Is this Plan B?


Nov 26, 2002
March 7, 2003
Investor Group Woos Unions With Proposal to Run United

The Texas Pacific Group, the investment firm whose partners have led turnarounds at Continental Airlines and America West, has laid out a recovery plan to United Airlines'' labor unions and other creditors that includes steep cost cuts and a new management team but not the low-fare airline that has set the unions on edge.
With United losing $12 million a day, Texas Pacific has not decided whether to proceed with its proposal, people involved in the discussions said. The plan entails the firm''s lining up backers to replace the $1.5 billion in debtor-in-possession financing that United obtained when it filed for Chapter 11 bankruptcy protection in December.
Some — but not all — of United''s unions are promoting the plan; other groups represented on the airline''s creditors'' committee, whose endorsement would be critical, have been briefed on the proposal but have not signed on to it, the people involved in the discussions said.
United''s management, which has been barnstorming the country to build support for its own reorganization plan, sees the alternative proposal as evidence of desperation on the part of the unions, whose legal and economic influence is increasingly shaky. And some legal experts said it would be difficult, given bankruptcy laws, for the Texas Pacific plan to win approval from the court.
The investment firm would install a new management team, ousting Glenn F. Tilton, who has been chief executive of the airline''s parent, the UAL Corporation, since September. The unions would be required to give concessions in the range of the $2.56 billion a year, for the next six years, sought by the current management.
United''s operations would shrink by 20 percent to 25 percent, with the airline scheduling fewer flights on unprofitable routes and switching to more efficient aircraft than it now flies.
But the Texas Pacific plan, according to the people involved in the discussions, does not call for creating a low-fare carrier like the one that Mr. Tilton says is vital to enabling United to compete with Southwest Airlines, JetBlue and other low-cost airlines.
United''s pilots and flight attendants adamantly oppose that notion, largely because workers assigned to the new airline would be paid less, get fewer benefits and work under stricter rules. Under Texas Pacific''s plan, United would pursue its traditional business customers with lower fares, rather than set up an alternative carrier to compete with Southwest and others for leisure travelers.
Over the next several weeks, employees'' 55 percent ownership stake in the airline is likely to fall below 20 percent, after a recent ruling by the Internal Revenue Service allowing the employee stock ownership plan to sell more shares. Once ownership falls below 20 percent, the three employee representatives on United''s board will lose crucial voting rights, including a veto over executive appointments, though they will keep their seats.
On March 17, United will have the right to file a bankruptcy court motion to be released from its labor agreements, allowing it to impose work rules in the absence of new contracts. But it is unlikely that the contracts would be voided, because the airline and unions have been negotiating in recent days on United''s demand for concessions. Even this prospect could add to management''s sway in those talks.
A senior United executive, who insisted on not being identified because of the sensitivity of the labor talks, said he believed that the looming change in authority was what had motivated United''s labor unions to hold discussions with Texas Pacific and other potential bidders. The executive said that he believed that those talks were as much an emotional reaction to the unions'' slipping power as an attempt to develop a serious financial alternative.
Nor does United appear to have an immediate need for the new financing that Texas Pacific would provide. The airline is performing ahead of forecast, and its relationship with its lenders is good, one United banker said.
The Air Line Pilots Association had no comment, while United''s other unions would not talk directly about the Texas Pacific proposal. A spokesman for the Association of Flight Attendants said the organization''s goal was for the airline to restructure successfully. Joseph Tiberi, a spokesman for the International Association of Machinists, said the union''s first priority was the contract talks with United, adding that the machinists were referring potential investors to the company.
Legal experts said that Texas Pacific or another alternative bidder for control of United would face numerous hurdles. For a 120-day period, the company has the sole right to present a restructuring plan to the court. This period of exclusivity does not expire until April 9, and it could be extended.
Moreover, any challenger would most likely need the backing of United''s 13-member creditors'' committee, which includes representatives not just of the unions but also the federal Pension Benefit Guaranty Corporation, Airbus Industrie and the Bank of New York, representing bondholders.
Lawyers for the creditors'' committee declined to say if there was significant support for the Texas Pacific proposal. A spokesman for Texas Pacific, Owen Blicksilver, also declined to comment.
Texas Pacific''s partners and other investors made hundreds of millions of dollars by investing in Continental Airlines and America West when they filed for bankruptcy in the 1990''s. Texas Pacific was also prepared to be the lead investor in US Airways when it sought bankruptcy protection last summer, but was ultimately outbid by the Retirement Systems of Alabama.
Texas Pacific made overtures to United before its filing, as well, but the airline''s executives were focused on their unsuccessful effort to win a $1.8 billion federal loan guarantee and told the firm they were not interested.
Now, Texas Pacific is still weighing its involvement with United. The firm could still decide to pass on this, said an executive involved in the matter. The unions want to create an impression that the talks are further along than they really are.

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