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Extended Chapter 11 stay filed by United
United Airlines' efforts to reorganize in bankruptcy appear to be hitting some turbulence, industry observers say.
The nation's No. 2 carrier said Thursday in a filing with the federal bankruptcy court that it will need more time to complete its Chapter 11 proceedings.
Elk Grove Township-based United had expected the process to take about 18 months and was working toward an exit date of June 30.
United put on a confident face, saying prolonging its bankruptcy stay was not a sign of desperation.
"We need to take the time necessary to complete our restructuring methodically and systematically rather than emerge prematurely," said United spokeswoman Jean Medina.
Industry observers noted that it is not unusual for a company that has filed for bankruptcy protection to take more time to reorganize than first expected. But prolonging Chapter 11 proceedings isn't a good sign, they added.
"It tells you they are having a hard time building a plan that will be OKd by their creditors," said Todd Pulvino, associate professor of finance at Northwestern University's Kellogg School of Management. "It tells you that their assets are probably worth less than they hoped."
United, which filed for bankruptcy protection in December 2002, is waging a fierce struggle against smaller, lower-cost airlines. Since that time the carrier has cut labor costs by $2.5 billion a year, reduced aircraft ownership costs by $900 million a year and dropped some unprofitable routes.
Some observers said United still has a ways to go.
"They need to cut $4 billion out of their cost structure," said Frank Werner, associate professor of finance at Fordham University.
Raising fares isn't a viable alternative because of the competition, Werner said.
And United must resolve serious issues that threaten its future.
The airline has yet to win government approval for a $1.6 billion loan guarantee needed to exit bankruptcy.
A sharp jump in the price of jet fuel, the airline's second-biggest expense after labor, is putting more pressure on the bottom line.
Jet fuel costs more than $1.03 a gallon, up 50 percent from two years ago, adding hundreds of millions of dollars in expenses a year.
For these reasons, Standard & Poor's aerospace analyst Philip Baggaley said he was not surprised that United needs more time to reorganize.
United also is in urgent need of pension relief before it can emerge.
"There is legislation pending in Congress which would ease pension funding requirements," Baggaley said. "United has very substantial pension obligations coming up over the next five years."
Existing federal law requires United's parent, UAL Corp., to pay $4.8 billion to its pension plans before 2009.
To further cut costs, United has proposed reducing its contribution to retiree medical benefits.
The idea of cutting back on retiree medical benefits has outraged United's unionized workforce. A special examiner is to report to the bankruptcy court Friday on whether United misled employees into retiring early by telling them it would preserve their medical benefits.
Those and other changes have hurt morale, some workers said.
"Employees are looking forward to exiting and are not necessarily happy with extending" bankruptcy, said Sara Dela Cruz, spokeswoman for United's unit of the Association of Flight Attendants.
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Long road back
Dec. 9, 2002: United files for bankruptcy. CEO Glenn Tilton says he expects the company will emerge from bankruptcy in 18 months, an optimistic view, according to analysts.
Jan. 31, 2003: United reports a record loss of $3.2 billion for 2002.
May 28, 2003: Helped by labor cost reductions, United meets its financial goal for April outlined in its bankruptcy plan. Tilton says the company may be able to emerge from bankruptcy sooner than expected.
June 10, 2003: United announces its stock will be worthless after the company's Chapter 11 proceedings.
Thursday: United requests more time to complete bankruptcy restructuring.