After wallowing over three years in chapter 11, United Airlines parent UAL Corp. finally emerged from bankruptcy this past Friday (previous posts here) amidst the usual wave of optimism that greets such achievements. Recent trading in bankruptcy claims and UAL’s unsecured bonds indicates that the reorganized UAL’s stock might perform better than anticipated, which would generate more for unsecured creditors than the estimated four to eight cents on the dollar dividend that UAL estimated during the disclosure and confirmation hearings in regard to its chapter 11 plan.
Count me as not so bullish on the reorganized UAL’s prospects.

United’s survival appears to have fulfilled the equity and reorganization policies that underlie chapter 11, but the larger issue is what United’s three year stint in bankruptcy means for the remainder of the reeling American airline industry. As Chronicle business columnist Loren Steffy noted in this insightful column recently, one of Houston’s largest employers, Continental Airlines, reported what is considered to be a reasonably optimistic earnings report in the airline industry by announcing a fourth quarter loss of only $43 million. Indeed, low-cost king Southwest Airlines remains the only profitable major airline, primarily because of a fuel hedging program over the past several years that enabled Southwest from incurring the full brunt of the $60-70 a barrel oil prices that have bedeviled other airlines.
Despite the chronic unprofitability of the airline industry, not all airlines have chosen the chapter 11 course of UAL. While UAL has been in bankruptcy, similarly-situated American Airlines has been streamlining its operation by reducing the number of aircraft, adding seats to boost revenue and cutting expensive amentities. But for $60 a barrel oil, American’s efficiency improvements and labor cost cuts would have the airline well in the black at this point. As a result, American’s stock price has quadrupled since 2003.
With that backdrop, United believes its business plan going forward is conservative. Through 2010, the plan assumes traffic, capacity and percentage of seats filled will remain about the same, and that the airline’s passenger revenue for each seat flown a mile will rise about 2% a year (well-below the 5% growth that United enjoyed in 2005). Accordingly, so long as long-term oil prices level at around $50 a barrel, UAL expects to report operating profit of $915 million this year and gradually escalating profits over the next several years.
Nevertheless, the reorganized United’s operations look less like Southwest and American’s than more. As this front-page W$J article noted a week ago this past Friday, United has been adding more amenities, removing seats to offer more legroom and placing a renewed emphasis on customer service. The Journal article reports that purchases of United’s $4,500 first-class tickets from New York to San Francisco have increased by almost 40% recently. In the meantime, other legacy airlines such as American continue to battle United for that high-priced market, but American appears to be better positioned than United to compete with the low-cost carriers as well.
So, what to make of all this? Well, much ado was made last week as UAL’s lucrative executive bonus plan was announced. United CEO Glenn Tilton will get stock and options worth $15 million, base pay of $605,000, and a bonus that could double his salary. Other senior executives also received potentially lucrative incentive compensation arrangements that could actually increase if the reorganized UAL stock price does well, but could also diminish if the stock price declines. Meanwhile, American Airlines’ CEO was paid less than $2 million over the past three years combined and received no stock awards, and American’s other senior executives compensation arrangements are nowhere near as lucrative as United’s.
The common reaction to the foregoing was that it is wrong that the UAL executives are getting a better comp package for steering UAL through chapter 11 than executives who managed to keep their airlines out of the bankruptcy tank. My take is a tad different — UAL executives are getting a lucrative comp package because there is a substantial risk that UAL’s plan could flounder and the airline could find itself in a chapter 22 case.
Larry Ribstein, who has written extensively about the travails of the airline industry, sums it up well:

If United itself doesnít reenter bankruptcy, as many of other reemerging airlines have, then one of its competitors will in this Chapter 11-plagued industry. . . . there will be real social losses unless the industry is fixed, and it isnít going to be in this way.