"UAL woes years in making"

Tuesday, October 29, 2002

UAL woes years in making
BY TAMMY WILLIAMSON
The Chicago (IL) Sun-Times


In January 1987, former UAL Corp. chairman Richard Ferris complained United
Airlines workers' salaries were "higher than any of its competitors," after
announcing the company lost $11.6 million in 1986.

Ferris was shown the door later that year amid lousy financial results and
disgruntled investors. He'd be followed by a number of UAL chiefs who would
contribute their parts to what Elk Grove Village-based UAL is today, 15
years later: an airline in a whole lot of trouble.

UAL, the second-largest airline in the world, reported this month it lost
$889 million for the three months ended Sept. 30--77 times the 1986 loss.

UAL, which lost $2.1 billion last year and which many industry analysts
consider the airline most likely to appear in bankruptcy court, has been
building to this point for years.

Agreeing to pay workers some of the highest wages in the business amid years
of labor strife, loss of business to its thriftier competitors and a
devastating falloff in passenger traffic since Sept. 11 have all put UAL in
the position of fighting for its life--and fighting to stay out of
bankruptcy court.

"It's a business where the costs can be masked over when there's an economic
boom," said Sam Peltzman, a senior economics professor at the University of
Chicago Graduate School of Business. "That's when you have business people
walk up to the counter, say, 'I need to get to New York now,' and United can
say '$1,000,' and they've got takers. When the economy turns south, these
high-cost carriers lose buckets full of money."

Most all of the nation's airlines are in trouble. In the third quarter ended
Sept. 30, Dallas-based Southwest Airlines was the only major U.S. airline
that turned a profit. But UAL is in the most precarious condition of the
major airlines, analysts say--other than US Airways, which is already in
bankruptcy reorganization.

"The biggest problem is United has high costs with an unfavorable mix of
business and leisure traffic, without a strong base of full-fare traffic,"
said Joe Schwieterman, a transportation expert with DePaul University and
former United Airlines pricing and strategy executive.

United's hubs in Denver and Chicago face heavy competition, with American at
O'Hare, Frontier Airlines in Denver, Northwest in Detroit, and loads of
discount carriers at Midway Airport.

United Airlines' well publicized woes in 2000 with on-time performance,
unappetizing meals and other aspects of its service--which it has since
improved--sent some customers into the arms of competitors.

"Unlike other airlines that have near-monopoly conditions at their major
hubs, United seems to face low-fare airlines at every turn," Schweiterman
said.

UAL has refused to give up, arguing that the United States can't afford the
loss of an American-flag airline more than United's shareholders can afford
to see what's left of their investment wiped out in bankruptcy court.

Last June the company applied for $1.8 billion of federal loan assistance
from the government, and today awaits a decision. This month it revised its
business plan before the Air Transportation Stabilization Board, after
reaching an agreement with a group of its unions to cut $5.8 billion of
costs over 51/2 years.

Now, it's working with its unions individually for cuts, a task it must
handle delicately.

Workers believe they have made plenty of sacrifices, such as agreeing to an
employee stock-ownership plan in 1994 that resulted in 55 percent of the
company's stock in the hands of its employees. What was supposed to force
employees to identify with management in fact has resulted in dozens of job
actions since then ranging from slowdowns, sick-outs, work-to-rule
enforcements and outright strikes.

"Employees are as skeptical as they are concerned," said Frank Larkin,
spokesman for the International Association of Machinists and Aerospace
Workers, which represents mechanics, baggage handlers and other workers. "A
lot of employees feel they've stepped forward before to ensure the survival
of United. There is no sense of denial on the part of what's going on. This
one has a life and death feature to it."

Debt burdens once-mighty airline

With UAL Inc. shares selling for $2.50 apiece yesterday, an investor
theoretically could buy the world's biggest airline for $142 million and
change.

What that investor would receive would be 540 jets that daily fly to 130
U.S. cities and 27 foreign countries, plus a free-lance air service called
United Shuttle that operates 455 daily short haul flights in the west.

The airline didn't always come that cheap. In 1997, the stock sold for more
than $100 a share, and earlier this year, it still commanded nearly $18.

A stalled economy in the wake of 9/11 has left United with huge fixed costs
and depleted revenue, resulting in a loss last year of $2.1 billion on
revenue of $16.1 billion. And things look worse for this year.

Meanwhile, United is facing a bill of nearly $2 billion from its debt
holders, due in November and early next year, and it doesn't have the cash
to meeting its obligations.

It's asking the federal Air Transportation Stabilization Board to guarantee
$1.8 billion so it can secure a $2 billion private loan to meet its debts.

Whether United can persuade the board to make that guarantee will determine
whether United can survive to fly another day or end up in bankruptcy court
for reorganization or outright liquidation.

UNITED'S LEADERS, LOSERS

No one culprit brought United Airlines to where it is today, on the brink of
bankruptcy.

But a roster of public and private sector players have had major roles since
the airline made its debut April 6, 1926, when Walter Varney launched
contract air mail service between Pasco, Wash., and Elko, Nev., by way of
Boise, Idaho. Among them:

Hugo Black. As a U.S. senator from Alabama in 1934, Black engineered passage
of a law prohibiting airlines from owning aircraft or
equipment-manufacturing facilities. That forced United to divest what would
become Boeing Co., and deprived the airline of a crucial source of low-cost
supply and revenue.

Harry S. Truman. As president of the United States in 1952, Truman
intervened in the first major strike at United by the Flight Engineers.
Management got the message that if it settled for high-cost contracts, it
would receive near-monopoly protection on routes and service.

George Keck. Led United to a pool of red ink in 1970 after premature
introduction of the Boeing 747 and loss of marketshare on the once-lucrative
Hawaii route. Also OKd the 1970 acquisition of Westin International Hotels.

Edward Carlson. In 1970, he began a string of six or seven disastrous CEOs
and presidents drawn from the hospitality or car-rental industries. He added
Hilton Hotels to United's portfolio.

Dick Ferris. Another innkeeper, Ferris engineered acquisition of Hertz Corp.
in the '80s and changed the company's name to the impenetrable Allegis Corp.
in pursuit of synergy that never existed.

Stephen Wolf. Although he jettisoned the Allegis name in 1987, Wolf was the
most disliked CEO in the airline's history. He led United to $1.4 billion in
losses and hammered labor-management relations to a low from which it still
hasn't recovered, despite signing contracts that made United employees the
highest paid in the industry.

Rick Dubinsky. The head of the pilots union throughout the 1990s, Dubinsky
harbored a personal animosity toward Wolf, poisoned labor-management
relations and obstructed efforts to reduce operating costs through work rule
changes.

Gerald Greenwald. Former Chrysler Corp. exec, the new CEO personally sold
employees on the idea in 1993 of trading part of their salary increases for
55 percent ownership in an Employee Stock Ownership Plan. Despite turning in
three successive record years ending in 1997, Greenwald was ousted by
disaffected machinists and pilots through the ESOP.

Osama bin Laden. His Sept. 11, 2001, attack on the United States sent
airline passenger traffic into a tailspin, devastating United's revenue
projections and bringing the company to the brink of bankruptcy and possible
liquidation.

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