United gears up for eight weeks of critical decisions
CHICAGO (USA Today) — Whether the nation's second-largest airline lives or liquidates could be decided in the next eight weeks.
Almost two months after filing for bankruptcy reorganization, United Airlines' parent, UAL, faces a tangle of critical decisions about its future that it must make soon if it is to have any hope of survival. But United is a managerial Rubik's Cube whose problems are interlocking and solutions confounding.
While operating 1,700 flights a day worldwide, UAL must in coming weeks cut costs dramatically by renegotiating contracts with labor unions, regional airline partners and the companies that own the leases or hold debt on 80% of its jets. It must convince its bankers that its negative cash flow is improving, or they could call in the crucial loans that keep United aloft, shutting it down.
There could not be a harder time for UAL to reinvent itself. The company announced Friday that it lost $1.5 billion in the fourth quarter and $3.2 billion for 2002 in the midst of the airline industry's worst slump in history. A U.S. invasion of Iraq, and fears of retaliation, could further chill the economy and scare off passengers. If the U.S. starts bombing Iraq, airline traffic could suddenly drop and fuel prices spike, soaking up precious cash United needs to fly and possibly destabilizing it and other cash-strapped carriers.
"If United fails, it's likely to be because of what happens in the next several weeks and months with its financing, labor contracts and the possibility of war," says Philip Baggaley, senior airline analyst for credit-rating firm Standard & Poor's.
Adds Mo Garfinkle, an aviation consultant who once advised United: "It is a task so difficult, so enormous, it will be miraculous if they achieve it all."
Among the issues that UAL executives are grappling with:
Reorganization plan. It must issue a preliminary business plan for reorganization and sell it to creditors, lenders, labor unions, customers and Wall Street. The plan will set the direction for everything else it has to do. CEO Glenn Tilton and his team presented the plan last week to UAL's directors and are scheduled to meet today with the creditors' committee. Without exaggeration, Tilton calls the document UAL's "plan for transformation." The company has declined to make Tilton available for an interview or discuss details of the plan.
Labor contracts. It must renegotiate labor contracts by March with increasingly hostile unions representing pilots, mechanics, flight attendants and other workers. Failing that, it could seek the court's permission to break the contracts and impose new, cheaper ones. That could alienate the employees who interact with United's passengers every day.
Fleet. UAL must decide which planes it's keeping or rejecting. The bankruptcy code gives airlines a 60-day stay on making aircraft payments, but UAL's grace period expires Friday. The company has asked the court for more time so it can continue negotiating for better terms on leases and other financing deals covering about 460 of its 567 jets. If it can't strike better deals before time runs out, UAL will have to make its payments current on the jets it wants to keep or risk them being repossessed.
One complication is that UAL is still trying to identify and track down some of the several thousand parties that have claims on more than 100 jets used as collateral for loans. Another problem is UAL's uncertainty about other aspects of its plan — such as its future labor costs — hampers productive negotiations with aircraft lessors. Lessors also are wary of giving a big carrier like UAL better terms because that could further depress already weak values for new and used airplanes at other carriers. It's a process that United executives anxiously call a high-stakes game of musical chairs.
Regional airlines. UAL must rework contracts with its regional airline partners to possibly let them handle more flying on small, less-expensive regional jets and perhaps at reduced rates. Unsettled labor issues touch on this problem, too, because United's pilots contract limits how much RJ flying the regionals can do. The partners — independent companies that have ordered millions of dollars of RJs — are worried. Atlantic Coast Airlines, one United Express carrier that gets 80% of its business from United, has asked the court to force United to spell out what role Atlantic Coast will play in future plans.
Financing. UAL must demonstrate to four big banks that lent UAL $800 million to operate that it can repay them later — and that it deserves an additional $700 million in months ahead. United this month must meet the first of monthly cash-flow targets. Although it's expected to hit February's goal, future months set progressively higher targets that will be harder to achieve.
At UAL's Chicago-area headquarters, the mood is determined. Executives say they haven't taken a day off since the filing. A small army of specialized consultants and lawyers is helping them shoulder through the mountain of work under impossibly tight deadlines. Employees note with irony how expensive bankruptcy is.
