United's woes may reform airline industry
A shakeup in the debt-ridden company may ripple across the industry, leading to competitive cost-cutting.
Never before has an employee-owned airline declared bankruptcy, let alone one as big as United Airlines.Skip to next paragraph
Subscribe Today to the Monitor
But with losses of more than $7 million a day, a $1 billion debt payment due this week, and its cash reserves depleted, the nation's second-largest airline is now facing that harsh financial reality. It's one the company had contended - until as late as last week - it would avoid at all costs.
But many analysts believe that bankruptcy will be good for United and the nation's beleaguered industry as a whole. The company has some of the highest operating costs in the industry as well as a deeply flawed financial model. Bankruptcy will force a change in both.
As the company reorganizes, it will set a new standard in employee wage and work-rule concessions that is expected to force a round of cost cutting across the board. It's a change long overdue in the nation's major network carriers, say analysts.
"United will absolutely emerge from bankruptcy and they'll come up leaner and meaner as a competitor," says Aaron Gellman an aviation expert at Northwestern University in Chicago. "And the other airlines will have to compete with them."
US Airways - already in bankruptcy - is negotiating with its unions for a second round of wage and work-rule concessions. American Airlines has also put its unions on notice that if United's workers are forced to make deeper concessions, it will ask the same of its employees.
United and the other network carriers must also come up with a creative alternative to their current business model. For more than a decade, they have depended on business travelers paying as much as five times more for a seat than leisure travelers. Since the recession hit in 2000, experts have been warning that it's outmoded because businesses are loath to pay the kind of premiums they once did - especially when low-cost carriers such as Southwest offer a cheaper alternative.
But airline executives have balked at making major changes, hoping against hope that the economy would rebound, bringing back business travelers. So far that hasn't happened.
American Airlines is taking the most aggressive stance to deal with the new flying environment. It has already slashed the gap between fares and is experimenting with changes to its hub-and-spoke network to make it more efficient. Experts say that's something United and the other network carriers must also do.
"They need to continue to be a full-service airline that has the frequency patterns that are attractive to business travelers, but at fares that business travelers are willing to pay," says Clint Oster, an aviation economist at Indiana University at Bloomington.
For consumers the changes could mean slightly longer waits for connecting flights and less service on unprofitable routes. Still, in order to successfully reorganize, United also has to try to make the bankruptcy as painless as possible for customers.