United Airlines parent UAL Corp. filed its Disclosure Statement yesterday in its longstanding chapter 11 case in Chicago and it was not a pretty sight. United was the second major airline to seek bankruptcy court protection during the current downturn in the industry that started in 2001. US Airways Group Inc. is about to emerge from a chapter 22 bankruptcy (two chapter 11 cases in a three year period) and merge with America West Holdings Corp. Delta Air Lines and Northwest Airlines both are currently on the brink of chapter 11. Here are previous posts that chronicle the UAL bankruptcy saga.

The disclosure statement is the chapter 11 equivalent of an offering memorandum that provides creditors with background information on which they can make an informed judgment on the debtor’s plan of reorganization. United’s disclosure statement revealed that the company is seeking to emerge from bankruptcy by around Feb. 1, 2006, but that creditors holding unsecured claims would receive equity in the reorganized company worth only four cents to seven cents on the dollar of such claims. As is typical in such debt-for-equity plans, pre-bankruptcy holders of UAL’s common and preferred stock will be wiped out under the plan. A February, 2006 emergence from bankruptcy would be three years and two months after UAL filed its chapter 11 case.
Not only is the return on creditors’ claims not particularly robust under the UAL plan, the financial basis of even that paltry return does not even appear to be particularly sound. UAL contends that it will be profitable for each of the next five years, projecting that total liabilities will decline to around $14 billion in 2010 from over $27 billion this year. The business plan is built on an assumed oil price of $50 a barrel from next year through 2010, which is a historically high fuel cost, but would you want to make a bet on UAL based on that price? A safer bet is that UAL does not have the cash available to hedge and lock-in such fuel costs for that period.
Under United’s plan, United employees and the Pension Benefit Guaranty Corp. (the federal pension insurer) will receive convertible notes in the reorganized debtor, with the emphasis on “convertible” because it appears unlikely that United will be in a position to pay such notes anytime soon. The PBGC has taken over all four of UAL’s underfunded pension plans and represents about $10 billion of United’s expected unsecured claims of about $28 million.
United is currently raising between $2.5 billion and $3 billion through a term loan and revolving credit facility to provide its plan “take-out financing” — i.e., the funds necessary to repay its interim bankruptcy financing and to provide liquidity to fund its post-bankruptcy operations. Somewhat amazingly, the United disclosure statement suggests that the company continues to consider the alternative of raising additional capital through a rights offering or a public or private equity offering, including giving unsecured creditors the opportunity to buy $500 million in new UAL common stock. My sense is that UAL management need not stay up nights waiting for unsecured creditors to jump at that “opportunity.”
After the reorganized company issues about 125 million new shares of common under its plan, UAL’s disclosure statement estimates that the reorganized company will have an equity value of about $1.9 billion, which values the new shares at $15. The disclosure statement projects that the reorganized company would initially have $18 million in debt and liabilities compared with the $26 billion that it had before filing its chapter 11 case. Although the company states that it will have sufficient cash flow” to service debt and fund operations post-bankruptcy, a mere 30% reduction in liabilities under a debt-for-equity reorganization plan is not the usual prescription for robust post-bankruptcy business performance. The federal government — through the PGBC — better get ready to hold a large equity stake in the reorganized United.