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Author: vcordle Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 610  
Subject: UAL: New director and forecast Date: 3/26/2002 3:23 PM
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UAL selection of a of Weirton Steel guy as a director is not a good sign in my opinion.

It means that the unions are selecting the board members and they are bringing in guys with experience in ESOP companies. One must assume that they like the ESOP concept (read control) and wish to continue it's existence. In my opinion, unions selecting board members is not a good thing for the shareholders nor the employees longer term.

Two new board members so far, and I would assume more to follow.

The steel industry and the airline industry are similar in that they both are heavily unionized, in trouble, and are being financially supported by the government.

Its not hard to envision UAL's future prospects: 1) Creighton "stabilizes" the company with temporary relief from labor and leaves with nice pop up in his stock options. 2) Wage snapbacks end the stabilization phase. 3) Company requires operational and financial restructuring on the down side of next biz cycle. 4) Union appointed CEO and management forced to resign (by labor) due to gross incompetence. 5) temporary relief sought from labor and a new
CEO and management team are required. Conclusion: The cycle repeats itself and the company continues to spiral downward in competitive terms.

Creighton's stabilization plan is not the same as saying he will position the company competitively. This would take a realization on the part of labor that there is a need for a permanent reduction in labor's slice of the revenue pie. I would also add that it will take a permanent shift in attitudes by labor in general if United is to become a viable (service oriented) competitor again. I say labor because it is labor who has the controlling say in
corporate affairs.

An optimal solution would be one where the company links a fraction of labor's take to the profitability of the airline. This would shift some of the compensation (and airline expense) to the fluctuations in the business cycle and shift the focus to one of improving the returns on company assets.

In terms of valuation, many cannot understand why UAL's market value ($875 million or $1.8b if ESOP shrs are included) is so much lower than that of DAL ($4 billion) and AMR ($3.9 billion). The answer is that UAL is less profitable and that there is a "minority discount" accorded to the value of the outstanding (float) shares.

The minority discount phenomenon, typically in the 35% range, reflect the minority's (46.7% of the shares are in the public's hands) lack of say in corporate affairs. In other words, there is a significant discount applied to the share price because the majority (employee owned-union controlled) control the governance of the company. Obviously, labor will vote themselves higher than optimal wage levels if given the legal right to do so. This also
means that the employee who retires and cashes in his ESOP stock will be penalized by the same minority discount. Its a significant hidden cost to the employee-owners that the unions leaders, most likely, did not concern themselves with.

In terms of profitability, UAL earned $3.5 billion from 1996 through 2000 which is 30% less than AMR's nearly $5 billion in earnings and 27% less than Delta's nearly $4.8 billion. Approximately $725 million of the difference in 2000 can be attributed to the pilot work actions (a like about in 2001 due to avoidance) with God knows how much when the company was focused on buying USAir. Most likely in the $500 million to $1 billion range due to lost
business.

Board members will have great difficulty controlling costs under the current arrangement with labor. Considering the "minority discount" and poor relative profitability, it would be reasonable to assume that UAL's shareholders will continue to be disadvantaged.

Perhaps its time for the employees to wake up to the idea of changing the corporate bylaws before their equity holdings are completely wiped out. Changing the corporate bylaws to allow the employee to cash out their ESOP shares -- before they retire -- is a prudent thing to do. My guess is that any resistance to this idea would come from the union leaders who do not want to give up a controlling stake in the airline.

This is not the same as saying the stock will not go up during the upswing in the new biz cycle. It will.
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