Whether United can continue to do so as it struggles to emerge from Chapter 11 is less clear. Chairman Glenn Tilton insists that the airline will continue to fly, and there’s no question that keeping service disruption to a minimum is in the best interest of both the carrier and its creditors. “United is clearly going to continue operations–at least in the short term. The last thing United would want to do is alienate its passengers,” says Daniel Kasper, a managing director at the economic consulting firm LECG and author of two books on aviation. “The stigma of airlines bankruptcies has gone away because it’s clear airlines can operate for quite some time under bankruptcy.”
As bad as bankruptcy is, other major airlines–notably, Continental, now the fifth largest carrier–have successfully emerged from Chapter 11 (though others, like Pan Am and Eastern, never did). If United is able to hold onto its passengers and its routes, but at the same time lower operating costs, Kasper says, it could even emerge a sleeker, stronger airline and “a formidable competitor.”
But lowering operating costs and boosting revenues proved a challenge for United even before the Sept. 11 attacks, to which United attributes much of its losses. The airline has had only one profitable quarter since 1999, and it lost a record $2.1 billion last year.
The fallout from the terrorist attacks and lingering economic woes made the situation worse, cutting passenger demand across the industry and adding new security costs. United has the most comprehensive route network of any major airline, and a large and loyal customer base, say industry analysts. But the airline depended heavily on business-class travelers, so it suffered when companies cut back their travel budgets and executives postponed trips or cancelled them altogether in the aftermath of the attacks. As the economy improves, however, a boost in business-class travel usually follows suit. United is counting on it.
The carrier announced Monday that it had already arranged for $1.5 billion in financing from at least three different banks so that it can continue to operate while in bankruptcy, and it plans to continue flying throughout the estimated 18-month turnaround process. But keeping planes flying and passengers coming back won’t be the only challenge United faces if it hopes to survive.
Labor costs are by far the company’s largest expense. In the third quarter, United spent $1.8 billion on wages and related costs-about 42 percent of its total operating costs. That’s more than other major carriers, except US Airways, which filed for bankruptcy in August.
Despite cuts in its operating costs this year, United was still estimating losses of $2 billion or so for the year. Though pilots had made wage concessions, they were still earning about as much as those of other major airlines. The cost-savings plan that United filed to the Air Transport Stabilization Board, along with its loan-guarantee request, allowed pilot pay to begin bouncing back in just two years. When the loan guarantee expired in six years, analysts say the airline’s unionized employees would have been making about the same as they are today. That may be one reason the ATSB, which was set up by Congress to help the industry recover from losses related to the Sept. 11 attacks, turned down the airline’s loan backing request last week. One board member said the business plan “was not financially sound.”
Part of the problem is United’s unique ownership structure. The airline is 55 percent owned by its more than 80,000 employees. But their stock is now worth less than the paper it’s printed on, and it’s likely that United’s management will try and redo the ownership structure now. It also pledges to make more cuts in labor and operating costs. Last month, United announced the elimination of 9,000 jobs, and those who remain face a substantial cut in salary. Beginning next week, United pilots will lose about 11 percent of their annual pay; other employees pay cuts range from 2.8 percent to 10.7 percent. United says it will achieve more than $5 billion in labor savings over the next five years. But the arline can only cut so much more without the threat of a labor strike.
“I’m watching to see how labor and management are cooperating now,” says C. Thomas Nulty, president of the travel-management firm Navigant International. “If we start seeing picket lines, that to me is a sign that the end is near.”
On top of wage and job cuts, changes in routes and aircraft size might be necessary if the airline hopes to recoup some of its losses. Industry analysts say the average plane now flies at a 72 percent capacity but in order to break even 82 percent of seats must be occupied. Last month, United’s average flight was just 69 percent full. To increase the number, United will have to fly smaller planes, and, perhaps, shorter routes, or it will have to attract more passengers. That’s not an easy task, at a time when passenger demand is down industry-wide. Tilton, however, remains optimistic that the airline will emerge from bankruptcy–and that passengers and employees will stick with it through the process.
“I am confident that we can restore profitability and reestablish United as the world’s premier global carrier,” he said, after the bankruptcy filing. “Our best days are ahead of us.”
