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

Mergers/Finance, Southwest, United

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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20 comments on “Southwest Has Less Cash Than United, So Why Is United the One in Trouble?

  1. Here’s an intriguing thought. Given that UA is already paying “sub-prime” interest for loans against assets, what kind of picture does that paint for new plane acquisitions?

    Boeing needs the order, United needs the planes, the banks don’t necessarily need to do anything, certainly not at a favorable rate.

    If United purchased what would their interest be on the loans to cover the deal? If they went the leasing route instead would the deal be any more favorable?

  2. Ever had to talk to anyone or actually fly on this airline? They have the least cooperative people working there of almost any legacy airline. Now they are picking on travel agencies yet again with this ‘don’t use credit cards for client’s tickets’ scam.
    Puhlease! I agree with Neil S-buh bye UA! Don’t let the door hit you on the way out!

  3. Yeah, I lived in SF for 12 years, flew UA most of the time, and was 1K for 5 of those years. It’s the only airline I know where premium status doesn’t get you treated any nicer. Yes upgrades. Yes an easier phone number for customer service. But no noticeable kindness from the staff, on the ground, in the air, or on the phones.

  4. It kind of makes you wonder what United is thinking to incur the potential costs of moving their operations into the Willis (Sears) Tower as reported by USA Today. I’m sure there are tax breaks involved, but will the tax breaks make up for the rent and cost of moving. Along with the almost certain (with UA) collapse in service, or what passes for service, during the move.

  5. Does anyone else see this as a business move?

    I will not name the company I work for, but in the earlier part of the decade, several smaller companies all went bankrupt and merged to form a larger company. Bankruptcy was all part of the plan when looking at it in the bigger picture.

    My point…

    Continental and United are forming a huge partnership, which includes a common IT platform. They are even planning on buying fuel together. Continental probably realizes that there is a very good chance that United is not going to survive this downturn. So when United goes bankrupt, Continental will be able to seize their assets at a much cheaper price than just buying them right now. And with several things already on the same page (IT, network schedules, airport gates, etc.) the take over will be a piece of cake.

  6. we studied united as part of my marketing class and the professor’s conclusion was that they are purely a yield company. Their number one priority is how to maximize cash flow out of each flight. Southwest and to a bigger degree Singapore are customer service companies. They care far more about understanding how their customers use their service, where they go and how they can add value. I have rented cars through the southwest website I would never do anything except buy tickets through united. I am sure somewhere someone has calculated the difference in the value of the southwest brand compared to the united brand. I would imagine it’s a factor of 2x at least.

  7. While United may have raised $175m at the end of June to be repaid in Jul-2012 for a 17% interest rate, the price of the bond jumped up on the 2nd day – i.e. people thought that the risk wasn’t so great as to require a 17% interest rate. The yield became 15% rather than 17%. It’s been around 15% ever since then

    Granted there are other bonds in UAL’s name, but these are not for repayment until 2021 and are thus deemed to be a higher risk

  8. As usual, I am the one and only satisfied United customer, so it seems. Yes, the planes are looking old, and yes the groundstaff are occasionally more than a little grumpy. But for me, flying almost solely transatlantic crossing, United are consistently:
    1) on time
    2) the cheapest or certainly as cheap
    3) professional and courteous onboard
    4) not patronised by the more irritating (to me) elements of British society
    5) somewhat generous to frequent fliers
    Although I have benefitted from the odd upgrade, I still fly 90% of my flights in the back. My experiences with American, Virgin, Continental, BA and NWA on similar routes have never been any better than UA, and in most cases significantly worse. If Emirates flew on UA routes, then I’d reconsider my loyalty.

    And the guitar thing, god, it’s boring now. And the song is sh1te.

  9. I agree with Bobber. My take is that all domestic airlines are the almost identical, and I choose by factors other than “This one is the best because I get a cookie.”

    In the big picture your experience comes down to small variables like an individual person’s friendliness or helpfulness, or an open seat next to you, a good (or bad) connection – rather than a corporate mandate to be “the best.”

    I fly UAL because I live in Denver, they offer the most non-stop flights and frequency options. I manage at least two awards flights every 18 months with miles, credit card, and other mileage plus promos I take advantange of. If I lived in Atlanta write the same about Delta, Houston/Continental and so on.

