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United hits turbulence of bankruptcy
Airline will honor tickets, mileage programs, but moves to cut non-union pay immediately.
December 9, 2002: 8:22 PM EST
By Chris Isidore, CNN/Money Staff Writer

NEW YORK (CNN/Money) - United Airlines started trying to navigate the turbulence of bankruptcy court protections Monday, as the world's No. 2 airline said it is looking to cut labor costs and unprofitable routes, change work rules and stem losses without alienating either key unions or customers.

The carrier filed for bankruptcy protection in the Northern District of Illinois early Monday, following a weekend of meetings of the board of directors of parent company UAL Corp. and negotiations with lenders.

Surprisingly, shares of UAL (UAL: Research, Estimates) were unchanged in trading Monday, closing at 93 cents, although shares had already lost more than two-thirds of their value at the end of last week following the rejection of its application for federal loan guarantees. Still the shares were widely expected to be worthless before the company emerges from bankruptcy, and the New York Stock Exchange said Monday it is looking at possibly delisting UAL's shares.

Most other major airline stocks were lower in trading Monday, and some companies that had business relationships with the airlines were also lower.

Computer services firm EDS (EDS: Research, Estimates), which said it would take a 5-cent-per-share charge to write down some United aircraft leases, saw its shares fall 57 cents to $16.32, while aircraft manufacturer Boeing Co. (BA: Research, Estimates) lost $1 to $32.40, after it said it had $1.3 billion in financings to United in the portfolio of its $11.5 billion Boeing Capital unit. The aircraft maker said those loans are secured, primarily by 777 aircraft delivered to United in the last three years. It gave no details on expectations for charges or effects on earnings.

Losses worse the expected

United attorneys told bankruptcy court judge Monday that United expects to burn through $20 million to $22 million a day in December and $10 million to $15 million a day in January, much more money than the previous daily burn rate of $7 million to $8 million. The judge approved $800 million in bankruptcy financing, which along with cash on hand should fund immediate operations.

United -- which operates about 1,800 flights per day, or about 17 percent of all U.S. air capacity -- said current and future tickets on its flights will be honored, Red Carpet Clubs will continue to operate, and frequent-flyer points will continue to be awarded and redeemed by United and partner airlines.

"United Airlines will continue to provide customers with the same experience and level of service they have come to expect," CEO Glenn Tilton said in a statement. "We stand by our commitment to provide customers with convenient schedules, quality onboard services and the most extensive route network in the U.S. and abroad."

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Glenn Tilton, chairman and CEO of UAL, talks about the bankruptcy and future for the airline.

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Chapter 11 allows companies to continue operations while shielding it from creditors. The company filed its application to the court asking for immediate permission to pay employees and key vendors during the reorganization.

"Chapter 11 does not mean United is going out of business. In fact it means the opposite," Tilton said in a letter to employees. Tilton, who became CEO in September, said the employees must put aside unhappiness with past management decisions for the company to successfully emerge from bankruptcy able to compete.

Sam Buttrick, analyst for UBS Warburg, said he believes United has a chance to emerge from bankruptcy as the lowest cost airline that tries to operate a wide network of routes and flights, rather than being the highest cost carrier in the industry, as it is today.

"We don't like to subscribe to the view that bankruptcy is an attractive strategic option," he said. "But, let's face it -- excess debt, burdensome labor contracts, expensive pension obligations, high aircraft ownership costs are all high on the list of what ails airlines. Bankruptcy can't build you a network -- and UAL already has a pretty good one -- but bankruptcy can certainly address these other issues -- which variously afflict all legacy network carriers."

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The company said it will work with unions to reduce labor costs even more than previously negotiated concessions, and change work rules, which could be a difficult path given rank-and-file objections to those pay cuts.

The filing will be bad news for some of the approximately 80,000 United employees, as the reorganization will almost certainly involve some job cuts. Wage concessions negotiated by unions in an attempt to win loan guarantees disappeared with the rejection of those guarantees, meaning about three-quarters of the planned cost savings will have to be renegotiated.

United moved ahead with plans to cut management and other nonunion employees' pay between 2.8 and 10.7 percent, while top officers will have their pay cut an average of 11 percent. But those nonunion wage cuts, which were estimated before the filing to save the airline about $1.3 billion over the next 5-1/2 years, were only part of a plan to cut total labor cost by $5.2 billion. And federal regulators who rejected the airline's loan guarantees criticized those cuts as insufficient to turn around the carrier, saying they would leave it the highest cost carrier in the industry.

Tilton, in a news conference, stressed that his company has good relations with its employees, and statements from the unions representing some of those workers concurred.

"The entire union coalition is committed to continue working together to ensure United's successful restructuring," said a statement from Randy Canale, an official with the International Association of Machinists and a member of the UAL board. "Service to our customers will be a key element to that success, and we urge the membership to continue performing your jobs as the true professionals you are. All United Airlines employees must work together to ensure our survival."

