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United gets break from JPMorgan

Cash requirement waiver will help stabilize carrier

Rocky Mountain News And Wire Services

Published November 26, 2008 at 12:05 a.m.

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United Airlines has reworked an agreement with its largest credit card processor to gain more flexibility amid economic and industry turmoil.

Under the revised deal, JPMorgan Chase & Co. will temporarily suspend a requirement that United boost its collateral with the firm if the carrier's cash balance slips below $2.5 billion. JPMorgan handles most of the transactions involving purchases of United tickets using credit cards.

United - the largest carrier in Denver - was in danger of having to meet that requirement because of cash needs tied to its fuel-hedging program, said Hunter Keay, an analyst with Stifel Nicolaus & Co.

Airlines use hedging programs to lock in fuel prices to protect themselves against extreme fluctuations. But after a dramatic rise earlier this year, fuel prices have sunk below the levels in some of United's hedging contracts, meaning the company has to cover the difference, depleting its cash balance.

The waiver from JPMorgan helps the third-biggest U.S. airline conserve cash after four straight quarterly net losses, a drop in demand for air travel and a 59 percent collapse in the price of jet fuel since July 3.

United ultimately will benefit if fuel prices continue to drop or stabilize at current levels.

"It's basically a timing problem that an airline has to post the cash collateral immediately when fuel prices drop, but the benefit they gain from paying less on what they consume will take place over a period of several quarters," said Philip Baggaley, a Standard & Poor's equity analyst in New York. "United's earnings prospects have improved due to the fall in oil prices."

United ended the third quarter with $2.9 billion in unrestricted cash, $248 million in cash dedicated to specific uses and $378 million in deposits related to hedges.

In return for the relaxed cash requirements from JPMorgan, United put up as collateral planes appraised at $800 million.

The airline can end the arrangement early and revert to its prior deal with the credit card processor. Under that arrangement, United's 25 percent cash reserve requirement jumps to 15 percent of its advance ticket sales if it has less than $2.5 billion in cash, with higher reserves if its cash drops further.

United also said Tuesday that it expects to report about $232 million in cash fuel-hedging losses this quarter and noncash costs of $138 million to adjust the hedges to current market values.

Revenue for each passenger flown a mile will increase between 2 percent and 4 percent from a year earlier, the company said in the filing. Including a change in accounting for frequent-flier miles, the so-called unit revenue will range from a 0.9 percent decline to a 1.1 percent increase, United said.

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