A Tale of Two Bankruptcies US Airways will emerge from Chapter 11 far better off than United. Here's why.
By John Helyar

(FORTUNE Magazine) – When the nation's no. 1 carrier, United Airlines, tried to buy US Airways in 2000, it seemed more like a mercy killing than a merger. US Airways was a weak No. 6, with poor prospects as an independent. The outlook only worsened in 2001 after the Justice Department nixed the deal and terrorists torpedoed aviation. US Airways was a consensus pick to be runway kill.

Today, of course, both airlines are bankrupt: US Airways filed for Chapter 11 last August; United's parent, UAL, last December. But it's US Airways, not the once-mighty United, that's rapidly regaining altitude. Under Chapter 11, which gives a company protection from its creditors, $7-billion-a-year US Airways has restructured its debt and attracted new capital; it is scheduled to emerge from bankruptcy March 31. Meanwhile United, which had $14.3 billion in revenues last year, is struggling just to meet its lenders' cash-flow and cost-cutting requirements. Absent progress, United could soon begin a spiral from Chapter 11 into Chapter 7: liquidation. The two airlines provide an object lesson in crisis management, proving that strong leaders, swift action, and smart strategy count for more than superior markets, equipment, and hubs.

One of the most obvious differences between the two airlines is the guy at the top. David Siegel, a young (41) yet seasoned veteran of the Continental Airlines turnaround whom US Airways hired as CEO last March, quickly implemented a new strategy: Focus on the carrier's best short-hop Eastern routes, and scuttle many big jets for cheaper regional ones. Siegel also forged new ties with pilots. His "jobs for jets" program (he gave furloughed pilots first chance to fly regional jets) and his willingness to open the company's books induced them to agree to pay cuts of at least 26% last July. That helped the carrier win conditional approval of $900 million in federal loan guarantees.

When the airline's mechanics wouldn't join other unions in making voluntary sacrifices, Siegel took the carrier into Chapter 11--a status that gives companies the ability to void labor contracts with a judge's approval. That leverage helped Siegel bring the recalcitrants around. "Filing Chapter 11 is a scary thing, but not nearly as much as Chapter 7," says Siegel. US Airways sought a second round of concessions in December; the pilots again led the way, agreeing to major work-rule changes. Now the pilots are grumbling because Siegel terminated their pension plan, eliminating a $2 billion shortfall and clearing the final hurdle out of Chapter 11. But many others are cheering. "David Siegel knows where he's going, and he's tough," says Frank Jay, a Houston-based executive recruiter for the industry.

Compare Siegel with United's Glenn Tilton, the former vice chairman of ChevronTexaco, who replaced interim CEO Jack Creighton last September. Tilton delivered swell pep talks to the demoralized workforce, but this oil-industry lifer knew too little about airlines to take decisive action and was too nice a guy to play hardball with union leaders. He allowed United's application for vital federal loan guarantees to be dictated by what labor was willing to offer in pay cuts ($6 billion) rather than what management felt was required ($9 billion). "Tilton is good with people, but that's not what they needed," Jay says. "They need somebody to kick ass and take names."

The Air Transportation Stabilization Board (ATSB), which administers the industry's bailout fund, found United's cost cuts too low. On Dec. 4, the ATSB rejected United's application for $1.8 billion in federal loan guarantees, forcing United to file for Chapter 11 a few days later. The company foresees another 18 months in bankruptcy.

Another key difference between today's United and US Airways is union power. Because a 1994 employee stock-ownership plan (ESOP) gave United's pilots and mechanics unions board seats and employees 55% ownership of parent UAL, the carrier's union leaders think of themselves as the true bosses. And they have an odd notion of sacrifice. Unions have so far agreed to only $70 million a month in interim pay concessions--a fraction of the required payroll trimming. Some bumper stickers in employee parking lots say FULL PAY TO THE LAST DAY.

The unions at US Airways had no such ideas. With their employer operating in secondary hubs like Pittsburgh and long hanging on for dear life, the workers were plenty receptive to credible management with a clear plan. "US Airways had been told for the last three or four years, 'You're the next Eastern,'" says George Hamlin, an airline consultant based in Washington, D.C. "Siegel has taken his troops through a positive, near-death experience. At United people are still in a grieving process."

Does United, whose debt load is now $21.5 billion (vs. $7.5 billion for US Air), have a future? "There's no remote chance of [Chapter 7]," Tilton insists. "There's far too much opportunity and far too much improvement that's within our control." He cites the airline's still-vast route network, its recent bold (and, he claims, successful) business-travel fare cuts, its plans for a new and separate discount-airline subsidiary, and its progress in negotiations with unions and creditors.

But United's relationship with labor is still frosty: The unions recently denounced the discount-airline plan as an attempt to shuttle their members into lower-paying jobs. And United is taking a very hard line in trying to wrest concessions from lenders and aircraft lessors, according to people close to those talks. That's risky, considering how many of those parties have US Airways as a basis for comparison. US Airways "went into bankruptcy with a very specific plan," says James Tussing, a lawyer representing some United creditors. "They established a degree of credibility with creditors that United hasn't."