Agreement Will Set Pattern for Other Carriers : Deregulation Adds to United’s Labor Strife

The headquarters of United Airlines rests here, sprawling for acres over the northwest Chicago suburbs and housing the only major airline that actually wanted the federal government to get out of the airline regulation business.

Ironically, the deregulatory movement to which United gave such a strong push has embroiled it in a major showdown with labor as it scales costs back to meet the threat from low-fare carriers who pay their employees less than do the members of the Establishment.

What happens in the conflict between United and the striking members of the Air Line Pilots Assn. will set the pattern for contracts at other carriers--primarily Delta and Trans World--that still have to negotiate with the pilots.

Remains a Dominant Force

But whether the strike is settled amiably or whether United rebuilds its pilot force slowly, it still figures to remain one of the dominant U.S. air carriers. When deregulation legislation was passed in 1978, United was the nation’s largest airline, second in the world only to the Soviet Union’s Aeroflot.

And it held that position when the strike began on May 17. The prime subsidiary of UAL Inc., United served all 50 states with 1,577 flights carrying about 120,000 passengers daily, about 15% of the U.S. airline business. Even though United is operating slightly more than 200 of its normal daily flights, it claims to be the sixth-largest U.S. airline.

Far-Flung Network

United is so big, its route network so far-flung, its ability to dominate the industry so obvious, that it has sometimes given the impression of being muscle-bound and slow to innovate.

For instance, which was first with bonus trips for frequent flyers?

American, not United.

Which was first with low-cost super saver fares?

American.

Which was first with even cheaper ultimate super saver fares?

American.

Which was first to get its labor costs in line with the upstart carriers and begin to expand its own routes and squeeze those upstarts?

American.

‘No Advantage to Being First’

But which had the better operating margin--income as a percentage of revenue--last year?

United, with 9.1%, compared to 6.7% for American.

“In this business, there is no advantage to being first,” Richard J. Ferris, United’s assertive chairman, said in an interview. “If I may, there is no pride in being first. Anything that you do can be matched instantaneously. The only thing that is of value is that, how do you take transportation--a non-differentiated product--and differentiate? How do you take size and make size work for you? These are the challenges that I think we face.”

Ferris was interviewed four days before the pilots struck, but he clearly was anticipating a strike.

That was the day that Ferris, despite an imminent pilot shortage, purchased 25 airplanes from struggling and shrinking Frontier Airlines for $265 million. Frontier will lease the planes back from United through the summer, but they are headed for United routes.

That was also the day that Ferris took a call from C. Edward Acker, chairman of Pan American World Airways, from whom Ferris is trying to buy Pan Am’s Pacific division for $750 million in order to turn United into an international giant as well as a domestic one.

Is there too much on his plate at one time?

Rebuilding and Growth

“I would like it to be more spread out,” Ferris said, but he added that the events converged coincidentally. “I have been working on the Frontier deal for over a year, Pan Am for over three years and pilot negotiations since January, 1983.”

Rebuilding United Airlines, with or without union pilots, is now obviously No. 1 on United’s agenda. But No. 2 is growth.

“Once we get the job done on the pilot wage side, we can expand this airline very, very fast,” said John L. Cowan, senior vice president for administration and finance.

Reducing the salaries of its new-hire pilots, the issue that precipitated the strike, is seen as a necessary evil by the financial community and by United management itself, which has been conducting a slick in-house propaganda campaign to explain to its employees what management sees as today’s financial facts. The publication is entitled “United’s Bottom Line.”

First-Quarter Loss

It reports this year’s first-quarter net loss of $3.2 million and explains that yield is down because of heavy discounting--forced by that dratted American ultimate super saver--and the fact that United has chosen not to add capacity until it gets its labor contracts in order.

That is the script American Chairman Robert L. Crandall followed with his unions and the one Delta Airlines is beginning to outline for its pilots--no cost savings, no growth.

While Ferris is saying that to the unions, it is obvious he intends to grow, with or without the pilots’ union. The Frontier and Pan Am deals underline that intention.

“The Air Line Pilots Assn. thing will resolve itself one way or the other,” Ferris said, “but those things are done, and they’re United’s answer to” its requirements for more airplanes, which airline executives like to call lift.

Far East Network

The purchase of the Pacific division would bring with it 17 airplanes and 2,700 Pan Am employees. More important for United, assuming the deal wins government approval, would be the instant acquisition of the Pacific routes and Pan Am’s carefully constructed hub in Tokyo. It took United 16 years to get its one route to Tokyo, so in one stroke it will have expanded that to a network.

“To effectively compete, we have to have a certain density, a certain mass,” Ferris said. “Singular routes are difficult to grow.” United already has a strong domestic network that feeds traffic to Los Angeles, San Francisco and Seattle, something Pan Am lacks.

James J. Hartigan, United’s president, is in charge of the United task force working on the acquisition. “We’re starting to put together a team and audit exactly what is being taken over,” Hartigan said. He is working with John J. Casey, president and chief executive of Pan Am World Services Inc.

Hartigan said that one of his concerns is to prevent United’s management from concentrating so hard on a $750-million deal that it ignores the daily care and feeding of a $6-billion airline, a number that refers to United’s revenue last year.

The details of the takeover range from questions of when to repaint the airplanes, whether or how to merge Pan Am’s and United’s operating and maintenance procedures and how long to use the Pan Am silverware. “The biggest thing is to make sure we don’t let things slip through the cracks,” Hartigan said.

Ferris said deregulation has been good for United. As one of its most vocal proponents, he hardly could say anything else. But deregulation was followed by a series of events that have been tough on United: a recession, the monthlong grounding of the DC-10 fleet after American’s crash in Chicago in May, 1979, and the air traffic controllers’ strike in 1981, which resulted in major flight reductions at Chicago’s O’Hare and Denver’s Stapleton airports, United’s biggest hubs.