United's Oil Slick

It has finally happened. Nearly three years after entering bankruptcy, UAL (OTC BB: UALAQ) has filed a plan to re-emerge from hock (you can download the complete plan here or a summary here). And, at first blush, it looks pretty good.

According to reports in this morning's Chicago Tribune and Washington Post, United believes it will post an operating profit for the first time since 2000 next year. Specifically, the news reports say, United could earn $916 million in operating income on a 4% increase in revenue. Sales, too, are expected to expand through 2010.

The news isn't so good for creditors and current stockholders, however. Stockholders won't receive a dime for their shares. Other unsecured creditors -- in other words, those who can't put a lien on a hard asset owned by United -- account for $20 to $30 billion in obligations. The airline expects to pay them four to seven cents on the dollar, and will issue roughly 125 million new shares to do so. According to a United spokesperson, the new shares could be priced at $15 per stub. That would raise close to $1.9 billion in new capital.

Frankly, I think United has done all it can for now. Yet investors shouldn't assume that the airline will see better days. That's because United's rosy outlook depends entirely on oil prices topping out at $50 per barrel over the next five years. United says forecasts back its assumptions, something we'd be hard-pressed to say with certainty given current conditions. Now the Department of Energy says its worst-case scenario caps the price of oil at $70 per barrel next year. Can United survive even five years after exiting bankruptcy if fuel prices are that high right out of the gate? Perhaps, but not without raising prices significantly.

In sum: United Airlines the company appears to have changed for the better. But United Airlines the stock -- when it's reissued, that is -- looks just as ugly today as it did three years ago.

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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication but has family who are retired from United Airlines. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


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