USA Today article on US Airways' code share partner



United, unions dig in for deal to dodge Chapter 11
CHICAGO - (USA Today) - United Airlines'' deadline is approaching. One month ago, its parent, UAL, announced the company would file for Chapter 11 protection this fall unless it had won big contract concessions from its unions by now. (Related item: United CEO''s people skills get high marks)
The airline, which has lost more than $3 billion since January 2001, demanded the cost cuts to help it qualify for a crucial federal loan guarantee and raise $2 billion in emergency cash.
We do not see bankruptcy as inevitable, United Chief Financial Officer Jake Brace said Monday.
United''s unions have spent weeks crunching numbers to propose several billion dollars'' worth of painful givebacks. But as union leaders present their counter offer to UAL this week, the airline and labor appear to be far apart on what United said it needs and what the unions say they can give in the next several years.
While United says it''s encouraged, many who have watched the airline''s stormy labor relations in recent years question whether a deal can be signed or ratified by workers in time to avert a crisis. Out of caution, United is preparing for Chapter 11.
The prospect of the largest airline bankruptcy in history is spreading alarm. Based on 2001 revenue, United is the world''s second-biggest airline, with 83,000 employees, nearly 600 jets and 1,900 flights a day. Experts worry that a UAL bankruptcy would put severe pressure on already-weakened creditors and competitors. Coupled with low ticket revenue and the possibility of higher fuel prices if the U.S. attacks Iraq, a UAL filing could squeeze other cash-strapped carriers, too.
Still, a United filing — if it occurs — probably wouldn''t come until October or November. The airline would keep flying in bankruptcy, and labor-management talks could continue. Nor would United be the first U.S. airline to enter bankruptcy court; some have been there repeatedly and kept flying. US Airways, which sought Chapter 11 protection last month, continues to operate, though with a reduced schedule. A post-bankruptcy United likely would be healthier.
United''s passengers, however, would feel an impact. If United files, it''s going to involve substantial cuts in the routes it serves, says Boston lawyer Jon Schneider, who represented creditors in the bankruptcies of Eastern Airlines and Continental Airlines. There''s a fundamental problem here: They are losing money ... and they have to stop that.
People familiar with United''s problem estimate the shrinkage would be at least 10% as it shed unprofitable routes. The airline probably would park more planes, especially Boeing 747s, which are the most expensive to operate and hardest to fill in this economy. Though it''s not clear which United routes would suffer, US Airways after its bankruptcy filing dropped one city, cut 13% of its flying capacity and discontinued 36 routes. It also tried to change the rules on its non-refundable tickets and frequent-flier program but later rescinded the most drastic changes.
United''s immediate hurdle is an $875 million debt payment coming due in November. Saying it won''t have enough cash and that it has been shut out of the capital markets, United has applied to the federal Air Transportation Stabilization Board for a $1.8 billion loan guarantee so it can borrow $2 billion. The guarantee is assurance to lenders that the loan would be repaid. The board, made up of representatives from the departments of Transportation and the Treasury and the Fed, has taken a skeptical view of applicants and has insisted on sharp cost cuts in airline business plans before it will consider aid.
But the upcoming debt payment isn''t United''s only worry. The travel climate in general remains grim a year after the attacks. And thanks to vicious competition, fares are at 15-year lows, pummeling revenue. The post-Sept. 11 recovery of passenger traffic stalled months ago, and the first week of September of this year, traffic at big network carriers plummeted again, off 15% on average from a year earlier. Although airlines suspect passengers were avoiding the terror anniversary, they aren''t sure bookings will firm this fall.
United''s big creditors are taking stock of their exposure. Boeing Capital, the airplane builder''s financing subsidiary, recently warned of a material adverse effect if UAL were to default on its $1.27 billion in loans and leases on airplanes. United is Boeing Capital''s single biggest customer and represents nearly 12% of the company''s total outstanding loans and leases.
Airbus is also exposed. It has firm orders from United for 45 planes, worth about $2.25 billion based on list prices. Three of the planes are in production.
