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.

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.

Antiquated business plans

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.

Effect on customers

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.

The company has already said it will preserve its frequent-flier program. Some analysts are suggesting that they'll also be forced to lower fares in the short term to keep passengers flying.

"One of the things you try to do is preserve customer programs," says lawyer Alan Gover, who worked on the bankruptcy and is a partner at Dewey Ballantine, LLP in Houston. "Your future depends on the loyalty of customers."

To keep customers happy, the company needs to have the cooperation of all its employees. And that will be a challenge. United's unions are angry. In 1994, in another effort to save the company, they gave almost $5 billion in wage concessions in exchange for 55 percent of the stock.

But experts say the employee-ownership experiment never took hold

Instead of the unions winning a sense of ownership and control over the company's operating procedures, they were closed out of key management decisions, such as the company's expensive and failed bid to buy US Airways in 2000. But the unions were able to wield their clout to negotiate some of the highest wages in the industry.

In bankruptcy - expected to be filed as early as yesterday - their stock will become essentially worthless and they could be forced to give back their recent wage gains.

"That's the Catch-22. They're not going to be happy campers," says Richard Gritta, a transportation expert at Portland University. "And if they're not happy campers, they're not going to be smiling and patting people on the back."

Some analysts contend that employee discontent could sink the company. For instance at Eastern Airlines, angry mechanics refused to make certain concessions, helping to force the company into liquidation in the early 1990s.

Some observers blame the rejection of wage concessions by United's mechanics for the Air Transportation Stabilization Board's (ATSB) decision last week to deny the company $1.8 billion in loan guarantees. But the ATSB made it clear in its denial that management's reorganization plan was unrealistic.

A smaller, nimbler United Airlines?

Still, Prof. Gritta and others believe that United Airlines will emerge from bankruptcy because of its market power, brand name recognition, and international reach. But it will be a smaller company, shrunk by as much as 20 percent.

It has already trimmed 20,000 jobs and expects to lay off another 9,000 employees in the coming months. Its fleet has been reduced to about 543 planes, down from a peak of 640. And, the airline is likely to try to limit its planes to one manufacturer.

"You need one kind of plane to maximize profits," says John Wensveen, a professor of airline management at Embry-Riddle Aeronautical University in Daytona Beach, Fla. "It cuts down on the number of parts and the number of mechanics you need."

That's just one of the innovations that Jet Blue and other lower cost carriers have come up with that the majors must now try to adopt if they are to survive.

Staff writer Ron Scherer in New York contributed to this report.

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