Hit by Downside of Low Fuel Prices, United Looks for Cash

By Sholnn Freeman
Washington Post Staff Writer
Wednesday, November 26, 2008

United Airlines yesterday moved to free up cash as losses mount on contracts intended to hedge against high fuel prices and as economic problems threaten to undermine demand for air travel.

The carrier, an operating unit of UAL, said it expected to record $370 million in hedging losses in the fourth quarter. Those long-term contracts were intended to lock in prices as fuel costs were soaring. Instead, lower-than-expected oil prices have soured fuel hedging bets throughout the industry, adding new pressures to cash-strapped airlines.

At United, the cost of setting aside cash to cover the bets is severely straining the company. J.P. Morgan Chase analyst Jamie Baker put out a report estimating that the current expense for United is $990 million.

To free up cash, United yesterday said it reached an agreement with Chase Bank to lower the amount of cash reserves it needs to process travelers' credit card transactions. Under the revised deal, instead of cash, United is putting up $800 million in aircraft assets as collateral.

"There isn't at this point any sort of free lunch on financing for any of these airlines," said Wolfgang Demisch, an industry consultant. "They are trying to squeeze a little bit more cash out of their fleet."

United said it expected to record $232 million in actual hedging losses and $138 million in non-cash losses in the fourth quarter. The airline estimates fuel consumption of about 500 million gallons in the quarter.

In an e-mail to employees, Kathryn A. Mikells, United's chief financial officer, said the airline expects to pay $2.81 per gallon for jet fuel, including the cash losses it is taking to settle hedging contracts. The price rises to $3.70 per gallon when the costs of hedges that settle next year are included. If the company had not entered into any hedging contracts, United would have paid about $2.57 per gallon in fuel costs in the quarter, the company said.

Liquidity fears are rising in the industry as projections fall for passenger travel in light of the weakening worldwide economy. Demisch said airlines were "rattling on all doors" to bolster their cash positions. The post-Thanksgiving winter season is typically slow for airlines, resulting in lower revenue.

"We are going into an economic downturn which many have said is going to be long," Demisch said. "Airlines are not going into it with bulging pocketbooks and lots of fat."

In the third quarter, UAL reported a net loss of $779 million. It reported that at the end of September, it had $2.9 billion in unrestricted cash and short-term investments. Under terms of the original credit card agreements, United had to maintain a cash balance of $2.5 billion or face escalating costs for using the processing system.

Credit card processors are vital to the industry, accounting for the overwhelming volume of ticket payments. Almost no one pays cash for airline tickets. United has said it plans to free up $1 billion in cash by revising its agreements with the processors.

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