Bust and losing billions – yet United plans to fly on

United Airlines yesterday bowed to the inevitable and filed for bankruptcy protection, making it the largest failure in the airline industry to date and among the top 10 collapses in corporate history.

The Chicago airline, with losses expected to reach $2,5-billion this year and still haemorrhaging $7-million a day, said the Chapter 11 filing — through which companies seek court protection from creditors while restructuring is agreed — was the only way to keep the world’s second largest carrier in the air.

United, founded in 1931, was eager to underline that it was ”business as usual” for passengers — all tickets would be honoured and travellers unaffected by the financial crisis. A loss of customer confidence could spark a damaging spiral for the stricken airline.

There are chilling precedents. The most recent period of turmoil faced by the industry, at the beginning of the 1990s, left only two of the seven airlines that filed for bankruptcy protection, Continental and America West, still flying.

United said it secured $1,5-billion of debtor-in-possession financing to ensure it can continue trading while the business is restructured. The bankruptcy is a bitter blow for the management, who had hoped to stave off collapse with a plan to save $5,2-billion through wage cuts by 2008. Glen Tilton, the chief executive, yesterday said that during the Chapter 11 process United would go ”further and deeper in our efforts to reduce our costs”.

Thousands of jobs are expected to go in addition to the 20 000 announced after the September 11 terrorist attacks last year, and dozens of routes are likely to be axed. United has a workforce of 83 000.

Analysts say United can only survive in a slimmed-down form: ”A lot depends on the unions,” said one. ”They need to concede a lot more. They’ve been reluctant so far but they must realise that Chapter 11 is one step away from going bust completely.”

United ran out of options last week when a US federal agency turned down its request for a loan guarantee of $1,8-billion; the agency said it was unconvinced by the restructuring plan United was trying to put in place — and that providing a loan guarantee would simply be throwing good money after bad.

Tilton, who took over in September — the third boss in 12 months — had been working with the unions on proposals to extract wage savings of $5,2-billion. He had reached agreement with pilots and flight attendants but mechanics were more intransigent. A vote on whether to accept a renewed offer was cancelled after the loan guarantee was turned down.

The airline faced $875-million in debt repayments later this week that would have effectively cleaned the business out of cash.

The bankruptcy spells the end of an ill-fated experiment in employee ownership, lauded by the Clinton administration when it was introduced in 1994. In what was an earlier attempt to regain control of the bloated cost base, the pilots and mechanics but not the flight attendants agreed to $4,8-billion in pay cuts and work rule changes in return for 55% of the company. Five years ago, when the shares were $100 apiece, that must have seemed like a good idea. They are now virtually worthless. The shares were down further at about 82 cents yesterday, and the New York stock exchange said it was reviewing the company’s listing. NYSE rules state that shares on the exchange usually have to be valued above $1.

The unions also gained three positions on the board, which critics said caused internal friction and gave the unions the power to veto difficult decisions.

United is not unique in facing losses. South West, the discount airline, was the only significant US player to record a profit this year and the combined effects of the terrorist attacks and weaker economy have wrought turmoil in the industry. US Airways is already in bankruptcy and some smaller airlines have gone bust.

The problems facing United, with its high cost base and history of labour disputes, have been apparent for some years, and many industry experts have blamed the ownership structure for a slow response to its current trials.

Judy Bishop, who runs United in Europe, the Middle East and Africa, played down the internal conflicts, insisting the airline’s problems were not of its own making. United, she said, had traditionally concentrated on business customers, leaving it particularly vulnerable to the downturn in expense accounts.

United’s strength on the US west coast also meant it suffered in the deflation of the dotcom bubble as Silicon Valley executives flew less frequently.

”This isn’t the end for us,” she said. ”This is just time out — a breathing space while we restructure. It allows us to reorganise and make United a better company, which will be more viable in the future.”

Morale, she said, remained solid. ”The staff are taking the news rather well. We’ve been preparing them all along for the idea that this possibility might exist.”

Yesterday Tilton said the airline would examine every element of the business and conceded it needed to ”broaden its appeal” to take on the low cost airlines. There were fears among rivals that United could slash the price of transatlantic tickets to bring in revenue, potentially damaging European carriers including BA and Virgin Atlantic.

One BA source said: ”The biggest fear here is that they’ll dump capacity on the Atlantic at unreasonably low fares, which would tilt the already biased playing field further in the direction of the American carriers.” The United filing’s impact was also felt elsewhere: from Boeing, the plane maker, to EDS, the computer services group which yesterday warned that profits in the fourth quarter would be 10% lower due to the bankruptcy.

Lufthansa, the German airline and a partner in Star Alliance, through which tickets can be transferred, has held out the possibility of providing loans and ground support, or even taking an equity stake in United. It is concerned that without the US operator, it would lose access to business transatlantic travellers.

Tilton said he expects United to emerge within 18 months a ”stronger, healthier and more competitive airline”. This optimism sounded thin as United capped probably one of the most miserable years in American business history. – Guardian Unlimited (c) Guardian Newspapers Limited 2001

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