United Airlines has warned that its fuel costs this year will be $750 million (€625 million) higher than it had first estimated and has downgraded an earnings forecast made only five months ago.
The revision to the earnings forecast cast doubt on whether United - the world's second-largest airline - will be able to secure a critical US government loan guarantee.
The deteriorating financial situation, which includes reducing its operating earnings for this year by $776 million, was disclosed in a filing with the bankruptcy court late on Friday. The revisions contrast with the upbeat impression of steady restructuring progress that executives, including chief executive Mr Glenn Tilton, have sought to convey.
The filing suggests that higher fuel prices have eroded the limited financial cushions United had built into its plan and that it is failing critical coverage ratio tests that providers of exit financing usually demand as a condition of providing funds.
The fuel crisis comes as the Air Transportation Stabilisation Board (ATSB) - the federal body set up after September 11th, 2001 to aid the airline industry - is preparing to decide on whether to grant United a $1.6 billion loan guarantee. If the ATSB says no, United faces an uncertain future as it has few other sources of financing available to help it emerge from bankruptcy.
The ATSB is expected to make its decision by the end of June. However, it will do so against the highly charged political environment of an election year, where the issue of jobs is central.
United employs 65,000 worldwide and it carries one in six US passengers.
According to the filing, United updated its business plan at the end of April to include higher fuel costs and pension relief. The airline has hit revenue forecasts but the new plan, dubbed Gershwin 4.1, forecasts that United will generate $606 million less in net cash flow and $776 million less in operating earnings than forecast in December.
United also said it was failing to meet important coverage ratios: the ratio of its free cash flow divided by fixed cash obligations, mainly pension funding and servicing debt. It said lenders typically want a ratio of 1.3 before they provide financing.
"Fuel costs have reduced United's projected coverage ratio in 2004 from 1.29 to just 0.68. United now satisfies the 1.3 coverage ratio requirement in 2005, 2006 and 2007 by only the thinnest of margins," the filing said.
It added that a 1.3 ratio is usually acceptable to lenders only at the start of a loan. "The steadily increasing coverage ratio that lenders expect to see, as was the case in Gershwin 4.0 (albeit minimally), does not surface in Gershwin 4.1 at all until 2008."
United said its financial situation underlined the need for cuts to its retiree welfare benefits, the highest in the airline industry. It asked the court to agree to impose retiree cuts to help it save $57 million a year.
