"Can United Rise Again?"

Wednesday, June 26, 2002

Can United Rise Again?
The airline claims a $1.8 billion loan guarantee and a three-year employee
pay-cut package will help it get back on its feet
NEWSWEEK MAGAZINE


     This week, the nation's second largest carrier, United Airlines, asked
for a whopping $1.8 billion in federal loan guarantees-by far, the largest
request since Congress established the airline aid program after the
September 11 attacks.

     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.

 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/cgi-bin/dcforum/dcboard.cgi?conf=DCConfID8

*****************************************