CHICAGO, Dec. 9 (UPI) -- United Airlines is likely to emerge from Chapter 11 bankruptcy a much different company than the once proud "friendly skies" carrier that had ambitions to merge with U.S. Airways and become the world's largest airline two years ago.
The former aviation industry leader will be a smaller, value-conscious airline, focused more on bargain-hunting economy customers than the first-class business travelers who once shelled out $3,000 to fly coast to coast on short notice. Realities of a post-recession economy have put a halt to that kind of corporate spending.
Hampered by the industry's highest labor costs for pilots and mechanics and tough union work rules, United told a federal bankruptcy judge Monday it could not compete with low-fare carriers such as Southwest Airlines. United will continue to operate a full schedule, at least through the Christmas-New Year's holidays, then big changes are likely. Mileage held by frequent flyers will be honored but there will be fewer seats on fewer flights.
"United has enormous global reach and has far more momentum for its recovery than the (other) airlines," said Alan Glover, an attorney who has served as lead counsel in various bankruptcy proceedings. "Once they rationalize their cost structure, I'm sure their business plan is designed to put them back into economic health and try to retain and recover their market position with their passengers."
Employees can expect more layoffs, smaller paychecks and a smaller airline.
To accomplish that, United will have to cut jobs, reject leases on larger planes in its 631 aircraft fleet, selectively cut service in some markets, scrap unprofitable international routes and reduce non-stop long-haul flights.
Continental successfully emerged from Chapter 11 twice and America West reorganized once, but Eastern Air Lines, Pan Am and Midway are among those that did not survive. U.S. Airways went under bankruptcy protection after federal regulators quashed an $11.6 billion merger with United.
Rival American Airlines, also saddled with high labor costs in a changing industry, has asked its employees for $3 billion in givebacks.
United blamed its woes on the unprecedented travel slump after Sept. 11, 2001, when two of its jetliners were hijacked, but the carrier was in financial trouble before 2001, when it lost $2.1 billion, and its problems were exacerbated by the terror attacks. A summer slowdown by disgruntled pilots who refused overtime during bitter contract negotiations alienated customers the previous year.
United had lost more than $2 billion this year and was on track to lose $2.5 billion, more than a quarter of expected industry losses of $8 billion to $9 billion.
Chairman, President and Chief Executive Officer Glenn F. Tilton said United must broaden its appeal to the customer and reevaluate the business "soup to nuts."
"Service can only get better now that it's in Chapter 11. We have an absolute, unequivocal focus on the customer," Tilton said as he shook hands with customers and hugged employees in the United Terminal at O'Hare International Airport, where the hometown airline is responsible for 49 percent of the traffic. United had about 20 percent of the U.S. aviation market with hubs in Chicago, San Francisco, Denver, Los Angeles and Washington.
The airline has 18,000 employees in the Chicago area where it remains a name brand with a reservoir of loyal customers and local goodwill.
"What we are saying to employees is that we should consider this for employees and United, Chapter One," said Tilton, who took over the reins at United 90 days ago.
"We expect to go through the process in 18 months and we think we will be successful in turning the company around," said Jake Bace, chief financial officer.
In August 2001, United had more than 103,000 employees and operated some 2,400 daily flights. It had 1,800 flights with a workforce of 83,000 before filing for bankruptcy, the largest ever in the aviation industry and the seventh-largest U.S. bankruptcy ever.
United planned to run full-page ads in major newspapers Tuesday reassuring travelers that it will keep flying as it restructures under court supervision.
The Chapter 11 filing buys the struggling carrier protection from creditors and time to reorganize, but every aspect of its business plan must get formal approval from a federal bankruptcy judge. The 55 percent of UAL shares in the employee stock ownership plan will be virtually worthless unless United gets back on its feet. However, the judge also could dissolve the ESOP.
The court will approve wage cuts, changes in work rules and schedule cuts and could order changes in the UAL board. Unions hold three seats on the board.
"If you go bankrupt you eliminate your debts," said Joel Goldhar, professor of technical management at the Stuart School of Business at Illinois Institute of Technology. "If they had funded their growth with equity they would be cash flow positive. They were over leveraged. Live by debt, die by debt. It's no different than (an) individual's stock account if you are on margin.
"Companies come and go all the time," he said. "It (bankruptcy) doesn't mean United will disappear. It will simply operate in bankruptcy. Financial condition is not the same as operating condition. The problem is providing (employees with) incentives to work hard."
Changing the 1950s corporate culture of the 76-year-old carrier could prove as difficult as turning a profit.
"(At United) labor was still labor and management was still management (despite the ESOP). Labor never got to vote out management. I don't think they could say let's go issue stock and sell new stock at new equity to buy this aircraft," said Goldhar. "They were never in a position to really affect the cost structure except as individuals but (there were) no rewards as individuals."
The airline announced plans to furlough 352 pilots Dec. 3 and said it would lay off another 1,000 flight attendants as it cut flights another 6 percent. United announced 9,000 job cuts last month and will have fewer than 74,000 employees worldwide in 2003.
Industry analysts say a 10 percent to 12 percent flight reduction is more realistic. However, United does hold profitable Pacific and Asian routes.
Lufthansa, United's European partner, said it was looking for ways to assist United.
The Association of Flight Attendants, which agreed to $412 million in givebacks as part of $5.2 billion labor cost reduction plan, issued an angry statement blaming past UAL Corp. management, the travel industry slump and lobbying by rivals American and Continental airlines for United's bankruptcy after the Air Transportation Stabilization Board rejected $1.8 billion in federal loan guarantees.
"It wasn't long ago that United Airlines was the biggest, best airline in the world. But a number of very poor decisions by recent CEOs, the loss of $20 billion in revenue among the major network carriers in our industry and the unethical collaboration between the Air Transportation Stabilization Board and some other airlines who stand to gain if United fails, combined to result in our carrier's bankruptcy filing," the AFA said in statement.
With no federal bailout and more than $920 million in loans due this week, United had no choice but to file for bankruptcy or risk being grounded. The Elk Grove Village, Ill., carrier lost more than $4 billion in two years and was burning through its remaining $800 million at about $9 million a day.
Sen. Dick Durbin, D-Ill., said the bankruptcy was a "terrible tragedy."
"I regret that the federal government, specifically the ATSB, refused to play a more constructive role in stabilizing United -- the nation's second-largest airline -- and protecting its nearly 80,000 jobs" Durbin said.
U.S. House Speaker Dennis Hastert, R-Ill., who lobbied for congressional support before the ATSB rejection, said he was confident United would get its financial house in order.
"While I'm disappointed, no one can say they are surprised by United's decision to file for bankruptcy. The fate of today's news was sealed last week when the ATSB refused to approve United's appeal for a loan guarantee."
(Marcy Kreiter in Chicago contributed to this report)