UAL Corporation (NDAQ: UAUA) shares dropped nearly 40 percent after the carrier was slammed with skyrocketing fuel costs. As a result, the United Airlines parent was forced to reduce its domestic business to maintain adequate liquidity. Analysts also expressed doubts on a conference call that debt covenants may experience problems, although this was quickly dismissed by the airline's Chief Financial Officer.
The quarterly decline also prompted the troubled airline to revise its five-year plan that it was forced to make when it emerged from bankruptcy. Now, UAL plans to reduce its domestic capacity by 9% by the end of the year; eliminate 30 older aircraft from its operations; target another $200 million in nonfuel cost savings; cut another 1,100 jobs; and reduce planned capital spending in 2008 by about $200 million.
The trouble airline carrier also commented that it would participate in mergers and acquisitions when and if the right deals became available and it made sense for employees, customers and shareholders. However, UAL did not comment on reports that it is involved in a potential combination with Continental Airlines. Although, investors already know that the two parties have held advanced talks in the past!
The argument for consolidation in the industry lies on the fact that a larger entity will be able to collectively bargain for more favorable terms for fuel and other expenses. Meanwhile, the larger capital base will give it the ability to raise more financing on better terms and remain better capitalized. Combined, these factors have convinced many analysts that mergers like the proposed one between Delta and Northwest may give them a shot at sustainable profitability.
In the end, UAL Corporation still has a long way to go before it gets out of this mess. Any consolidation may be welcomed by shareholders who are now sitting on substantially greater losses. However, absent of any such deals, the airline may have to continue cutting while it waits for fuel prices to lower in the future to relieve pressure on its margins.
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