Tilton, who signed on to run UAL just last September, is poised to start promoting his business plan. Even before it's unveiled, the plan — which calls for a new low-fare airline subsidiary — is under fierce attack from union leaders. Last week, they angrily called it a "breakup" of the airline.
Pilots, flight attendants and other work groups that already have sustained thousands of furloughs could be hurt by more lost jobs or lower pay under that plan. One out of every five United employees has been furloughed since the Sept. 11 terrorist attacks, and unions are braced for announcements of many more layoffs.
"We will oppose management's breakup plan by every lawful means available to us," says Paul Whiteford, pilots union chairman.
His anger stems partly from the fact that 92% of United's pilots recently voted to take voluntary 29% pay cuts from January to April to help United cut costs quickly in bankruptcy. Flight attendants also agreed to pay cuts.
A shift in strategy
People briefed on the low-fare concept say as much as 30% of United's flying capacity might be shifted to the new low-fare airline subsidiary that would have a separate identity, fleet and workforce.
The new airline would fly from United's hubs, such as United's home base of Chicago O'Hare, to leisure destinations, and connect with regular United flights at hubs.
Tilton, who was previously vice chairman of ChevronTexaco and CEO of Texaco, has become convinced a low-fare airline operated within UAL is critical to its survival and can succeed — even though it's never been done profitably by a traditional airline.
His view is not unique. Delta Air Lines last week announced the April launch of Song, a low-fare airline that will fly Boeing 757s between the Northeast and Florida.
United is facing threats from aggressive discounters undercutting its fares: Frontier Airlines at United's Denver hub, American Trans Air at Midway Airport in Chicago, and Southwest Airlines on the West Coast, among others.
But United's unions suspect management wants inexpensive, separate labor contracts for the new unit and plans to take job applications from anyone without regard for United employees' seniority. The controversial venture could draw UAL into an ugly, public court fight with its unions, who have two seats on its board. The conflict is the latest example of labor-management tensions that have bubbled within UAL for years despite a 1994 deal that brought employees majority control and broad influence over UAL's governance in exchange for billions of dollars in concessions.
"Given labor-management relations at this airline, this low-fare airline strategy is a good concept in theory but could be nuclear in practice," Garfinkle says.
Labor leaders don't want employees' honeymoon with Tilton to end. Since arriving, Tilton has worked hard reaching out to employees craving leadership after the terror attacks. On a January trip to Tokyo's Narita Airport to christen United's renovated terminal, Tilton was met by employees wanting his autograph.
"I'd be lying if I told you the labor-management relationship at United is wonderful right now. But it's better than it's been in my 14 years here," says Greg Davidowitch, the new chairman of United's flight attendants union. "We don't want a company of people who are scared."
There are no plans to amputate parts of the airline's massive network, such as the valuable trans-Pacific routes. United has been closing individual international cities that apparently weren't profitable. Last month, Caracas, Venezuela; Santiago, Chile; and Dusseldorf, Germany, dropped off United's route map. Next month, New Zealand will, too.
The painful cuts reduce losses but risk losing customers.
"I am staying with United, but I am very disappointed in the number and severity of the service cutbacks," says Jennifer Eck, a Chicago-based human resources director who flies to Latin America. "Now, I am almost forced to fly American to those markets."
In a clear outreach effort to coveted business fliers, United just launched a sale reducing some last-minute business fares 40% from Chicago and Denver and on connecting routes. That has brought an encouraging uptick in bookings, although UAL officials won't say exactly how much and whether revenue is up as well.
It could be a sign of things to come. United and other traditional airlines have to revamp their fare structures and close the wide gap between leisure and business fares to survive. The throngs of $2,000-a-ticket business fliers haven't returned since the recession hit, and they might never come back.
Amid their turmoil, United executives and employees can't help but brag about the kind of airline that passengers see every day. For the first 11 months of 2002, latest figures available, the government ranked United No. 1 among the largest carriers for on-time flights.
"Despite everything that's going on, our people are doing an extraordinary job," says Davidowitch, a flight attendant from New York. "When the whole world is out there saying, 'You're going to fail,' that's really inspiring."