This is all secured by aircraft, says Boeing Capital spokesman Russ Young. But since airlines already have parked many planes and there''s a glut, aircraft aren''t worth what they were last year. The question of exposure would be how much the airplanes ... are worth now, he says. We''re watching that very carefully.
The first creditors to see any disruption of payments would be unsecured creditors, such as United''s big hub airports dependent on airline fees and service companies such as aircraft maintenance, catering and fuel firms. Competitors are bracing themselves. We are taking this seriously, says Elise Eberwein, a vice president for Frontier Airlines, a Denver-based discount carrier that competes with United there. Frontier could benefit if United cuts routes or flights but would be hurt if United decided to compete against us with irrational pricing, Eberwein says. You don''t know which scenario to plan for. They are so big, and we have 35 planes.
At a time when raising cash has become extremely tough, some United competitors are worried about a United bankruptcy for other reasons.
Airline executives are very concerned about two things this fall: a war with Iraq and a United bankruptcy, says Gerry Pasciucco, a senior Morgan Stanley investment banker who specializes in airline financing and is advising United. A bankruptcy would send a negative signal to the markets about airlines'' ability to get labor concessions short of bankruptcy.
The fear, he says, is a United Chapter 11 filing in this environment could dry up already-tight credit during the slow fall and winter travel period and put cash-strapped, highly leveraged carriers at risk.
A UAL filing would probably do further damage to airlines'' cash access, adds Standard & Poor''s bond analyst Phil Baggaley. If United returned planes to creditors, it would worsen the industry glut of unwanted planes and make lenders wary of them as collateral.
Bankruptcy talk and the industry''s other ills have taken a toll on airline shares. Last week, FMR Corp., parent of Fidelity, the nation''s largest mutual-fund company, disclosed to the SEC that it had dumped virtually all its stock in United parent UAL, whose shares are trading under $3. FMR dropped its stake to a few hundred UAL shares from 3.1 million, a 5.6% stake, a month earlier. It also disclosed it had slashed its stake in Continental Airlines, to 3% from 12.8% four months ago. Last month, FMR disclosed it cut its stake in Delta Air Lines to 7.5% from 12.5% last Dec. 31. Fidelity declined comment on the moves.
While it works to stay out of bankruptcy, United is methodically preparing for a bankruptcy filing. Experts say advance work for such a filing, including lining up debtor-in-possession financing, can take weeks or months for a big company. United hired law firm Kirkland & Ellis last fall. It recently signed on financial adviser Rothschild North America. New York-based Rothschild is known on Wall Street for advising companies on restructuring and bankruptcy.
Union leaders acknowledge that they, too, have hired bankruptcy specialists to protect their interests in court. United is 55% owned by employees, and representatives of the mechanics and the pilots unions have seats on the board. In a bankruptcy, that equity likely would be wiped out. Employees fear losing their huge personal investment and their board votes.
Employee ownership at United adds a peculiar complexity to talks. United''s former president and COO, unpopular with the unions, recently resigned. New CEO Glenn Tilton, an oil executive hired by the board two weeks ago with the support of the mechanics'' and pilots'' unions, now must negotiate with them for cuts in pay, benefits and work rules.
Those unions have been down a similar road before: In 1994, the International Association of Machinists (IAM) and the Air Line Pilots Association agreed to major contract concessions over six years in exchange for stakes in the company and seats on the board. Monday their UAL shares closed at $2.68 each.
Tom Buffenbarger, international president of the IAM, United''s largest union, says he believes bankruptcy can still be avoided.
If it isn''t avoided, all parties have failed to do their jobs, he said. Asked if he thinks his union''s members will vote to ratify pay cuts after receiving hard-won contracts and raises a few months ago, Buffenbarger didn''t commit. I''m not going to predict that. There''s too much that''s unpredictable in this industry.


Aug 20, 2002
You can bet the next couple of weeks are going to be VERY interesting for both UA and US. We all better load up on the Maalox now!


The DOT second UA-US code share review is scheduled for completion on Monday, September 23.