Home / World Business
Fri, Sep 09, 2005 - Page 12 News List

United Airlines expects to see profits next year

REORGANIZATION The airline anticipates moving into the black next year, but its projections are based on average oil prices in the US$50 range

AP , CHICAGO

United Airlines forecasts a nearly US$1 billion operating profit next year after five straight years of losses, but it is counting on oil prices being significantly lower once it leaves bankruptcy next February.

The nation's second-largest airline, a unit of UAL Corp, said in its reorganization plan filed on Wednesday that it anticipates returning to profitability next year after a restructuring that CEO Glenn Tilton said leaves it "more flexible, more efficient and ... positioned to compete with the best carriers."

The company projected operating income of US$916 million next year and an overall net profit based on 4 percent higher revenue, and said income and revenue should rise steadily through 2010. But those projections assume oil prices average US$50 a barrel, well below Wednesday's settlement price of US$64.37 on the New York Mercantile Exchange.

Addressing the apparent discrepancy, United said most forecasts suggest an average oil price in the mid-US$40s to US$50 over the next five years and its business plan can withstand a higher level. But it also said every US$1 increase in the price of a barrel of oil increases its annual expenses by about US$60 million.

"If long-term oil prices are significantly higher than are contemplated today, they will drive industry fare increases or structural changes, such as capacity reductions," the company said in its filing.

Bankruptcy expert Douglas Baird said that United's assumption concerning fuel costs is "vulnerable."

Overall, he said, it's a positive sign that United now has positive cash flow after previously burning through millions of dollars a day. But it's impossible to know how well it will fare out of bankruptcy protection.

"They're concentrating more on international routes, they've restructured their domestic operations and now they're going to cross their fingers," said Baird, a bankruptcy professor at the University of Chicago Law School. "Do they have a business model that works? The answer is that we don't know."

United's stay in bankruptcy, initially expected to last 18 months, is now ensured to take more than three years -- complicated by soaring fuel prices, the difficulties in obtaining two rounds of labor cuts and the failure to secure a federal loan guarantee.

But it is hopeful that its return to a positive cash flow in recent months signals a turnaround is taking hold. The extensive restructuring measures -- US$7 billion in yearly cost reductions from renegotiated airplane leases, new labor contracts, some 20,000 job cuts and the elimination of pension obligations -- have given it a financial edge over other large network carriers.

This story has been viewed 3566 times.
TOP top