Ripple effects of an airline's woes

United mounts final effort to avoid bankruptcy in a changing industry.

For several months, managers have handed out "United Will Stand" bumper stickers to the employees of the nation's second-largest airline. Now the carrier that coined the term the "Friendly Skies" is in a last-ditch battle to make the stickers come true.

Losing money at the rate of $5 million to $7 million per day, the airline is desperately trying to get steep employee concessions and government loan guarantees. Even if United gets the help, some analysts believe it will be forced into Chapter 11, like US Airways.

But a bankruptcy filing by United would be much larger, effecting 83,000 employees and a route structure that stretches from coast to coast. United's problems could ripple over to hundreds of vendors and scores of airport authorities since the airline is dominant in such cities as Chicago, Denver, and San Francisco. Airplane manufacturers like Boeing could see fewer orders. Moreover, what United ultimately does may result in significant changes in the entire airline industry - from how much it charges to how it operates its route systems.

For flyers, bankruptcy will mean at least some inconvenience. But, for the most part, it will not keep travelers from getting anywhere over the holidays. United will keep flying even if it is forced into bankruptcy.

"We have a pretty robust system and if we lose even one carrier, even if it's a big one, it will keep going," says Darryl Jenkins, director of the Aviation Institute at George Washington University.

United is negotiating for $700 million in wage cuts over five years from the International Association of Machinists (IAM) union, which rejected the wage rollback last week. The airline has already won concessions from pilots, flight attendants, and baggage handlers. The IAM leadership is now trying to convince the membership to reconsider.

Monday, United said the machinists will vote on a revised offer on Thursday. The airline hopes that the union concessions will help convince the Air Transportation Stabilization Board to guarantee new loans.

Yet Mr. Jenkins, for one, doubts United can win the board's backing. "First United said they didn't need the loans, and now they don't have much respect from the people at the board," says Jenkins.

Roots of the problem

No matter what happens to United, the airlines are dogged by a much deeper financial conundrum. While the current recession and the impact of 9/11 have taken their toll on the nation's airlines, the industry's woes started a year before the terrorist attack. The airlines' entire financial structure is based on the premise that business passengers will pony up far more to fly on the spur of the moment than leisure fliers who book well in advance.

Throughout the booming 1990s, business travelers paid as much as five times more than leisure travelers for the same seat. While they made up 8 to 10 percent of the major carriers' passengers, they accounted for as much as 40 percent of their revenues. The entire hub-and-spoke system, developed after deregulation, was designed to attract and keep business travelers happy by providing more frequent flights to more destinations.

But there was a price. It costs more to run and maintain such a system than a destination-to-destination structure, the kind low-cost carriers such as Southwest instituted with great success. It's the only major carrier that has continued to make money through these tough times.

When the recession first hit in 2000, business travelers started to balk at paying high prices. They flew far less frequently, and when they did travel, they looked for lower-priced options, using everything from the Internet to discount airlines to Amtrak's high-speed train in the Northeast.

The major carriers' revenues plummeted, but they were still left with the higher costs associated with their network systems. While the carriers experimented with a few changes to their fare structure and restrictions - such as doing away with the Saturday night stay on some busy business routes - most have kept their fare structure essentially the same, hoping that when the economy recovers, business travelers, with their thick wallets, will be back.

But many analysts believe that may be wishful thinking. As a result, companies like United face a bleak future unless they can revamp their financial structure.

"Their cost structure is simply out of step with the cost structure that it's going to take to attract travelers back to the industry," says Clint Oster, an aviation expert at Indiana University in Bloomington.

Earlier this month, American Airlines became the first big carrier to begin addressing the problem. It released a streamlined fare structure that significantly reduces the gap between what leisure and business flyers pay. "That's the first sign of a major network carrier facing up to that reality," says Mr. Oster. "I'm surprised the other major carriers didn't jump in and follow suit."

United and American share many routes, and over the next few months analysts will be watching to see if American's new fare structure attracts some of United's business travelers. While Oster notes that the threat of bankruptcy could also send some passengers to other airlines, he says Americans are used to flying on bankrupt carriers.

Emerge stronger?

USAirways is operating under Chapter 11 protection and recently produced one of the best on-time performances of any of the majors. In the early 1990s, Continental went bankrupt and emerged a stronger carrier. But not all have done as well. Eastern Airlines, which had worse labor relations and less adept management, was forced to liquidate.

In Eastern's case, it was the recalcitrance of mechanics that helped finally do it in. That's one reason United is working hard to get their mechanics on board. But it's proving to be a tough sell. Some machinists are passing out bumper stickers of their own that say "Full Pay to the Last Day."

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