It is the fourth and largest major carrier to apply for a portion of the $10 billion in loan guarantees Congress has made available to airlines that meet stringent financial criteria. But it’s debatable whether United’s request, filed just a few days before the June 28 deadline, will be approved.
Already, the Air Transportation Stabilization Board has turned down requests from two smaller airlines, and has given out just $380 million (to America West Airlines in December). It is still considering a request submitted earlier this month from US Airways, which asked for $900 million in loan guarantees to avoid bankruptcy, as well as applications from American Trans Air, Spirit, Evergreen and National Airlines.
Even if United’s request is approved, its long-term viability remains unclear. The airline lost $2.1 billion last year, the most ever by an airline. United has suffered from a sharp drop in business passengers as corporations have cut travel budgets and switched to lower-cost carriers. The airline, the majority of whose shares are owned by its employees, is also burdened by some of the highest labor costs in the industry. Last week, it was able to secure wage cuts of about $950 million over three years from pilots, management and salaried workers, but it does not yet have deals with mechanics-its biggest union-or with flight attendants. Will the airline stay afloat? NEWSWEEK’s Jennifer Barrett asked Jon F. Ash, a 35-year veteran of the airline industry (including 20 years with TWA) and founder of Global Aviation Associates, a Washington-based consulting firm.
NEWSWEEK: What are the chances United Airlines will get the $1.8 billion in loan guarantees it requested?
Jon F. Ash: First, you have to ask: do they really need it? The answer may be no. Though it doesn’t hurt to ask for it-there is $10 billion on the table. United has more than $2.5 billion in cash and marketable securities right now. Other airlines are not excited about seeing United secure lower-cost financing.
The second question that has been raised consistently with other applicants is whether they have a viable business plan that will allow them to significantly reduce costs and guarantee that they can pay back the loan. The business plan that they submitted contains very modest concessions and that is not something that the board has been enthusiastic about in the past. They have been looking for significant concessions specifically from labor groups, as that demonstrates that they are willing to make the necessary sacrifices to ensure long-term viability.
United-along with US Airways, which has said it will be forced to declare bankruptcy without loan guarantees-has the highest labor costs in the airline industry. How will that affect their chances of getting federal aid and of surviving over the long term?
They certainly do have the highest costs. That’s what happens when you have employees owning the airline and pilots driving the policy. There is an underlying governance issue here and I think the stabilization board is going to choke on that. The pay concessions they got are nothing for an airline of that size. Last year, the airline’s costs were about $6 billion-so, relatively speaking, we’re not talking about a lot of money here.
Will United’s mechanics and flight attendants agree to the necessary concessions?
Not likely. The mechanics have said they probably won’t play and the flight attendants have said they definitely won’t play.
So what happens if United doesn’t get the federal loan guarantee?
At that point, the employees, who own 55 percent of [UAL Corp., United’s parent company], really have to consider how they will assign stakeholders’ participation in restructuring to allow the company to be competitive. If they don’t fix the underlying structural problems, the company may be forced to take the Chapter 11 [bankruptcy] option. And what that does is flush all that equity down the drain-the equity the employees have acquired by taking pay concessions between 1995 and 2000. This really puts the burden back on the pilots and the mechanics, and they will have to fish or cut the bait.
In a letter sent to employees last fall, United Airlines’ CEO at the time, James Goodwin wrote that the airline was “literally hemorrhaging money” and warned: “Clearly this bleeding has to be stopped-and soon-or United will perish sometime next year.” Is that still a possibility?
I think that comment was probably a little premature and overstated. I don’t think that’s something we’re facing just yet. United has in excess of $2.5 billion cash and marketable securities, as well as its unencumbered assets. Unlike US Airways, it has time to fix its problems. And it has a great route network. But for its serious governance problems, United is potentially one of the strongest airlines in the world.
How have low-cost carriers like JetBlue and Southwest hurt its business?
Consumers and, in particular, business customers have rebelled against the price structure of major air carriers. That’s why we continue to see yields deteriorate [on major carriers]. The load factors might be there but there’s not the revenue. The business traveler has said he won’t pay $2,500 for a flight when he can go on JetBlue for $300. In the case of international travel, a seat in the back end of the plane can run $600 to $700 to London; but, in business class, it’s north of $7,000 round trip. The price-quality equation doesn’t work anymore. The business traveler is either staying home, using teleconferencing or searching for lower-fare alternatives. That increases the pressure on carriers like United and US Airways. United is dependent on business travelers, as are American and, arguably, Delta. The product was designed for the business traveler.
Under the current circumstances, that seems like a bad business model.
I think that’s what everyone is rethinking. Does the equation work-charging six to 10 times the airfare charged by low-fare carriers to go to the West Coast? And the answer they are being given is “No.” Now, the issue really is can the airline restructure the fare system? I think they are diligently looking at that, but so far there is no hard evidence that it is taking any strong measures.
Could United ever recast itself as a low-cost airline?
That would be very difficult. It’s hard for a major network carrier that grew up in a regulated environment and took on that baggage to all of a sudden turn into a Southwest or an AirTran which grew up in a deregulated environment. Those carriers are not limited by these massive and very expensive work rules, and they have designed a very streamlined, simplified product. United, and also American and Delta, have to play the game differently because they were dealt cards from 30 or 40 years ago. They are stuck with conditions-for example, the labor-agreements principle-and the hub network system where you basically operate from one power base. They can’t be reborn. But they can re-engineer and play to the power they do have.
UAL’s interim CEO Jack Creighton said this week that United is close to working out a code-sharing deal with US Airways, in which airlines would share one plane on a route using flight numbers for both carriers, that could generate more than $200 million annually. Do you think the deal is likely to go through?
It needs approval from the Department of Transportation, which is not likely to have a big problem with it. But the question is whether the pilots would approve something that lets them feed each others’ route networks. They will be asking: why would I want to feed their networks, why wouldn’t I want to fly their networks? So, time will tell. Though, clearly in many areas of the country, this deal would be complementary to each airline. This would mean they could fly over each others’ networks, and they would presumably be taking food off other airlines’ tables and not each others'.
United and US Airways are definitely struggling-and more than a half dozen other airlines have applied for federal aid, as well. What airlines are doing well?
Southwest is definitely No. 1. Then JetBlue would be behind them. After that, we’re probably looking at AirTran, Continental and then Delta, which looks good, relatively speaking. Of course, everything is relative these days.