But Buttrick said it is possible that the airline could see, "labor disruption as certain labor constituents potentially act up in response to the filing."

With $25.2 billion in assets, UAL's is the largest bankruptcy in airline history, according to BankruptcyData.com. But it isn't the first airline to go bankrupt this year; US Airways Group sought court protection from its creditors in August and has continued to operate. Some smaller carriers, including Midway Airlines, Vanguard Airlines and National Airlines, halted operations, with Vanguard and National also being rejected in requests for federal loan guarantees.

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The Air Line Pilots Association blamed the U.S. government -- specifically, the Air Transportation Stabilization Board, which turned down United's request for loan guarantees, setting the stage for the Chapter 11 filing -- for crippling "one of this nation's greatest airlines."

"Instead of stabilizing the industry, the ATSB is doing its best to de-stabilize it, and [the Bush] administration ... is ... idly sitting by and letting another of our nation's premier airlines go into bankruptcy," Captain Duane Woerth, president of the Air Line Pilots Association International, said in a statement.

Financing to fund operations

United said it had arranged for about $1.5 billion in loans, known as debtor-in-possession (DIP) financing, needed to fund operations during a court-supervised reorganization. It also said it had about $800 million in unrestricted cash on hand to help fund operations.

The DIP financing is structured as a $300 million facility from Bank One and a $1.2 billion facility from a group that is led by J.P. Morgan Chase and Citibank, and includes CIT Group and Bank One.

The company missed about $920 million in scheduled debt payments a week ago and faced the end of grace periods on most of that debt this week, with a last chance to pay $300 million of that amount Monday, prompting the filing. The company is forecast to lose $11.73 a share in the quarter.

The bankruptcy judge approved $800 million of the $1.5 billion in DIP financing. A United attorney told the judge that $800 million should be available in the next 11 days, enough to fund its near-term operations.

Click here to see the Chapt. 11 filing (PDF file)

Among the costs that United will be paying is millions in professional fees to attorneys, public relations firms and consultants, United attorneys told the bankruptcy court.

At the news conference, Tilton said he expected the company to be in bankruptcy reorganization for about 18 months, during which time one of its primary goals would be to respond to growing competition from low-cost carriers such as Southwest Airlines (LUV: Research, Estimates) and JetBlue Airways (JBLU: Research, Estimates).

"We have to broaden our appeal to more customers than simply high-end customers. We have to understand that, in the aggregate, there are fewer customers out there, so we have to appeal to them all," Tilton said.

Bankruptcy courts have the power to void labor and other contracts, though that can be a difficult and time-consuming process. Tilton told employees in a recorded message Friday that deeper cuts than those already negotiated and changes in work rules would be needed if the company is forced to reorganize in bankruptcy court. He didn't specify if management expected to win the deeper cuts in new negotiations or through court action.

Winning further negotiated concessions from the employees will be difficult. The airline's 13,000 mechanics voted against the concession package last week, despite strong support from their union's leadership. The Air Line Pilots Association said Friday it was surprised by Tilton's comments.

"We believe it is very premature to discuss these issues. ALPA is not interested in conducting our negotiations in the public forum," said the union's statement.

Series of woes over last two years

The airline was once the world's largest and most successful. But it was hit with a series of problems starting in 2000 that led it down the road to the bankruptcy filing. The carrier has not reported a quarterly profit since the second quarter of 2000. It lost $1.7 billion, or $30.96 a share, in the first three quarters of this year alone. (Click here for a timeline of United's path to bankruptcy)

First, management proposed a merger with US Airways Group, a deal that was eventually blocked by federal antitrust regulators. But the more than one-year effort to complete the merger distracted management and led them to negotiate an expensive contract with the pilots union in an attempt to win their support for the deal. The deal left United with the highest labor costs in the industry.

In 2000, pilots and mechanics at the airline also engaged in a series of job actions to put pressure on management for new contracts, actions that led to flight cancellations and helped chase away some business travelers.

When the country's economy slowed, it led to a sharp drop in business travel and business fares, hurting the company's finances. It also faced greater competition than other major airlines from the growing low-cost, low-fare carriers such as Southwest or Jet Blue that do not operate the extensive network of flights of United or American Airlines (AMR: Research, Estimates) or Delta Air Lines (DAL: Research, Estimates).

Then came the Sept. 11 terrorist attack, which also sharply curtailed demand for air travel and fares. United was also unfortunate enough to have major debt payments come due before there was any meaningful recovery in the industry.

Click here for a look at airline stocks

"There is not one smoking gun for United," said John Heimlich, director of economic and market research for the Air Transport Association, the industry trade group. "There were a lot of factors that emerged. Some were controllable, some of them were not. Then 9/11 was the lighter fluid on the grill."  Top of page


-- CNN/Money's Mark Gongloff contributed to this story.




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.