Subject: [NEXTEL-1] United Flies into Chapter 11

From: Marcel <[email-masked]>
Date: Mon, 09 Dec 2002 15:34:43 -0500

UAL -- Bankruptcy Is A Smart Move

Mark Tatge and Brandon Copple
Forbes

12.09.02 7:30 AM ET

CHICAGO - United Airlines' parent, UAL filed for Chapter 11
bankruptcy protection--a move that experts say may be United's
smartest in years. Finally, the nation's No. 2 air carrier (2001
revenue: $16 billion) will be forced to bring its bloated costs
under control.

But there is major risk involved--if reorganization fails, United
(nyse: UAL - news - people ) could go the way of other bankrupt
carriers, namely Eastern Airlines, Pan Am and Braniff, and never
emerge from bankruptcy.

Even in the best case scenario, reorganization could take years to
complete, particularly given the fractious relationship United has
with its unionized pilots, baggage handlers and flight attendants.

The question now whether the carrier, often crippled by
indecision, will get so bogged down negotiating with creditors and
labor unions that the franchise erodes beyond viability.

United has $1 billion in cash on hand, but it is burning $7
million a day. At that rate the company is expected to lose $2
billion this year. United needs to slash $9 billion in order to
survive. That's a Herculean task in the high-fixed-cost airline
business, where majors like American Airlines (nyse: AMR - news -
people ) and Delta Air Lines (nyse: DAL - news - people ) are
chasing fewer customers since Sept. 11 and where air travel is
increasingly becoming a commodity.

United has the highest costs in the airline industry, spending 11
cents per available seat mile, mostly due to expensive labor
contracts. Labor costs are nearly 60% higher than low-frill
juggernaut Southwest Airlines (nyse: LUV - news - people ),
according to J.P. Morgan Chase.

But labor isn't United's only problem. UAL management can look
back on its share of screwups. Two years ago, UAL then-Chief
Executive James E. Goodwin cancelled 23,700 flights after pilots
staged a work slowdown. Thousands of furious travelers flocked to
the competition. Goodwin wound up caving in to the pilots, who
along with other union members were demanding catch-up pay for
$4.9 billion in past concessions. So immediately after it agreed
to raise its pilot payroll by $900 million, United was forced to
slash fares in an attempt to win back passengers.

United's directors, three of whom represent pilots and mechanics
unions, forced out Goodwin in October 2001 after he publicly
speculated that United would go bankrupt if it couldn't reign in
costs. Unfortunately, Goodwin was right. United may have been just
as well off filing Chap. 11 last December.

Instead, Goodwin's successor, Glenn Tilton, has been preoccupied
since September with securing $1.8 billion in loan guarantees from
the federal government so United could restructure and avoid
bankruptcy. But UAL's Tilton didn't win any sympathy from United's
unions by taking a $3 million signing bonus last fall, just before
launching a cost-cutting campaign aimed at cutting flights and
jobs while extracting concessions from those who kept their
jobs.On Wednesday, the Air Transportation Stabilization Board
rejected United's restructuring plan for lack of sufficiently
aggressive cost cuts.

Chapter 11 poses perils for United, particularly since it still
will need the cooperation of its unions to get costs in line. Of
the eight largest airline bankruptcies going back to Braniff's
filing in 1989, only two carriers have emerged intact--Continental
Airlines (nyse: CAL - news - people ) in 1993 and America West
(nyse: AWA - news - people ) the following year. (US Airways went
into Chap. 11 in August and is expected to file a reorganization
plan by Christmas.)

Could United go the way of Eastern Airlines and Pan Am? It's
possible.

Bankruptcy will wipe out shareholders' equity--55% of which is
held by pilots and mechanics under a 1994 employee stock option
plan. All United's employees are looking at pay cuts. And if
pilots and mechanics feel they're getting a raw deal, they could
disrupt service, as the pilots did so effectively in 2000. That
would in turn drive more passengers away--further shrinking
United's vanishing revenue.

"They have to walk a very fine tightrope between alienating
employees and driving away customers," says Ray Neidl, an airline
analyst at Blaylock & Partners. And in bankruptcy, Tilton will be
working without a net.

http://www.forbes.com/2002/12/09/cz_mt_1209ual.html

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