Cash squeeze may put United Airlines in a bind -- chicagotribune.com
The global recession has caused airline ticket sales to plunge deeper than anyone -- carriers or analysts -- anticipated.
Rather than banking cash from peak-season flying this summer as they normally do, United and its peers are paying a king's ransom to borrow money to get them through the winter months, when demand for air travel usually chills.
But after leveraging everything from frequent-flier miles to spare jet engines, United is running low on assets that it can use as collateral for debt or sell to raise cash. That limits the Chicago carrier's options as it faces requirements by its credit card processors to keep unrestricted cash near the present level of $2.5 billion, analysts said.
The prospect of another lean winter for U.S. carriers could spur more consolidation, analysts said, with United and Houston-based Continental Airlines as the likeliest carriers to head back into merger negotiations.
Cash is tight across the airline industry, and Ft. Worth-based American Airlines and Tempe, Ariz.-based US Airways could also face liquidity crises if conditions deteriorate, analysts warned. American faces steep debt payments over the next year and pressure from a credit card processor. US Airways has little debt but thin cash reserves.
"The whole industry is looking at an erosion of liquidity and cash flow," said Bill Warlick, senior director and lead airline analyst with Fitch Ratings. "It's a very grim revenue picture."
The need for action is especially pressing for United. If its cash holdings decline, two major credit card processors, JPMorgan Chase & Co. and American Express, could require it to set aside hundreds of millions of dollars to safeguard advance bookings in case the company folds.
Under an agreement that took effect March 1, American Express requires United to pony up money on a sliding scale if its unrestricted cash falls below $2.4 billion. The lower United's cash, the greater the amount it must set aside. United may also pledge aircraft, real estate and other assets as collateral.
As of January 2010, Chase will require United to hold at least $2.5 billion, a provision that would have cost United $134 million had it been effective in May. If United's cash falls to $1 billion, Chase would require it to set aside half of its monthly credit card charges, according to a Securities and Exchange Commission filing.
While credit card firms pushed Frontier Airlines into bankruptcy last year, (See: Mayday! Mayday! Mayday! ) analysts think it very unlikely that they'd pursue similar drastic measures with United unless operations deteriorate to the point where the airline isn't viable.
Chase, in particular, has a deep partnership with United that gives it a vested interest in keeping the carrier aloft. Chase's Mileage Plus affinity card is one of its most popular credit cards, while the bank last year gave United $600 million for the advance purchase of frequent-flier miles. A Chase spokesman declined to comment.
"When you have big boys at the table like credit card companies, and a big airline like United, nobody is going to throw anybody into bankruptcy," King said. "They're going to find a way around it, unless there's no way around it."
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United Airlines, Bankruptcy, Merger, Chase, American Express, Credit Card Reserves, Unrestricted Cash,
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