broad implications for creditors, competitors and suppliers.

Now that the federal government has denied the parent of United Airlines' $1.8 billion request for a government-backed loan, UAL is expected to file for Chapter 11 in the coming weeks. UAL's bankruptcy filing would be the largest in the history of commercial aviation.

The ripple effects will be felt by competitors like


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American Airlines unit as well as UAL's creditors and suppliers, many of which will never see payment for services rendered.

A bankruptcy judge will ultimately determine who gets paid and how much they get, but an early look shows that a UAL bankruptcy would pinch business at some of America's largest companies.

Before being halted, UAL shares fell 59% to $1.28 Thursday on the news.

Employees and Equity Holders

Tops on the list of losers are current stockholders, who will get nothing for their shares once UAL files Chapter 11, something analysts stressed on Thursday morning. "We expect shares in UAL, currently at $3, to be essentially worthless by the end of the month," wrote Jamie Baker, analyst for J.P. Morgan, in a research report.

Of course, another loser likely will be UAL itself, which might never escape bankruptcy -- joining Eastern, TWA and Midway in aviation's dustbin. And UAL's employees, who likely would lose their 55% ownership stake in the company, along with decades of hard-fought negotiation for better benefits and pay, would shoulder the heaviest burden.

The enmity felt if employees lose their 55% ownership stake in the company could make it even harder for UAL to reorganize and re-emerge from bankruptcy as a success. United will cut capacity and even more jobs under Chapter 11, further alienating a labor base that has been growing increasingly frustrated, not only with management, but with its own labor leadership.

"We do not believe management has prepared its employees for Chapter 11," wrote Jim Higgins, analyst for Credit Suisse First Boston, in a research report to investors. "With significant internal dissension within and among labor groups, and labor/management distrust considerable, getting labor concessions to stabilize UAL may be difficult."

Creditor Crunch

A handful of lenders, suppliers and business partners also face a bumpy road.

"UAL has a wide range of creditors, like


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General Electric

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unit GE Capital, along with a large group of about 50 banks and institutional investors," said Philip Baggaley, credit analyst for Standard & Poor's. "Those loans aren't publicly disclosed; however, Boeing Capital and GE Capital talked about it in their third-quarter releases."

According to a filing with the

Securities and Exchange Commission

, Boeing took a pretax writedown of $79 million related to lease agreements with UAL -- the airplane maker's largest customer. Through the third quarter, UAL accounted for $1.2 billion of customer financing, prompting Boeing management to say that a United default "could be a material adverse effect on the Company's earnings, cash flows or financial position until such time as the aircraft are successfully redeployed."

While Boeing management was concerned about the possibility of a UAL bankruptcy, Wall Street analysts were more positive because the carrier already had deferred delivery of planes from Boeing, which has only one 777 jet left to deliver. Boeing does hold more than $1 billion in UAL debt.

"Given that UAL is sure to press for lower and delayed payments," said Cai von Rumohr, an aerospace analyst with SG Cowen. "Some write-offs are likely even though Boeing feels that it has a decent 'loan-to-value' ratio."

GE Capital is in a similar position, with two of its major customers,


and United, likely to be in bankruptcy at the same time. Combined, GE Capital has exposure to both airlines totaling $4.4 billion, which includes loans, leases and other commitments. While GE Capital has been in discussions with United over debt repayment, it also may be forced to take writedowns.

CIT Group

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Morgan Stanley


are also active in the area of aircraft finance. Company officials couldn't be reached for comment and neither has disclosed if they have exposure to United Airlines.

The market took a largely negative view of the companies facing exposure to UAL. On Thursday, Boeing dropped 3.9% to $32.61, while Morgan Stanley slipped 4% to $42.25. GE and CIT were off 1.6% and 1.1%, respectively.

Mickey and Mo'

The ripple effect will hit companies that many wouldn't think have exposure to the airline sector, like


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Philip Morris

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On Thursday, Disney said it is also likely to take a write-down if UAL's defaults. The entertainment company made $114 million in lease investments with UAL between 1992 and 1994. After falling 11% over the last four sessions, Disney shares were up 0.3% at $17.73.

Philip Morris also leases aircraft and will be hit with a double whammy when UAL files Chapter 11, because it also leases to USAir. All told, Philip Morris is on the hook for quite a tidy sum of money -- something Josh Sahrmann, a fund manager at Bear Stearns, has been warning clients about for months.

In its third-quarter earnings release from a month ago, Philip Morris highlighted its concerns that both carriers could trigger writedowns. As of Sept. 30, the company was leasing 16 Airbus A319s and 24 Boeing 757s to the two carriers, for an aggregate total of $536 million, or 6.2% of the company's portfolio of finance assets. Philip Morris fell 0.8% to $39.28.

The Shock for Suppliers

United Technologies

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, which makes airplane parts, services engines and provides financing, likely will see a small hit to its business as well, but won't face as much writedown risk. The company has $100 million in exposure in UAL financing, but the carrier accounts for 3.5% of UTX's engine business, which is one reason its stock slid 2.6% to $61.12.

"UAL probably represents about $150 million to $200 million in very profitable annual revenues for UTX," said von Rumohr, who added that the impact on UTX's earnings will be in direct proportion to the amount that UAL cuts capacity.

UAL already had planned to cut capacity by 6%, something some analysts think could double under bankruptcy, which would really hurt UTX's bottom line. "A 20% drop

in capacity would represent a 3-cent hit to UTX's full-year earnings per share," von Rumohr said.

No matter what happens, suppliers such as Boeing and United Technologies are sure to face a bumpy road ahead, simply because the airline industry is slashing capacity to meet slumping demand. And with a war in Iraq looming, oil prices seem likely to spike and air travel demand will further diminish, exacerbating the problem.

Regional Partners: More Problems or Better Potential?

UAL's partners, especially smaller regional carriers that rely on United flights as a source of traffic, will likely see their businesses affected, but in what way remains to be seen. Both

Atlantic Coast





have agreements with United that could be revised under bankruptcy, which would almost certainly cut into revenues and profits at the two airlines.

Indeed, CSFB's Higgins believes uncertainty is growing over the business prospects for the pair, and J.P. Morgan's Baker pointed out that the company will use bankruptcy to pay them less.

"UAL pays approximately $3,300 per departure to its partners," he said. "With

rivals offering rates in the $2,800 to $2,900 range, we expect UAL to significantly renegotiate its regional contracts."

But how this will affect Atlantic Coast and SkyWest is still up for debate. Deutsche Bank analyst Susan Donofrio maintained her buy rating on the stocks, telling investors that additional growth opportunities for United would offset the possibility of lower payments. In her eyes, the larger carrier could turn to the smaller flyers to maintain share as it pares its own capacity.

Like many of the issues surrounding UAL's bankruptcy, the impact remains to be seen, but investors took a bullish stance Thursday, raising Atlantic Coast 19.6% to $12.94 and lifting SkyWest 6.4% to $13.83. AMR, meanwhile, rose 10% to $7.74.