cgull

until the merger.


http://secure.stansberryresearch.com/secure/digest/2009/html/index/29
SA Digest June 2009


I'm about to tell you how I know exactly when Continental Airlines will go bankrupt. You might recall my similar work on GM. I spent about two years explaining, quarter after quarter, that there was no way the company could escape bankruptcy. Even though such information can be incredibly valuable to stock traders, my work inspired a lot of anger from our subscribers, who didn't understand my reasoning had nothing to do with cars, or "America," but simply with mathematics. GM's enormous debt load ($172 billion at last count) couldn't be supported by the car company's dwindling market share and negative profit margins. At a certain point (I'd say 2006), it became mathematically impossible for GM to ever make enough money to repay its obligations. The interest payments were compounding faster than it could ever hope to grow the business, and it didn't have enough equity left to refinance.

These situations are tragic for investors, employees, and customers. There are no easy explanations for why companies sometimes end up in these "no way out" scenarios. Thus, it may seem crass or even immoral for me to demonstrate how these situations can be the best investment opportunities of all. But I'd ask that you, if only for a minute, put aside these "good neighbor" emotions. You see, when you buy a stock, an endless number of things might go wrong. As an analyst, it is impossible for me to identify every possible business risk. And as you know, sooner or later, everything that can go wrong will go wrong.

On the other hand, when you're researching companies that are truly stuck in "no way out" scenarios, there aren't any realistic alternatives. No matter what else happens, their debts and interest payments will come due. And that means you can know, with a far higher degree of certainty, what your investing outcome will be. And so, I ask you: Would you rather own a stock that may or may not increase in value? Or would you rather short a stock that you can know, for certain, will go bankrupt by a specific date in the future?

This kind of analysis has always appealed to me because of the certainty. Most subscribers don't know my very first newsletter, written in 1999, accurately predicted the demise of the original AT&T, which was the most widely held stock in America at the time. Most recently, I told my subscribers Continental Airlines will go bankrupt. And now I can even tell you when...

The company has $105 million of equity sitting under more than $12 billion worth of debt. It operates at a loss because its gross margins have fallen in half in only three years. Fuel costs and competition have rendered its full-service, high-cost, and unionized business model obsolete – much like what happened to General Motors. It has $900 million worth of lease and capital obligations coming due this year and only $2.7 billion worth of cash left. In 2011, 40% of its $6 billion in long-term debt will come due.

But the trigger for Continental's bankruptcy will be an obscure clause in its credit-card processing agreement with Chase Bank. The agreement requires Continental to maintain at least 25% of its current obligations in cash. Next year (2010), the portion of its long-term debt that's due in 2011 will become "current" – due within the next 12 months. That will cause Continental's current obligations to soar to nearly $7 billion. At the same time, its cash reserves will be falling. The collapse of the current ratio will trigger a cascade of debt defaults, pushing the airline into bankruptcy. Thus, Continental will go bankrupt at some point in 2010.

I know Continental can do nothing to avoid a default. It only has $105 million of equity left. That's simply not enough to restructure its debts. And it can't operate profitably enough to afford to repay its debts – it doesn't even have enough cash to pay for the planes it has already agreed to buy from Boeing. If you short the stock today, I'm 100% sure you will double your money in 12 to 18 months.

liquid

What ever helps you sleep at night dude.

workingforfree

Poter is still taking dollars for payment!

APC225

How about we focus on our current failed management instead of past ones.

Chicago Business, July 2009, United Airlines will be part of industry consolidation one way or another

United Airlines continues to be a troubled company. The Chicago-based airline stock is trading at levels indicating bankruptcy may once again be likely. With air travel down due to the economic recession United Airlines finds itself in danger of running out of cash. Cash is exactly what United needs right now with reports of more than $1.5 billion in debt due early next year. According to analyst Bill Warlick of Fitch Ratings Inc., "They could be in a position where they are in danger of running out of cash." Some experts are publicly stating that United Airlines can survive until the middle of next year [that would be just about when the merger was announced] unless the economy drastically improves.

So United Airlines is on a trek to failure unless dramatic changes are made. If the economy takes off and business travel rises to previous levels and fuel prices do not rise substantially United will be okay. If this does not happen as described they won’t be okay. So with the economic situation of today, United needs a strategy to solve their core issues assuming there will be no economic recovery. The drastic changes that are required for United Airlines to move beyond their current woes is to bring in new leadership that is capable of orchestrating a merger and relieving the company from its excessive debt burden.

United Airlines needs to face the reality that Tilton is not the right CEO for the company. In fact, he may have been the right leader to be at the helm during 2007 when oil prices surged and jet fuel reached historic levels, but when his level of expertise was most crucially needed he failed the company. Being a former oil man, Tilton should have better handled the commodity issues of 2007. He should have had a strategy to hedge oil futures to protect the company from the dynamic shifts in the market. This was Tilton’s initial strategic failure and it is still hindering the company today.

According to Mo Garfinkile, CEO of Virginia-based GCW Consulting LLC, who has advised Mr.Tilton and United "the game plan now is to survive." Now the company is possibly headed once again into bankruptcy and seems to be a prime candidate for being liquidated. With the drop in air traffic and strong competitors like Southwest Airlines expanding into the traditional business route and offering lower-priced options, the airline industry will squeeze the weaker players out. The industry is in need of consolidation and if business leaders don’t do it through mergers the market will do it through bankruptcy and liquidation. United Airlines will be part of the industry consolidation but they may not survive it [career expectations?].

For more info: Read "Tilton's Troubles"by John Pletz at http://www.chicagobusiness.com/cgi-b...rticleId=32164

Wrsofked

In the words of Mike Ditka...."stop it"

Both carriers had their share of financial ****holes ove the years. Can we just call that equal and move on to issues that have a snowballs chance in hell of affecting the SLI?

APC225

I agree. That's why I say we could do this all day.

cgull, Why start a thread with the crush-you-in-the-SLI message. Both SLI committees have all the economic info and will do their best to destroy the career expectations arguments of the other side. Then the arbitrators will sort it all out. We don't have to. Let's learn the new contract fly the contract as it's the first thing we can do in unity.

LAX Pilot

No kidding....guys SLI is going to be a wash. There is so much scrutiny on this I can't see anybody being able to figure out over the course of their entire career whether it was good or not, so don't sweat it.

Lets just grow the airline with the big airplanes, and help get those old guys to consider retiring before 65.

Then we will all be fine and we can stop the bickering.

flybynuts

But we didn't right size for a merger or have debt refinanced at 17% on spare parts (only liquidity the company had). This article was bashing on a certain trajectory that would have never occurred with the building recovery.

See it's the same and you are basing a lot on what CEOs said to
Congress and leaked info to "need" the merger. We know CEOs lie to make it work and this kind of stuff just causes hate and discontent. We have a contract and our SLI will follow shortly. This is just poking the sleeping bear or fear of the ISL. We can't control the SLI so just have a beer and watch the show. It'll be a good one I'm sure.

Myboyblue

This Stansberry article was put on the union/classified board in the IAH crew room. It was followed by an article about the Stansberry group being brought down by the SEC for shorting stocks then a few weeks later posting these articles. In short, front running.

It is an inside joke with many IAH crews that this must be where the few UAL guys get their idea of UAL saving CAL comes from.

johnso29

You guys are wasting your time. It's likely going to arbitration, and posting articles covering the past isn't going to influence the arbitrator(s).