A Tale of Two Airlines


Aug 27, 2002
Tilton''s Path to Bankruptcy Surprised Airline Industry

By Keith L. Alexander
Washington Post Staff Writer
Saturday, December 21, 2002; Page E01
When oil executive Glenn F. Tilton took the reins of United Airlines in September, the marketing pro immediately launched a campaign to get employees, customers and politicians to lobby the Bush administration to bail out the airline. Tilton exuded such can-do confidence that many were surprised when the effort collapsed, forcing the company to file for bankruptcy protection a few weeks ago.
David N. Siegel, a longtime airline executive, took a different approach when he stepped in to run US Airways in March. Weeks before the carrier''s August bankruptcy filing, he signaled to markets what was coming, and he arranged for financing, government backing and employee cuts based on that idea.
Like much of the airline industry, United and US Airways were hurt when the economy slumped and passengers became fearful of flying after last year''s terrorist hijackings. But the two airlines were in worse financial shape than many of their competitors, and neither was able to come up with strategies to win more customers, boost revenue and cut costs fast enough to stay out of bankruptcy.
It now falls to Tilton, 54, and Siegel, 40, to come up with a winning strategy to transform the carriers -- each is losing millions daily -- into profitable operations.
Tilton is an outgoing optimist who referred to the company''s Chapter 11 bankruptcy filing as Chapter 1. It''s a new beginning for United. Tilton, who was vice chairman of ChevronTexaco Corp., developed a reputation as the kind of executive who can steer a company through a crisis because of his tenure as a top Texaco manager during a bankruptcy, an oil crisis and a corporate upheaval.
However, Tilton has no background in airlines. He was selected by United''s board of directors after seasoned industry executives turned down the job, according to sources. Tilton, who is out of the country, declined to be interviewed for this story, according to a spokesman. Siegel also was unavailable for comment.
Tilton didn''t know anything about the airline industry, and he didn''t have time to really learn it before he had to make some major decisions, said Aaron J. Gellman, a former director of Northwestern University''s Transportation Center.
Siegel was named chief executive of US Airways this spring after the airline''s previous CEO, Rakesh Gangwal, resigned. Other than a brief stint at Avis Rent a Car System Inc., Siegel has spent most of his career at Continental Airlines and Northwest Airlines. He earned praise for his role in turning Continental''s regional jet unit, Continental Express, into a success.
Siegel is a well respected airline executive and brought that expertise to US Airways at a time when it needed it the most, Gellman said.
Both men inherited airlines saddled with some of the highest expenses in the industry. Each headed into bankruptcy court only months after taking over, although their routes to Chapter 11 differed.
Siegel steered US Airways into bankruptcy. But United just stumbled into it, airline analyst Raymond Neidl of Blaylock & Partners LP said, describing a view widely held among analysts and aviation consultants.
Less than a month after Siegel joined US Airways, he brought in a team of top managers from Continental and Northwest. He began courting several of his recruits before he took the US Airways job, sources said.
Siegel also tapped into his airline background when searching for financial backers. He was able to secure $200 million from Texas Pacific Group, a private equity firm he worked with during his years at Continental. Within a month, Texas Pacific was outbid by the Retirement Systems of Alabama.
Although US Airways lost more than $2 billion last year, investor sources said the carrier was attractive to investors because Siegel was able to arrange a $900 million federal loan guarantee and nearly $850 million in pay concessions from employees before filing for bankruptcy.
Siegel always knew Chapter 11 may be the necessary steps to reorganize this airline, so he came there with that in mind. Timing is critical, and that position helped them, one bankruptcy attorney said.
When Tilton joined United, the airline''s president and chief operating officer, Rono J. Dutta and Andrew P. Studdert, resigned, leaving Tilton without senior management overseeing the airline''s day-to-day operations. Recently, the airline lost Shelley A. Longmuir, who guided United''s international and government affairs operations for more than a decade.
Tilton reorganized some of his top officers within United''s management team yesterday, but airline officials said. He needs to go outside United and attract other talented airline executives. He needs a former or current airline person to help him redesign his route system, an industry consultant said.
For the first three months of his tenure, Tilton mainly focused on lobbying the federal government to approve United''s application for a $1.8 billion loan guarantee. The government''s rejection prompted United to file for bankruptcy and triggered a last-minute scramble for financing to allow the carrier to operate while under the bankruptcy court''s protection. Some analysts said United had spent too little time preparing for bankruptcy.
However, one investment banker familiar with United disagreed. He said the airline had been trying to arrange financing to operate in bankruptcy since September. Tilton, too, has said that United executives were making bankruptcy preparations for months, in case the government turned down United''s proposal.
United had a well-thought-out plan. They tried to get the loan guarantee, and when that didn''t happen, everything else fell into place the way we all expected, the investment banker said. From the outside looking in, their plan may not appear to be organized, but it was.
Some industry experts question some of Tilton''s latest decisions, such as his plans to relaunch a low-cost shuttle operation on the West Coast. A previous effort failed, but Tilton has said that a new attempt will be successful because past mistakes will be corrected. Details of his shuttle plans have yet to be made public.
Tilton''s decision to named Douglas A. Hacker, United''s former chief financial officer, head of strategic operations has also attracted attention. Hacker was a leading proponent of United''s failed attempt to acquire US Airways for $60 a share when the Arlington-based carrier was trading for $26 a share. He was also a key coordinator in United''s failed efforts to win the federal loan guarantee.
One area where Tilton has gotten high marks has been his ability to work with unions, something his predecessors failed to do. And experts agree he will need workers'' support to pull off a reorganization. But United is only just entering into the toughest part of its labor negotiations, and Siegel''s honeymoon period with employees ended when he tried to extract tougher work rules.
But United''s unions say they understand that concessions are needed. They are hopeful that Tilton will deal with them in a straightforward fashion and that he has the ability to save the company.
Tilton has come in and worked very closely with labor, said Patricia A. Friend, president of the Association of Flight Attendants. If we take a problem to him, the problem gets fixed.