, parent of United Airlines, jumped 19% in Monday's session after the second-largest carrier unveiled its long-awaited restructuring plan, which it needs to secure a government-backed loan to stave off bankruptcy.
But in buying shares of the beleaguered carrier, investors are making a risky bet. UAL has rallied 73% from its October low and could be forced to file for bankruptcy protection by Dec. 2, according to the company -- just 7 1/2 trading sessions away.
With a $375 million debt payment due on Dec. 2, the company says it will be forced into bankruptcy if this restructuring plan isn't enough to win it a $1.8 billion loan guarantee from the Air Transportation Stabilization Board. Ultimately, UAL buyers are either covering their shorts, or buying into the idea that the federal government will not allow UAL to fold.
Even those who have given UAL a break in recent weeks, like Ray Neidl, airline analyst with Blaylock & Partners, who recently upgraded the stock to hold, have their doubts. "Unlike most other observers, we do not believe a filing is inevitable, although it remains probable," he wrote in a report to investors. "Unless the company can pull a rabbit out of its hat, a bankruptcy filing appears more likely."
Some, like the Business Travel Coalition, which represents business travelers, maintain the ATSB should grant UAL's request because it needs to ensure the stability of the airline industry. "A UAL bankruptcy
could produce a 20% to 25% cost gap between UAL and
unit American Airlines ... forcing American to seek bankruptcy," said the BTC in its analysis of the ATSB application. "Never in our commercial history has the U.S. had two major airlines -- two powerful national economic engines -- in bankruptcy at the same time."
The stability of the airline industry is just one of the factors that enter into whether UAL gets the money it needs over the next two weeks. In fact, in a letter 10 days ago, the ATSB asked UAL for detailed information about its restructuring plans -- a possible sign the agency was more concerned with getting that $1.8 billion loan repaid than what would happen if UAL were to go bankrupt. That's what makes the release of the restructuring plan so important, because UAL is finally giving the ATSB the information it needs.
Under the plan, UAL will eliminate 9,000 jobs by 2004, reduce capacity by 6% next year and shrink the staff 23% from where it was before the Sept. 11. 2001, terrorist attacks. Labor costs will be slashed by $5.8 billion over the next 5 1/2 years, with specific terms outlined for pilots, flight attendants, fight dispatchers, nonunion employees and company management. Thanks to these cutbacks, the company said it will return to profitability by 2004.
"Our plan is intended to restore United's financial health, and it gives us the ability to repay ATSB-guaranteed loans," said Glenn Tilton, United chairman and CEO, in a statement. "The plan aligns our costs and revenues, while building a platform for future growth."
But UAL still has some more work to do. Specifically, it needs to lock in labor cuts from its machinists union, which has been reluctant to negotiate with management. The union was the last to offer anything in the way of wage concessions and was the first to get up from the table when pressured
last month. And without machinists on board, the ATSB may balk at giving the guarantee.
But even if the ATSB accepts the current restructuring plan, it could give the UAL the $1.8 billion guarantee on a conditional basis, provided the company complete its restructuring plan, which is what happened with
. But with just two weeks until UAL said it would have to file for bankruptcy protection, the money from the ATSB loan could come too late to save the company -- leaving shareholders with nothing.
As highlighted earlier, such a tactic would be an easy political out for the ATSB, which can say it attempted to save UAL, but that the company couldn't meet its standards and prove it could repay the loan.
Shares of UAL finished higher Monday by 55 cents to $3.50.