Overall, the U.S. airline industry improved a bit last week as United Airlines parent UAL Corp. announced that it received creditor approval of its chapter 11 plan to emerge from bankruptcy next month as low-cost airline Independence Air announced its plan to liquidate rather than to attempt to emerge from its recently-filed reorganization case. Here are the earlier posts on the UAL financial problems and the Independence Air bankruptcy.
As noted earlier here, UAL has arranged a $3 billion all-debt exit financing package to emerge from chapter 11 funded by J.P. Morgan Chase & Co., Citigroup Inc. and General Electric Co. About half of that credit facility is dedicated to repay the $1.3 billion debtor-in-possession loan that has kept United operating through its over-three year adventure in Chapter 11.
United’s plan reminds the market of the risks involved in investing in or extending trade credit to a highly-leveraged legacy airline these days. Although the plan proposes to pay secured, priority tax, and administrative claims in full, UAL’s $20 billion in unsecured claims will receive a dividend of between 4% to 8% of such claims in the reorganized UAL common stock while existing common and preferred equity receive nada. UAL’s restructuring advisers have estimated that the reorganized UAL will have an equity value of about $1.9 billion upon emergence from bankruptcy, but the market is already somewhat bullish on the reorganized United (do people ever learn?) — UAL bonds are currently trading at much stronger prices than the four to eight cents on the dollar that UAL unsecured claims will receive under the plan.

However, Steven Jakubowski reminds us in this informative post that UAL’s emergence from bankruptcy is not all peaches and cream. UAL’s unions and the creditors’ committee are objecting to UAL’s management equity-incentive plan that would award 11% of the new stock in the reorganized UAL to 400 top management employees, which is a downward adjustment from the initial 15% award that management first floated. Similarly, the creditors committee is not pleased with United’s plan to be able to issue preferred stock as a possible “poison pill” to repel a takeover of the company. In gearing up for a December 27th hearing over these objections, the Committee recently filed an emergency motion to retain Yale Law School’s Professor Jonathan R. Macey as its “corporate governance expert” at a mere $800 per hour, a real bargain given the $300 million plus in professional fees that have already been expended in the UAL case.
Meanwhile, Independence Air unit will shut down operations this coming Thursday because it failed to draw a firm offer from a buyer or investor that could have kept the airline aloft. Under federal law, travelers holding Independence tickets can find standby passage on other carriers for a $50 fee. Independence advised customers to visit its Web site, www.FLYi.com.
Formerly known as Atlantic Coast Airlines, Independence Air’s demise is a ripple from the UAL bankruptcy. The company was reasonably profitable — at least as U.S. airlines go — when it flew as a feeder airline for United. But after United filed for Chapter 11 bankruptcy protection in late 2002, Atlantic Coast decided to go independent of United as a low-cost airline using 50-seat regional jets instead of the larger planes other discounters use. That turned out to be a notoriously bad business plan as those smaller jets cost about a third more to fly a seat per mile than larger planes.
Interestingly, one of Independence Air’s more interesting assets in its liquidation is a $500 million unsecured claim against United, which — as noted above — will translate into an equity stake in the reorganized UAL.
So it goes in the wacky world of the U.S. airline business.