UAL Corp.'s United Airlines is asking lenders for permission to spend as much as $500 million on "shareholder initiatives" such as stock buybacks after it repays $350 million in debt.
The plan was presented to lenders Tuesday, with a decision likely next week, Chicago-based United said. Normal and special dividends, as well as buybacks, "are on the list" for consideration, Chief Executive Glenn Tilton told reporters in Boston.
United's request comes amid investor demands that U.S. carriers take action to raise their stock value. The Bloomberg U.S. airlines index has fallen about 25 percent this year. Pardus Capital Management LP, which owns shares in UAL and Delta Air Lines Inc., this month urged the two companies to merge.
"United management has been clear over the last several months that it will pursue measures to advance shareholder interests, even at the potential expense of some incremental improvement in credit quality," Douglas Runte, a strategist at RBS Greenwich Capital Markets in Greenwich, Conn., said Tuesday. "This is a step in that direction, with possibly more steps to come."
Jake Brace, UAL's chief financial officer, said Nov. 7 that the company would use any cash in excess of $3 billion to improve its balance sheet and benefit shareholders, possibly through measures such as a stock repurchase.
"The board hasn't made up its mind yet as to what the most appropriate initiative would be," Tilton said after speaking at the Boston College Chief Executives' Club of Boston.
UAL had $5 billion in cash and short-term investments as of Sept. 30, including $788 million in restricted cash, according to its third-quarter earnings release.
Long-term debt as of that date fell to $7.03 billion from $7.45 billion on Dec. 31, the company said in a quarterly regulatory filing.
United said Tuesday that if changes to its credit agreement are approved, additional shareholder initiatives would be permitted in exchange for further early debt repayments.
The airline said it cut total net debt by $2.7 billion in the 20 months since it left bankruptcy and generated more than $2 billion in operating cash flow in the first nine months of this year.
Standard & Poor's affirmed its credit rating of B, or five steps below investment grade, on UAL and United after Tuesday's announcement.
United's plan is "evidence of an aggressive financial policy, given UAL's speculative-grade credit quality and the cloudy airline industry outlook," S&P analyst Philip Baggaley said in a report.
A $500 million share buyback or special dividend would raise UAL's debt-to-capital ratio "slightly," to 88 percent from 86 percent, and wouldn't result in an increase in debt, he said.
Goldman, Sachs & Co. raised its rating on UAL to "buy" from "neutral" and added the company to its America's Buy list. United will benefit from U.S. capacity restraints and growth in international markets where it doesn't face low-fare competition, analyst Robert Barry said in a report.
Tilton wouldn't say whether he or other executives at the nation's second-largest carrier have been in any talks with Delta or other potential partners, but he said industry consolidation "would be a plus, yes, absolutely."
Asked why no airline merger proposals had surfaced recently despite growing pressure to cut expenses amid high fuel costs, Tilton said: "It's a very difficult thing. Multiple constituencies have to agree that it's appropriate."
Tilton's speech focused on the need for greater investment to improve U.S. aviation infrastructure, including air traffic control.
He said obsolete aviation systems and outmoded industry thinking jeopardize the U.S. airline industry's health.
"In an industry with a long history of value destruction, creating sustainable shareholder value is likely to be more difficult than restructuring," Tilton said. "Our ambition, to the benefit of all stakeholders, is to do just that."
Shares of United added 83 cents, to $40.61, on the Nasdaq stock market.
