"In bankruptcy, United flies on"

Saturday, August 14, 2004

In bankruptcy, United flies on
Chicago largely unfazed by airline's Chapter 11 - so far
By MATT KEMPNER
The Atlanta (GA) Journal-Constitution


CHICAGO - So your city's primary airline - and a huge local employer -
files for Chapter 11 protection in bankruptcy court.

Disaster for travelers and locals? Hardly.
  
"We took a little bit of a dip," carwash owner Daniel Fuller says
hesitantly, if only because he says it really wasn't that big a deal for
him when United Airlines filed in December 2002. Though he is just a
mile from ground zero, United Airlines' headquarters in Chicago's
northwest suburbs, Fuller barely noticed a bump.

How United's 20-month-old bankruptcy has played in Chicago's suburbs and
O'Hare International Airport offers insight for Atlanta should its own
hometown carrier, Delta Air Lines, file for Chapter 11 as its financial
ills worsen.

If Chicago's experience is any predictor, people outside the company can
expect minor turbulence rather than shock waves from a Delta filing, at
least in the short run.

People in Chicago braced for far worse when they heard about United's
bankruptcy filing.

Business travelers considered rushing to use frequent-flier miles before
they became worthless. Chicagoans worried about a hit to an
already-damaged local economy.

Yet United flies on - which shouldn't be too surprising since that's the
whole point of a Chapter 11 case. The law is designed to enable
companies to work out financial problems behind the scenes while
maintaining business as usual.

Experts say the real impact will come less from United's decision to go
into bankruptcy court and more from how it emerges, if it does. Even
after nearly two years, that is still unclear.

Meanwhile, frequent-flier miles are still honored. Terminals are
crowded. And the company launched a new ad campaign and is repainting
its jets in a new design.

Inside the company, the picture isn't as benign. Employees are reeling
after taking sometimes steep pay cuts and dealing with the very real
potential that their retirement nest eggs will be fried.

EMPLOYEES

The airline industry is known for perpetual employee turmoil, but United
workers say their morale sank especially low in the last two years.

United shed 20,000 jobs after the 9/11 terrorist attacks and cut nearly
20,000 more after its bankruptcy filing, leaving it with 62,000
employees - almost 40 percent less than in its boom times.

Pilots say they have taken pay cuts of 30 percent to 40 percent. Flight
attendants and gate agents gave pay concessions, too. And unions agreed
to reduced medical and life insurance benefits for retirees.

"You work more. You are away from home more. You make less money. You
start asking yourself is this really worth it?" said Ed McMahan, a
38-year-old United first officer.

McMahan's stock holdings in the company lost $50,000 in value, he said.
He sold a camper, moved his family into a less-expensive home and joined
the Navy Reserves to get backup retirement benefits. McMahan is
considering a new career, perhaps in real estate development.

Such pressures are at odds with the need to improve service, and
sometimes the strain shows.

Mark Burkhart, a vice president for an Iowa software company, recalls a
recent flight on which a passenger got yelled at for not turning off his
cellphone fast enough.

"The flight attendant was literally screaming at him. That's not normal
for United. They are just generally more stressed if you have employees
who think they might lose their jobs," Burkhart said.

United employees say some colleagues are bitter but that most try to
find small ways to please customers and save the airline.

"People who work there have a new dedication to being efficient," says
Kit Darby, a United pilot who lives in Peachtree City. "Only when the
company is on the verge of bankruptcy do you get a lesson in this."

Pensions are an area of intense interest and controversy. One United
union last week called for a court-appointed trustee to replace
management after the company moved to suspend payments into pension
reserve funds.

If United terminates its pension plans, a quasi-federal agency would
make payments to retirees - but only up to certain limits that would
mean reduced benefits for higher-wage workers. Another option would be
for United to keep current plans but scuttle pensions for future
workers. Some analysts think Delta is already considering that step.

James Petri, who retired in 1997 as a computer support manager after 45
years with United, has put off thoughts of moving with his wife to
Hawaii. Worried friends, he says, have come out of retirement to work at
Home Depot or to drive hotel shuttle buses to and from O'Hare.

O'HARE AIRPORT

As in Atlanta, Chicago boosters and airport officials continue to push
for a massive renovation and expansion at O'Hare International Airport.

The expansion, bitterly fought by some nearby residents and businesses,
would make the airport's intersecting runways parallel, a move aimed at
reducing delays. Plans also call for a new terminal with up to 50 gates,
the extension of two runways and the addition of another. Bonds
financing much of the estimated $6.6 billion in work would be backed by
airport fees.

"The project is moving forward," says Rosemarie Andolino, executive
director of the O'Hare Modernization Program.

Andolino predicts that even the shutdown of a carrier such as United
would have only a short-term impact - five years or less - on traffic at
O'Hare. Other airlines would fill the void, she said.

But it would be a big hole. United had a 50 percent market share at the
airport last year and accounted for a quarter of O'Hare's operating
revenue, according to Standard & Poor's. By contrast, Delta and its
subsidiaries have about 78 percent of the Atlanta market.

For now, both O'Hare and Hartsfield-Jackson International get high bond
ratings from Standard & Poor's. Traffic at both is rising, and federal
officials are pushing airlines to cut back on flights at O'Hare this
summer to reduce delays there.

TRAVELERS

A strange thing sometimes happens to airlines in Chapter 11. They worry
more about pleasing customers.

United didn't have a stellar reputation for service before it filed for
bankruptcy protection. Delays, overbooked flights, high fares and
haughty employees were not uncommon, travelers say. Now, passengers
notice improvement.

United ranks second-worst among major airlines in on-time performance
since the government began keeping a database in 1987.

