Analysts believe AA''s future dependent on UAL!

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Jan 9, 2003
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American Airlines Has Huge Stake in Outcome of United''s Bankruptcy Case
Source: New York Daily News
2003-02-01
Feb. 1--The future of American Airlines Inc. hinges heavily on what happens
in a downtown Chicago courtroom. That''s where rival United Airlines Inc.''s
federal bankruptcy case continues to unfold.
The myriad of outcomes -- ranging from United''s liquidation to its rebirth
as a meaner and leaner competitor -- could affect American''s strategy as
much as its own efforts to save itself, experts and consultants say.
Everybody''s looking towards that courtroom, said consultant Robert Mann,
who has done consulting work for American''s pilot union.
If United fails, it will leave a major void in Chicago, where American is
the strong No. 2. Fort Worth-based American would probably capture much of
the lucrative business travel in Chicago and probably could raise fares.
The whole world changes if you see a liquidation at United, Jeff Campbell,
American''s chief financial officer, told investors recently.
If United survives bankruptcy and dramatically lower its costs, American
will have an even tougher time competing and probably will end up in
bankruptcy itself, the experts say.
United has a long road to get there. Spokesman Chris Brathwaite said the
carrier''s reorganization remains on the schedule, but he wouldn''t comment
beyond that. It''s only been 60 days since we started, he said. The carrier
gave itself 18 months when it filed in December.
While no one''s crystal ball can divine United''s future, one of the following
outcomes appears likely, creating implications for American and the rest of
the industry:
Liquidation
The revelation Friday that United''s parent firm, UAL Corp., lost $3.2
billion in 2002 did little to convince industry analysts that United will
avoid Chapter 7 liquidation.
United''s management hasn''t yet garnered the confidence from the financial
community needed to get its support. While a few details of United''s
step-by-step restructuring can to light this week, none of the steps seem to
be revolutionary, said consultants such as Mr. Mann.
I don''t think that the latest leak helped them much, said Mr. Mann.
Others say United''s management team isn''t up to the task because it doesn''t
know the industry well enough. Chief executive Glenn Tilton was an oil
executive before taking the job Sept. 2.
United''s management has little margin for error. A cadre of banks lent
United $1.5 billion to finance the reorganization. To get the last half of
that money, United must meet cost-cutting deadlines this month. If it fails
to meet the goals or loses a lot more money than expected, United could see
the banks call the loan and sell the airline''s assets to get some money
back.
All of this as United faces a lagging economy and a looming war. Prized
business travelers aren''t jumping back on planes. And when they do, they''re
paying about 10 percent less than last year.
An Iraqi war of any length would trim demand for international flying, one
of United''s few bright spots, said analyst Gary Chase of Lehman Brothers. In
1991, the Gulf War cut industry international revenue by 8.6 percent, Mr.
Chase said in a recent report to investors.
Meanwhile, United''s labor unions are increasingly unsettled. And United
can''t afford a worker revolt, said Robert J. Gordon, professor of economics
at Northwestern University and a frequent critic of airline issues. Some
United mechanics and machinists are wearing buttons that read Full pay to
the last day, as their union, the International Association of Machinists,
has been reluctant to go along with restructuring.
The biggest threat to [United] is not a hypothetical Iraq war but rather a
suicidal strike or work slowdown by the IAM, and that cannot be ruled out,
Mr. Gordon said. But he gives United a two-to-one chance of surviving
bankruptcy because it has such a strong franchise in key cities.
Experts say that even if United were liquidated, its assets wouldn''t stay
grounded for long. Even before the carrier filed for bankruptcy Dec. 9,
various leveraged buyout firms and venture capital arms were swarming,
looking to carve out pieces, said consultant Mr. Mann.
Given the chance to acquire United planes, gates, passenger information and
even its international route authorities for pennies on the dollar, dozens
of interested parties would line up.
United could emerge from bankruptcy without solving all of its problems and
then continue to struggle. This has happened in other cases, such as that of
Trans World Airlines, which escaped Chapter 11 only to find itself doomed to
subsequent bankruptcies.
United already is in the process of rewriting labor contracts and has
already secured significant wage reductions. But will those be enough to be
profitable?
Even though they took a 29 percent pay cut, United pilots in some cases will
still be making only 8 percent or 9 percent less than what American pilots
flying similar aircraft earn now.
United''s plan to launch a low-fare, low-cost competitor has been panned by
its pilots and several consultants, but others feel the only way to combat
Southwest Airlines Co. on the West Coast will be to match the Dallas-based
company''s industry-low costs.
This scenario concerns industry experts the most. It doesn''t solve the
industry''s overcapacity problem because United will muddle along until the
next economic downturn, where it could face another bankruptcy filing.
In the final scenario, United could become what analysts call the category
killer of network airlines.
With dramatically lower labor and infrastructure costs and its global
network intact, United soars. Its low-fare carrier wins back some market
share it had ceded to Southwest in California, and it finds it can make
money while charging substantially lower business fares.
United needs to be in the ballpark of Southwest''s costs -- it doesn''t have
to match them, but just be within shouting distance, said economics
professor Sam Peltzman at the University of Chicago, who gives United even
odds of getting out of Chapter 11. If they keep doing what they''re doing
now, they''re a Dodo.
Costs are most frequently measured by units, and one airline unit is one
seat flown one air mile. United spends more than 11 cents to produce a unit;
Southwest spends just over 7 cents.
United hopes to close the cost gap by increasing employee productivity. So
does American, which has very similar costs to United. In this scenario,
with United becoming a vicious competitor, an American bankruptcy becomes
likely.
Even if it can win some concessions by negotiating with its unions, they
would fall short of the United''s bankruptcy-brokered changes. Some speculate
American might have to file for protection as a defensive move if United
comes back stronger.
No matter the outcome, United''s woes are already changing the industry
landscape, resetting expectations for unions, lowering the value of
airplanes and changing how tickets are priced.
American has begun active engagement with its labor groups to carve out $2
billion (to meet a total goal of $4 billion) in annual savings, regardless
of what happens at United. Next week, it''s expected to unveil a long-term
plan to save the carrier, according to reports from the Allied Pilots
Association.
On the aircraft front, United continues to negotiate for lower rates with
its leasing companies. If United is successful, analysts say, American and
others will look for similar discounts.
And all three of the largest carriers are trying new things with ticket
prices, but United took the boldest step in December when it cut its most
expensive fares out of Chicago and Denver by 40 percent. American and other
carriers matched the changes, and analysts say a simpler fare structure will
gradually expand around the country.
Looking ahead, American''s worsening financial status may begin to overshadow
United''s bankruptcy woes. American Airlines parent AMR
Corp. has lost $5.2 billion in two years and will begin draining its cash
reserves this year to keep flying.
The revenue, cost and profit data show that AMR is in almost exactly the
same situation as UAL, except for a bigger cash cushion and more
unencumbered aircraft, Mr. Gordon said.
 
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