United Airlines Files for Chapter 11 Bankruptcy Reorganization

U By James F. Peltz

united Airlines, once the nation’s most powerful air carrier but now drowning in red ink, filed for bankruptcy reorganization Monday – the largest in airline history.

The filing under Chapter 11 of the bankruptcy laws culminated a grueling, downward spiral at United that in the process eroded service, alienated many passengers, sapped employees’ morale and crippled the carrier with $21.2 billion of debt.

Compounding United’s problems is the deep slump in air travel that was exacerbated by the Sept. 11 terrorist attacks, which included two hijacked United jetliners. The slowdown reduced United’s income and helped low-cost, low-fare carriers such as Southwest Airlines eat away at the market share of United and others.

But many analysts contend that the post-Sept. 11 trauma to the industry mainly exposed structural weaknesses at United – namely its high operating costs and declining service – and accelerated their impact.

At the center of United’s downfall was an acrimonious tug-of-war between United and its powerful labor unions. Each side blamed the other for much of the airline’s swoon, which has left it unable to fund nearly $1 billion of debt payments that are now due.

Together, they staged a last-gasp effort to produce a recovery plan and keep the airline out of Bankruptcy Court. But it failed. Last week, the Bush administration rejected United’s bid for a $1.8-billion loan guarantee, making a bankruptcy filing inevitable.

The Chapter 11 filing marked the first step in revamping United, which will continue to operate while it develops a restructuring plan. Yet the carrier and its parent, UAL Corp., are expected to undergo significant changes in the coming months. Those changes are likely to trigger major shifts throughout the airline industry and in the choices available to travelers.

But for now passengers are unlikely to notice immediate changes because United, the No. 2 airline behind American, has vowed to keep flying its current schedule and maintain its frequent-flier program. The Elk Grove Township, Ill.-based airline carried 75 million people last year, but as it reorganizes it probably will shrink significantly and lay off more workers, analysts said.

United began the process Monday with an announcement of wage cuts for salaried personnel starting next week, including an 11 percent cut in executives’ base pay.

And there also is the prospect that large pieces of United, or even the whole airline, could be sold. Some of United’s routes, airport gates, aircraft and other assets could be divested to raise cash for the airline’s lenders and other creditors. Even a liquidation of United is not out of the question, analysts said.

California will be a pivotal region in the shake-up. United is the biggest airline at the Los Angeles and San Francisco airports, and several of its most heavily traveled routes involve those two cities. Nearly 23,000 of United’s 82,700 employees are in California.

Glenn Tilton, UAL’s chief executive, said California would remain central to the airline even if it drops some unprofitable flights. “The West Coast is a real core strength for United, and obviously is our window to the Pacific,” he said in an interview. “Even if we had to prune a route … we would protect the region.”

Like most airlines, United already has slashed its operations by about one-fifth to cope with the travel downturn. United now has about 1,775 daily flights around the world and 550 aircraft. Another major airline, US Airways, also has been operating under bankruptcy protection since August.

One immediate concern is how United’s employees will react to the turmoil of bankruptcy, and whether they can maintain a level of service that appeals to travelers. “Thousands of customer-service employees are likely to be distracted, angry and worried about their jobs and retirements,” said Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group for business fliers.

In the air, United’s pilots offered reassurance to passengers throughout United’s system. “The pilots want this company to succeed, not just survive,” said Paul Whiteford, head of the United branch for the pilots’ union, the Air Line Pilots Association.

The morale issue is acute at United because its employees own 55 percent of UAL’s stock, yet that stock now stands a good chance of becoming worthless with the company in Chapter 11. The stock finished unchanged at 93 cents a share Monday on the New York Stock Exchange.

The employees obtained their controlling stake in United eight years ago, when they made wage concessions in exchange for company stock and – in the case of its pilots and mechanics – seats on UAL’s board of directors.

Now, the employees will be asked to make new concessions that are even deeper than the $5.2 billion in total labor cuts that United proposed in its bid to get the federal loan guarantee. In addition to wage cuts for salaried personnel, the airline said it would soon seek wage cuts from union workers.

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United’s bankruptcy filing is an ignominious chapter for an airline that was once the nation’s largest and most profitable, a carrier whose “Friendly Skies” advertising jingle was nearly a household phrase. By the late-1990s, United not only boasted one of the best route systems in the world – with hubs in California, Chicago, Denver and Tokyo, among others – it also was riding the crest of the strong economy.

United was the airline of choice for business travelers, who thought little of paying $2,000 for a one-way domestic ticket to make a business meeting. That was especially true in California, as United exploited the fortunes of Silicon Valley computer companies and the plethora of “dot-com” firms that populated the state.

At its peak in 1998, United earned an operating profit (before one-time gains or charges) of nearly $1.5 billion on revenue that year of $17.6 billion. But as the new millennium dawned, the economy weakened and the technology “bubble” began to burst. Business travel began a prolonged skid whose severity surprised even veteran airline executives.

Ultimately, it was obvious that United’s labor and other costs remained much too high compared with the now-reduced level of travel, and compared with the much lower fares that business travelers and even leisure passengers were willing to pay. Of every dollar that United currently spends, 41 cents goes to labor.

When 2001 was over, United had lost an industry record $2.1 billion on revenue of $16 billion, and the airline has lost an additional $1.7 billion in the first nine months of this year. In its Chapter 11 filing, UAL listed debts totaling $21.2 billion and assets of $22.8 billion.