But as it teetered financially in 2002, it ranked No. 1 - as in the
best. In the last year, United has settled near the middle of the pack.

How much that reflects an overall service improvement is unclear, but
some say crisis can force improvement.

"They got religion in a big way," says Douglas Baird, a bankruptcy
professor at the University of Chicago who had stopped flying United
because of high fares and poor service.

Like other airlines, United reduced meal service after Sept. 11. When it
resorted to bankruptcy court, some travelers worried that more draconian
steps were coming. They feared frequent-flier miles would become
worthless, and some rushed to use them. But United made it clear early
on that its MileagePlus program would survive, a crucial carrot to keep
passengers flying.

While concerns about whether United will survive have diminished, they
haven't disappeared.

"I would not book an international flight way in advance" on United,
said Alan Heatherington, a musical conductor from the Chicago area.
"Absolutely not, because I would be afraid they wouldn't exist."

STRATEGY

Peter Janikowski lives across the street from United's corporate campus
near O'Hare, but he says he can't see any difference since the company
filed for bankruptcy protection.

"The parking lot is full," the 24-year-old sheet metal worker says. "If
something happened there, you don't notice it."

Likewise, United has made few big changes in basic operations. It has
gotten smaller in the past five years, logging 17 percent fewer revenue
passenger miles in 2003 than in 1999. But most of that has come not from
eliminating routes but from switching to smaller planes for some flights
or pruning schedules.

The airline still has connecting hubs in Chicago and Denver, a heavy
presence in California and the Northeast, and numerous international
routes.

If anything, the company has beefed up efforts to sell itself to the
public. United adopted a new paint scheme, giving its planes a brighter
look that the company says didn't cost any more because the planes need
regular painting anyway.

The company bumped up advertising spending in its first year in
bankruptcy and launched a new ad campaign. It also launched Ted, a new
unit with lower-fare flights aimed at leisure travelers. It is similar
to Delta's Song unit.

But it hasn't all been rosy. United slashed some operations, closing big
maintenance centers in Indianapolis and Oakland, Calif. While scrambling
for union concessions, it cut aircraft and lined up "debtor in
possession" financing to carry it through the Chapter 11 process.

While initially executives said they expected to pull the company out of
bankruptcy protection by this summer, the airline didn't get $1.1
billion in federal loan guarantees it sought. That will prolong the
case.

What the airline will look like if and when it exits bankruptcy court
still isn't clear. But it is important. United's future ultimately
depends on how it is reshaped and whether it can repair its finances
enough to be viable outside court.

One group almost certain to get the short end of the stick is
stockholders. Shares in parent UAL Corp. sank from over $30 a share
before Sept. 11 to a little more than $1.

As is common in Chapter 11 cases, UAL predicts the stock will be
worthless under any reorganization plan. Creditors often wind up owning
a big chunk of new stock in a post-Chapter 11 company.

ECONOMIC IMPACT

The area around O'Hare was hammered by the double whammy of the airline
downturn and a weak economy. But United's bankruptcy filing has yet to
noticeably dent the metro Chicago economy.

United has 16,000 employees in Chicago, making it the area's
14th-largest employer last year, according to Crain's Chicago Business.
That's about 2,000 fewer local employees than it had before its
bankruptcy filing and about 6,000 fewer than it had prior to the 2001
terrorism attacks, according to Crain's.

United's job cuts have been big, but they haven't made much of a splash
in such a big metro area, said George Putnam, an economist with the
Illinois Department of Employment Security.

Unemployment rates have improved in the Chicago area. And 85 percent of
local airline industry workers who sought unemployment benefits after a
bankruptcy filing have since been re-employed, many back in the airline
industry, Putnam said.

The area's housing market remains strong, and local officials say they
know of no United vendors that have shut down. Chapter 11 gives United
temporary relief from debts incurred before the filing, but it must pay
new bills promptly.

Charitable giving by United has remained about the same, according to
both the company and organizations contacted, though more of it is in
travel credits as opposed to cash.

Still, United's drive to cut costs has had some effects.

A local school district took a budget hit when United won a 14 percent
reduction in the tax assessment on its corporate facilities. The
district ended up paying a refund to United.

The change wasn't enough to cause school cutbacks, but United's
situation helped persuade voters to allow higher taxes to pay off debt.

EXIT SCENARIOS

It's one thing to file for bankruptcy. It's another thing to get out of
court intact. 

What is United's future?

The most likely scenario is that it eventually will exit Chapter 11 as a
major hub-and-spoke airline, though somewhat smaller, says Douglas
Baird, a bankruptcy professor at the University of Chicago's law school.

Another possibility - one other airlines including US Airways have
fallen into - is that United will leave court but remain so weak that
more restructuring and possibly even another bankruptcy filing are
needed, Baird said. Options he considers less likely are that creditors
will force a liquidation soon or that the airline will be bought.

If United collapsed, the impact on Chicagoland wouldn't be nearly so
gentle as it has been so far. Trish Johnson, a travel manager for
William Blair & Co., a Chicago-based investment banking firm, predicts
fares would soar with less competition.

"It would be ugly," she said.

United's space at O'Hare eventually would be filled by other carriers
such as American Airlines, which also has a hub there, predicts Peter
Glassman, a senior economist for Chicago-based Bank One.

Unemployment would rise for a few months, but many United employees
could probably get jobs with other airlines, though perhaps at lower
pay, he said.

Some corporations that have done business with United would take a hit,
including Bank One, a major lender, Glassman said. Still, he sees the
problems as mostly temporary and unlikely to diminish Chicago's heft as
a transportation hub.

"United does not equal Chicago. United going down does not mean Chicago
going down."


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