Southwest Has Less Cash Than United, So Why Is United the One in Trouble?

If you’ve heard United’s name mentioned in the news lately, it’s probably related to their financial troubles. I’ve seen plenty of people predict bankruptcy for the airline in the not-so-distant future, but when you look at the airline’s Q2 results on the surface, they don’t look so bad. They made money (on paper) thanks to fuel hedging gains and they have more cash than Southwest, but nobody is predicting Southwest’s demise. So what’s the story?

There are some major differences between the two airlines that put United in a much more precarious state than Southwest, despite the current cash position. Let’s review, and I’m promise I won’t get too technical.

  • Cash Balance – Nobody denies that demand sucks right now, so the key is making sure you have enough in reserve until things turn around. The best immediate measure of this is cash in the bank. United had unrestricted cash of $2.6 billion at the end of the quarter and Southwest had $2.2 billion. Both have raised a little more since the end of the quarter. So United looks to be in good shape, right? Not exactly.

  • Unencumbered Assets – Cash is good, but another key figure is how much additional cash you can raise. A lot of that is based upon how many assets you have that you can use as collateral for a loan. Much like your house backs your mortgage in case you default, airlines put up planes and parts as collateral to get loans. United only has about $1.1 billion left in unencumbered assets – assets that haven’t already been pledged as collateral previously. And many of those remaining assets aren’t that desirable. They recently raised money at a 17% effective interest rate, partially because they put out some spare parts and those aren’t worth nearly as much to lenders as, say, a brand new 777.

    Southwest, on the other hand, has between $7 and $8 billion in unencumbered assets. They’ve always been more conservative when it comes to debt, so they have plenty of room to raise more if they need it. And they won’t be looking at a 17% effective interest rate.

  • Debt Obligations – Cash is important, but we also need to see how much money is going to be flowing out of the company. Looking at long term debt, Southwest has only $105 million coming due in the next year while United has $846 million.

    We can also look at the current ratio which puts current assets over current liabilities. United’s is .67 while Southwest’s is 1.00. In other words, United’s current assets would only cover two-thirds of their debt obligations in the coming year whereas Southwest is just about at one for one.

  • Operation Size – Just comparing cash levels isn’t really a fair comparison. For example, if little Frontier had $2 billion + in cash, they’d be in fantastic shape. Though Southwest is larger than United domestically, it is still smaller overall. Southwest’s Q2 revenues were $2.6 billion while United’s were $3.7 billion.

This doesn’t even address the issue of credit card covenants. If cash gets below a certain level, the credit card processors are allowed to hold back a certain amount of money as insurance in case the airline were to go under. United has renegotiated these deals (as have others), but they are still relatively close to their limit.

So as you can see, Southwest is truly in better shape than United when it comes to its ability to generate enough cash to meet obligations, regardless of where the current cash position stands today.

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