United Files Plan to Leave Bankruptcy

United Airlines forecasts a nearly $1 billion operating profit in 2006 after five straight years of losses, but it is counting on oil prices being significantly once it leaves bankruptcy next February.

The nation's second-largest airline, a unit of UAL Corp., said in its reorganization plan filed 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 $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 $50 a barrel, well below Wednesday's settlement price of $64.37 on the New York Mercantile Exchange.

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

Shored up financially and targeting a Feb. 1 emergence from bankruptcy, the airline now faces months of hearings at which investor groups are expected to jockey for higher portions of its limited assets.

The huge filing in U.S. Bankruptcy Court mostly outlines the company's proposals for repaying creditors and recounts its restructuring moves, omitting any detailed discussion about management's vision for United's future or its long-term operating strategy.

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 _ $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.

"We are a vastly different airline than we were in 2002," Chief Financial Officer Jake Brace said in an interview. He cited the lowered cost structure, the shift in emphasis from domestic to international routes, the launching of United's discount carrier Ted and an improved performance record.

United will be heavily laden with debt when it emerges from bankruptcy, with its proposed plan to be financed by a $2.5 billion, all-debt loan package from Citigroup Inc., JPMorgan Chase & Co., General Electric Co. and Deutsche Bank AG.

The company said it intends to cancel its existing common stock, as long warned, and proposed issuing up to 125 million shares of new common stock in UAL to settle the claims of unsecured creditors. It said it is exploring the possibility of offering an additional $500 million in new stock, with proceeds providing extra capital for the company to fund its operations or pay down debt.

But strong objections are expected from lower-priority creditors during a series of hearings set to culminate in mid-January under United's proposal. Unsecured creditors would get minimal payouts _ new stock representing only 4 percent to 7 percent of what they were owed _ and current holders of UAL common and preferred shares would get no distribution whatsoever.


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