The wild ride in United parent UAL's stock

Shares of UAL, the parent of United Air Lines, went into a tailspin briefly this morning after the (Fort-Lauderdale) Florida Sun-Sentinel published a story this morning on its web site that UAL would be filing bankruptcy. Which UAL did.

Six years ago.

The article in question was a story that the Sun-Sentinel’s sister paper, the Chicago Tribune, published in 2002, except the date was changed to today. Interestingly, the story didn’t move the market until a staffer at Income Securities Advisor, a Miami investment advisory firm run by the much respected Richard Lehmann, mentioned it in a subscription-service that he distributes via the Bloomberg wire service.

All this created a panic in UAL’s stock around 11 a.m., with its shares plunging from roughly $12 a share to…a penny, as apparently more than one investor panicked (or a market maker refused to absorb any losses amid the uncertainty, and set the bid at a mere cent).

NASDAQ halted trading in UAL, the company issued a statement calling the bankruptcy talk “completely untrue” and lashing out at the “irresponsible posting” of an article published six years ago. The “whodunit” here is shaping up to be a real potboiler because an editor at the Sun-Sentinel was quoted afterward saying that its computer records indicated that no one had opened that story file since 2003—which raises the question of whether this was the handiwork of a hacker who cracked into the Sun-Sentinel’s computer system and reposted the story to profit from the inevitable plunge in UAL’s shares.

For now I’ll leave it to other publications to chase the Whodunit, and I’ll address the question that none of these newshounds is asking: Was a purported news story saying United was filing bankruptcy even plausible in the first place? And is United at risk of filing bankruptcy in the foreseeable future?

The answers are no and no and here’s why…

Granted, articles I have written in the past year have been critical of United's management, raising the question whether CEO Glenn Tilton was so fixated on dressing United up for a merger (which never happened, and now probably won't) that it eroded the carrier's competitive position. And the economic climate has been brutal for airlines--soaring fuel prices, a drop in demand, and that's just for starters.

But based on the carrier's current balance sheet, cash flow, and the recent dip in fuel prices, it doesn't appear United is at risk of filing bankruptcy in the immediate future. As of June 30, the carrier was sitting on $2.9 billion in near-term liquidity, and that doesn't include a deal the Chicago-based airline struck with Chase Bank (which issues its affinity credit card) and Paymentech (its credit card processor) that should enhance its liquidity by another $1.2 billion. And cash needs for 2008 are moderate: $700 million in maturing debt, $450 million in capital spending and minimal pension funding requirements (since the airline terminated virtually all of its defined-benefit plans while in bankruptcy.)

Overall, the $2.9 billion in liquidity United reported at mid-year was equivalent to 14% of its trailing 12-month revenues. According to analysts at Standard & Poor's, that's relatively less than peer airlines, but S&P analysts also note that UAL doesn't count collateral from fuel hedge counter-parties in its cash position as other airlines do. But after factoring in the proceeds from Chase and Paymentech, S&P analysts predict that United will finish out the year with more liquidity than it reported on June 30. And even if oil prices turned sharply north again, the airline still has $3 billion in aircraft and other assets that it hasn't borrowed against and could if the industry outlook became dire enough.

And the recent dip in oil prices--along with the prospect that oil could drop back into double-digit levels--should be enough to either nudge UAL back into the black, or at worst, trim back the size of its losses. Ironically, the UAL bankruptcy "story" hit just hours after Ray Neidl, a veteran airline analyst for Calyon Securities, issued a broad report predicting that the worst may be over for the industry:

"Unless oil prices go above $150/bbl or we experience a sharp recession in the coming months, we believe trends for the industry are bottoming out," Neidl wrote. "If the worst is over, at the current low stock prices even after the recent rally, we could see a strengthening of airline stock prices between now and next spring."

To be sure, not all is wine and roses at United. S&P Analysts still believe the carrier could lose more than $1 billion this year (not including non-cash charges for writing down the value of goodwill and other assets). And the airline still faces a number of unique challenges, including labor relations that are among the most poisonous in the industry. Against this backdrop, S&P analysts downgraded UAL's debt in late July from 'B' to 'B-', with a negative outlook, a development that could raise the airline's borrowing costs even higher.

I'll expand on this posting but that's my two cents for now.