UAL Plans No Further Investment in Avola

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UAL Plans No Further Investment in Avolar
By David Bailey

CHICAGO (Reuters) - UAL Corp. said on Friday that it has stopped seeking outside investors for its business jet unit Avolar and plans to halt further investment of its own, a move analysts said could be the beginning of the end for the fledgling unit.
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The parent of United Airlines also said Stuart Oran has stepped down as Avolar's president and Doug Hacker will serve as acting president after UAL (NYSE:UAL - news) halted a months-long search for an investor to take a majority stake.

``It sounds like it is being put out to pasture. Obviously if they are cutting funding and they haven't obtained an outside investor that implies that there really isn't a white knight on the horizon,'' said Richard Aboulafia, senior aircraft analyst at the Teal Group.

UAL formed Avolar in May 2001 to tap corporate America's appetite for business jet travel by selling part ownership interest in planes. UAL decided to look for outside investors for the start-up following the Sept. 11 attacks as the carrier struggled with huge losses.

The No. 2 U.S. airline posted an industry record net loss of $2.1 billion last year as the U.S. economy and travel slumped following the attacks. UAL plans to ask workers for billions of dollars in concessions to help restore financial stability, and it continues to dismiss the possibility of bankruptcy.

In a regulatory filing with the U.S. Securities and Exchange Commission on Friday, UAL said it intends to halt its financial commitment to Avolar on March 31.

``This move is consistent with our previously stated intentions to protect United Airlines from further financial exposure to this business and to achieve the best return for UAL on its investment,'' UAL Chief Executive Jack Creighton said in a statement.


AVOLAR A DISTRACTION

Avolar may not be beyond hope, but the odds have been against it from the start with strong competition well rooted in the market, Aboulafia said.

``They are trying to preserve the initial investment but don't want to put any more capital into the enterprise,'' ABN Amro airline analyst Ray Neidl said. ``They have been saying that all along.''

However, halting further investment in Avolar is not enough, aviation consultant Michael Boyd said.

``This is a sideshow, not a bad sideshow, but one that is going to divert their energy from their core business,'' Boyd said. ``United has enough trouble on its plate with its scheduled business. Why do they have management talent running off worrying about a separate business?''


SIGNIFICANT WRITE-OFF POSSIBLE

UAL's board of directors authorized investment of up to $250 million when it formed the business jet unit in May 2001, according to the SEC filing.

Through January, UAL had invested $102 million in Avolar for advance payments on aircraft purchases and operational expenses. It could face a significant write-off if the new strategy fails, UAL said in the filing.

Oran said in January that Avolar expected revenue of $400 million to $500 million in 2002, rising to more than $1 billion by the end of its fifth year of operations.

Avolar's aircraft choices include Beechjets by Raytheon Co. (NYSE:RTN - news), Learjets by Bombardier Inc. (Toronto:BBDb.TO - news), Gulfstreams by General Dynamics Corp. (NYSE:GD - news) and Falcons by Dassault Aviation.

At the end of 2001, Avolar had agreements with Gulfstream and Dassault to buy 82 jets for $1.9 billion, after deducting advance payments for delivery starting in 2002, with options to buy 142 more, UAL said in the filing. It can cancel the purchase of specific aircraft with certain conditions.

Shares of UAL rose 80 cents, or 4.9 percent, to $17.20 Friday on the New York Stock Exchange.
 
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