Pension ruling boosts United, but also raises new strike risks

United Airlines won a key victory this week in its bid to emerge from bankruptcy when a judge ruled it could default on its pension obligations. That's expected to sweeten the deal for badly needed potential investors.

But that win comes with significant costs, the highest of which may turn out to be employee morale. Already battered by record layoffs, pay and benefit reductions, and increased hours, many employees now also feel betrayed. The pensions they've worked years for will now be significantly reduced. That's stoking more talk of strikes, which could scare off those badly needed backers.

So, as the bankruptcy court in Chicago now considers whether United can also abrogate its contracts with some of its unions - another potential flash point for a strike - the nation's second-largest carrier finds itself on firmer ground, but still in a precarious position.

"The worst may be yet to come, unfortunately," says airline analyst Robert Mann of R.W. Mann & Co. in Port Washington, N.Y. "If you're a hedge fund or a prospective financier, you look at your partners who are the employees, and you wonder if you can trust these folks to play along, or do you have to worry that they're going to essentially go over the hill and withhold their services."

Other analysts are more sanguine, noting that since the major carriers went into their tailspin in 2001, employees have been remarkably gracious in accepting dramatic reductions in their compensation. That's a sharp departure from the early 1990s, when threats of cuts prompted the mechanics union of Eastern Airlines to walk out, a move credited with helping to push the carrier into liquidation.

"People have been surprised by the relative harmony despite all of the cutbacks and changes: This is unprecedented what the airlines have done with their employees," says Kevin Mitchell of the Business Travel Coalition in Radnor, Pa. "But everybody should be somewhat cautious on this because now you're messing with pensions, the last thing worth hanging in there for, and so anything could happen."

United also faces some new and unexpected financial hurdles. While much of the press has focused on the pension default, last week a judge also ruled against the way it had intended to pay for its leased aircraft. The result is that as many as eight of United's 767-300 jets could be repossessed and about 175 planes will end up costing the airline more than it had expected.

"The impact of this will be higher costs for aircraft than they'd anticipated," says Mr. Mann. "That's another factor to consider. It's not a foregone conclusion that they will emerge from bankruptcy."

Other major carriers are watching all of this closely. If United does succeed in emerging from bankruptcy, analysts expect that will put pressure on other carriers - mainly American and Delta - to abandon their traditional pension plans as well.

If that happens, the Pension Benefit Guaranty Corporation, the government agency that takes over once a company defaults, could end up insolvent as well. And that could leave the American taxpayer footing the bill for a massive bailout that some analysts predict would be bigger than the savings and loan fiasco of the 1970s and 1980s.

But many analysts are withholding judgment before predicting those pension dominoes start to fall.

"Everyone is saying if United does pull this off, other airlines will have to follow," says Mitchell. "But the conundrum for other airlines is that to rid themselves of their pensions ... they almost have to go to the precipice of financial disaster before they can get something like this accomplished. What a mess that would be."

FOR now, United is focused primarily on getting out of bankruptcy. And many employees are doing their best. In fact, a strike is the last thing they want. They're fed up with management and the unions. They just want the company to survive.

One pilot, who's not authorized to speak to the press, notes that despite 9/11, the SARS outbreak in Asia, two years in bankruptcy, and huge personal losses, United's employees continue to carry 173,000 people on more 1,500 flights a day.

"And through it all, we've served our customers faithfully," says the pilot. "Most of us are just focusing on doing our jobs because we have to. It's the most important thing getting people from one place to another safely. This is just another bad day. But we've demonstrated that we can get through them."