The gloomy analysis runs counter to optimistic, we'll-see-it-through presentations the carrier has been making lately--its announcement of a $211-million first-quarter operating loss was headed, "UAL Corp. Reports Restructuring Progress." But the darker side suited the company's purpose in a May 21 legal filing asking the U.S. Bankruptcy Court to impose $57 million per year in retiree medical benefit cuts. To underscore the importance of the issue, the carrier revealed that in April, it estimated that 2004 fuel costs would be $610-million higher than it projected only four months earlier, in December 2003, and that in the past month the $610-million estimate has grown to "upward of $750 million."

UNITED IS AT THE MERCY of the open market as it buys fuel, because Chapter 11 eliminates its access to financial mechanisms that airlines normally use to hedge fuel prices. And this year's market has rocked the company, each month worse than the previous one. Compared with projections it made in December 2003, United spent $18 million more on fuel in January, $27.3 million more in February, $50.1 million more in March and $62.5 million more in April, the carrier told the court. On May 27, United said it would have made an operating profit in April, instead of a $75-million loss, if fuel prices had been "more typical."

The new fuel cost estimates will have a dramatic impact on United's upcoming income statements and balance sheets, but the most immediate threat is to a key measure used in capital markets to judge a company's creditworthiness--the "coverage ratio," cash flow divided by fixed, non-operating cash obligations, mainly debt service and pension funding. In simplest terms, the coverage ratio gauges how well the cash a company generates from operations during a year can be expected to cover the cash payments it must make. The higher the coverage ratio, the better.

United's plan for getting out of Chapter 11 centers on $2 billion in exit financing, which JP Morgan and Citibank have committed to provide, assuming that the Air Transportation Stabilization Board (ATSB) approves federal guarantees for $1.6 billion of the total.

"Feedback from the financial markets suggests United must target an initial 1.3 coverage ratio [that is, its cash flow would exceed fixed obligations by 30%] to receive exit financing guaranteed by the ATSB," the carrier said in the filing. "Moreover, a 1.3 ratio is acceptable only at the beginning of the loan; the capital markets require that this ratio increase over time to reduce their risk."

Based on its December 2003 projections, United believed it could scrape through the ATSB review with coverage ratios of 1.29 in 2004, between 1.3-1.4 in 2005-07, and substantially higher after that (see table). The cash flow analysis that went into those projections assumed all of the labor, operations, aircraft-lease, debt and other cost reductions, worked out during what was at that time a full year in Chapter 11. These are estimated at $5 billion when fully implemented in 2005. The analysis also assumed pension-relief legislation enacted by Congress as well as the retiree-benefit reduction at issue before the bankruptcy court. The latter is relatively minor compared with the rest, but it would add $400 million to the balance sheet over seven years.

The April 2004 reestimate for fuel took its toll on the coverage ratio. For 2004, the ratio drops to 0.68, little more than half the target, and for 2005-07 it hovers 0.04-0.08 below the earlier numbers. In 2008-10 the ratio improves on the December version. Evidently United assumes a big fuel-price effect this year and little, if any, continuation into 2005.

Denial by the bankruptcy court of the retiree-benefit reductions would reduce the coverage ratio by 0.04 each year, United said. The carrier portrayed this amount as more significant than it seems. "The ATSB and exit lenders have already seen fuel costs undercut the company's coverage ratio despite favorable developments in terms of pension relief and with respect to municipal bonds. United cannot responsibly risk yet another hit to the plan from the removal of [the retiree-benefit] savings."

Further, in a "downside scenario"--an analysis conducted by the lenders of what would happen if United's revenue assumptions turn out to be overoptimistic--the retiree-benefit savings "could determine whether United has sufficient liquidity to continue operations outside of Chapter 11." This is the problem US Airways faces now, United said, citing press reports that retiree benefits account for $50 million of $800 million US Airways seeks in new labor concessions to avoid a second bankruptcy filing. "In other words," United said, "despite all of US Airways' efforts in Chapter 11, this once-proud carrier now confronts the bleak prospect of Chapter 22."