    I’m flying Southwest to Florida and back next month, only because they have an early departure which gets me back to work Monday morning. Barring E+ on UAL the seat I’m sitting in, or the view, won’t be any different.

    Of course I preferred Lufthansa to Munich over my UAL flight to Europe, but apples and oranges. For most domestic flights I simply sit in my chair, read, and ride from A to B. I figure the average joe that finds one airline exemplary while another the pits is just nitpicking, high maintanence, or needs to spout off at the water cooler.

    I don’t have any sob stories about why they’ll never fly with X again. But then again I don’t check luggage.

  10. Brett–
    your analysis is essentially correct, but in United’s case the long term debt is also critical. UAL emerged from chapter 11 with an $8 billion loan from banks led by JPMorganChase. The banks were investing $8 billion based on a business plan that industry RASM would increase every year even without any capacity reductions, there would be no economic downturn at any point between 2004 and 2012, and fuel prices would peak in the mid $60s, and decline thereafter. Some of that loan has been repayed, some has been transferred into JPMorgan credit card deals (UAL giving away the value of future Mileage Plus accruals), some appears on the short term debt line, but there’s still no chance that the original loan will ever get repayed.

    Southwest has lots of issues, but they’ve never ever had a huge timebomb on their balance sheet. The “will UAL survive” question has nothing to do with aviation fundamentals, it is just a question of whether the banks who hold the many pieces of this loan are willing to finance the losses in the hopes that they get lucky down the line.

  11. UA isn’t going anywhere since A) legacy carriers, like Cher and the cockroach, are impossible to get rid of and B) this administration is not going to let a unionized Illinois company go out of business. That said, a merger is always a possibility.

  12. Man, every time I mention United (regardless of the context), the comments section always turns into a United-bashing session . . .

    Optimist – There has been a lot of speculation that the request for proposals for new aircraft was an effort by United to pit Boeing vs Airbus so that they can get cash out of the winner. That’s not going to happen, so we’ll see if an order actually materializes. But the reality is that those should get lower rates, because the planes would be worth a lot, unlike spare parts.

    Andrew – If United goes bankrupt, I would imagine Continental will be there to pick up as many pieces as they can get. It’s hard to know everything that’s going on behind the scenes right now, but I will bet that a million scenarios are being discussed.

    David – Doesn’t matter what the rate jumped to after the issuance, because United won’t see those funds.

    hhoran – Yes, of course. I was simply focusing on the short term needs, and the current portion of long term debt is so high because of all that debt they took out coming out of bankruptcy. Clearly that was not a smart move.

    Trent880 – People said that about Pan Am back in the day as well. Yes, I know that was under a Republican administration, but never say never.

  13. CF – I agree that United won’t see the extra funds (about $6m) because they sold the bonds too cheaply.

    I guess the point I wanted to make, is that 15% is what lenders deem to be a fair interest rate for the money United had to borrow, when one considers the risk of a possible future Chapter 11 filing. United just paid 17% because they were not completely confident that they would get the loans they wanted – betrayal of fear always leads to others taking advantage of you.. If you want to use a borrowing rate to describe United’s credit risk, then 15% is the one I reckon one should use rather than 17%

  14. Every time it turns into a United bashing session?

    Says something about their brand, no? They’ve destroyed their good will. (Witness Jetblue bouncing back from the JFK ice storm disaster…)

    A guy at work asked me what I thought of United charging some new fee for something, and I replied that it was hardly going to be the thing that changed them from awesome to horrid.

    Physically tough for them to be much worse.

    Sitting in First on PS, munching on warm mixed nuts, and staring at duct tape that’s trying to keep the compartment overhead vs. underhead…B A D.

  15. Southwest may have even less money now that they have put in a bid to purchase Frontier. Should be interesting if Republic can come up with more money to top WN’s bid. That would be one way for WN to fight UA in Denver, buy the other guy based in Denver. You would think WN can come up with more money then Republic so the auction next month should be interesting. Now watch American all of a sudden get interested in Frontier, are they dumb enough to go into battle in DEN with United and Southwest?

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