Charges help sink shares of United

Jul 12, 2008 (Chicago Tribune - McClatchy-Tribune Information Services via COMTEX) -- UAUA | Quote | Chart | News | PowerRating -- UAL Corp. shares sank Friday after the United Airlines parent said that second-quarter results will be hurt by up to $2.7 billion in charges.

The bulk of the charges reflect an accounting-related write-down of the value of intangible assets known as goodwill.

Although the big goodwill charge ensures Chicago-based UAL will have a substantial bottom-line loss in the quarter, it is not necessarily a reflection of the company's fundamental financial condition.

Given the disastrous conditions afflicting the airline industry, UAL's decision to write off up to $2.3 billion in such assets isn't unusual: In recent months, rivals Delta Air Lines Inc. and Northwest Airlines Corp. each have recorded multibillion-dollar charges to write down the goodwill on their books.

Nonetheless, UAL shares dropped 54 cents, or 13 percent, to end Friday's session at $3.63. That represents not just a new 52-week low for the stock, which was trading above $50 eight months ago, but also a new low-water mark for UAL shares since the airline emerged from Chapter 11 bankruptcy protection in early 2006.

Like its rivals, United has been increasingly battered by a combination of sky-high fuel costs, punishing competition and a weakening U.S. economy that has dampened demand for travel. Those troubles are worsening: Several airline stocks fell sharply Friday on news that oil prices touched an all-time high of $147.27 a barrel.

UAL has been moving to cut costs by eliminating about 2,550 jobs, cutting routes and reducing the size of its fleet of aircraft. Those actions will require charges as well.

On Friday, the company said in a regulatory filing that it expects to record charges in the second quarter of $2.6 billion or $2.7 billion.

Included in that total will be a $246 million asset-impairment charge linked to the company's plan to retire Boeing 737 jetliners from service. The company is also taking an $82 million charge to cover severance charges it will pay to workers losing their jobs and a $60 million charge related to projects that the company has either dropped or put on hold.

More such cutback-related charges will appear in future quarters, UAL said, although it can't yet estimate the amount.

In addition to those operational-related charges, UAL said it will take a non-cash charge of between $2.2 billion and $2.3 billion to write off the remaining goodwill on its books.

Under accounting rules, companies list not just the value of their tangible assets but also intangible factors such as a strong brand name developed over a long period. Goodwill can be important in the event of a purchase or merger.

But if circumstances change enough to reduce the value of the goodwill on its books, a corporation is obliged to take a non-cash charge to reflect the lower value.

With the airline sector in disarray, Delta took a $6 billion charge to lower the goodwill on its books to $6 billion in April. And Northwest, which is slated to merge with Delta, took a $3.9 billion charge to write down goodwill that month.

"Given current market conditions," said a UAL spokeswoman, the value of the goodwill on the company's books when United emerged from bankruptcy "is significantly reduced."

Separately, United said it has reached a deal with the International Association of Machinists and Aerospace Workers to offer early retirement packages to up to 400 customer service and ramp workers.

It said employees who are at least 45 years old and have 15 or more years of service with the company as of Sept. 7 will be eligible. Severance payments will be based on years of service and retiree travel benefits.

Also Friday, United won U.S. permission to delay the start of its flights between Washington and Moscow by five months because of high fuel costs. The carrier may not start the service later than March 29, the Transportation Department said. United originally planned to begin the flights Oct. 26.

The Associated Press contributed to this report.

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