Sometimes it seems as if United Airlines can't win. First, the airline is criticized for being the only major carrier that lacks an airplane order. Then it says it will discuss potential new orders with Boeing ( BA) and Airbus. As soon as that happens, it gets downgraded by JP Morgan. Shortly afterward, CEO Glenn Tilton gets added to Jim Cramer's "Wall of Shame." To top it off, parent company UAL ( UAUA) is priced around $4 and "is discounted for bankruptcy," even though the risk of that actually happening is minimal, says Jesup & Lamont analyst Helane Becker. Becker says critics of the potential aircraft purchase should relax. United is "not even placing the orders now, and the deliveries will probably come over eight to 10 years," she says. "They are window-shopping, and this is a good time to do that." The carrier announced its intent to seek aircraft requests for proposals on June 4. The next day, JP Morgan analyst Jamie Baker downgraded the shares to underweight from neutral. "We view United's aircraft RFP as evidence of increasing liquidity creativity, highlighting the challenges in raising capital against older aircraft" and suggesting that the purpose for buying new aircraft is to raise financing capital from manufacturers, Baker wrote in a report. However, he said he expects Airbus and Boeing to be skeptical and that United "may find extracting cash from either manufacturer much more difficult" than getting them to discuss new orders. Last week, Cramer added Tilton to his "Wall of Shame," saying that United has been plagued by poor execution, plunging revenue and a decline in share value relative to its peers. This year, UAL shares are down about 63%, while the Amex Airline Index has fallen 29%. Since UAL emerged from bankruptcy in February 2006, its shares are down 88%, while the index has lost 66%. Cramer noted that United, once the biggest airline in the world, is now fourth. Between 2000 and 2008, its fleet shrank by one-third, its workforce fell by half and its passenger count decreased by 38%.
United's pilots view the order as "a ruse," says Jay Heppner, spokesman for the United chapter of the Air Line Pilots Association. He says the intent is to raise capital and provide leverage in contract talks. "This is akin to putting something on eBay with a minimum price, and then nobody bids your minimum price," Heppner says. Additionally, linking aircraft orders to concessions in contract talks is a common technique in the airline industry, he says. United has begun talks with its pilots regarding a contract that becomes amendable at the start of 2010. In a letter to employees to discussing the RFP, Tilton said United wants to replace its widebody fleet and potentially its 757 fleet. He specified these conditions: "In addition to earning a return
on investment, any aircraft order must be financed in a way that strengthens our balance sheet over the long term and does not impact our cash position," Tilton wrote. Clearly, United enters the aircraft market at an advantageous time. Orders at Airbus and Boeing have slowed precipitously during the past year. Aviation consultant Robert Mann says the potential order is particularly important because it sends a message to employees that United is not planning to shrink indefinitely, but he said the failure to fully explain the financing diminishes the gesture's value. "I would have thought that would have been part and parcel of the announcement" he says. "The question is do they have the internal cash flows to support a good chunk of this. After all, the credit markets are terrible, the revenue environment is terrible, and United hasn't produced free cash flows at a rate to cover existing expenses, let alone to invest in new airplanes. I'm sure they can do it," Mann says. "So I don't think it's a matter of not having a business case, but rather of not showing the business case."