State of Disunity at UAL
When United Airlines recently chose John Creighton Jr. as chief executive, after his predecessor quit under fire, United’s powerful unions quickly said they would work with him to help the ailing airline stem its massive losses.
United then also was running television ads that, in cleverly combining the carrier’s name with the national mood, featured employees saying, “We’re united.”
But the evidence shows they aren’t, and that Creighton’s honeymoon with United’s work force of 100,000--which owns a majority of the stock of United’s parent, UAL Corp., and has three representatives on its 12-member board--is over after only a month.
The disharmony has heightened concern over how soon the two sides will agree on ways to further cut United’s costs before the big airline’s cash crunch gets even worse. Although the entire airline industry struggles with a post-Sept. 11 plunge in passenger travel, United stands out as one of its weakest players financially.
UAL is expected to lose more than $800 million in the current quarter, giving it a loss for all of 2001 exceeding $2.5 billion, excluding one-time gains and charges. And because United is the nation’s second-largest carrier behind AMR Corp.’s American Airlines, it is being closely watched as a benchmark for how other major carriers might ride out one of their darkest periods in history.
United already has slashed more than 20% of its operations and 20,000 jobs to preserve cash and staunch losses, just as most airlines have scaled back. But Creighton, a former paper executive who already was a UAL director, is having to scour for other ways to right United.
United said Creighton was unavailable for an interview, and it declined to make any other comment. But sources within the airline said that by mid-month, Creighton expects to unveil specific plans to fix United that might include a plea for employee wage concessions, and that another management shake-up by year’s end is possible.
Meantime, Creighton faces a host of obstacles:
* Only 22 days after Creighton became CEO, the union for United’s 15,000 mechanics rejected a federal offer of arbitration to settle a contentious fight over the mechanics’ new contract. That started a 30-day “cooling-off” period that could end with a strike during the holidays, although President Bush has vowed to block any walkout.
* The senior management that Creighton inherited when he succeeded James Goodwin as CEO is being blasted by the unions representing United’s 10,000 pilots and 21,000 flight attendants. The unions, dissatisfied with the performance of other executives, are demanding that they be ousted if United wants any wage concessions from their members.
* Speculation is widespread that, notwithstanding the unions’ demands, Creighton will force out more United managers. Yet at a time when so many travelers already are skittish about flying, such upheaval in United’s executive suite could unsettle the public and further inhibit a rebound in the carrier’s passenger traffic.
* Though they respect Creighton, union officials say their members are extremely frustrated by United’s malaise, a bad omen for a company in the service business and one controlled by its work force. “I’ve never seen morale lower, and I’ve been here 22 years,” said Bobbie Pilkington, secretary-treasurer for the United unit of the Assn. of Flight Attendants.
* United is flying with one of the highest cost structures in the business, a key reason the airline is losing about $13 million every day. Amid a recession and the travel slump, Creighton must find ways to get those costs down if United wants to get back in the black, analysts said.
“John Creighton certainly has his work cut out for him,” analyst Michael Linenberg of Merrill Lynch & Co. said in a recent report. United’s lofty cost structure alone “provides little breathing room for profits in all but the most profitable times.”
To be sure, United isn’t on the verge of bankruptcy. Fixing the airline is “less an issue of survival than giving the company a chance to prosper,” said James Higgins, an analyst at Credit Suisse First Boston in New York.
United has about $2.7 billion of cash and $4 billion of “unencumbered” planes and other assets--meaning United could use them as collateral to borrow several more billion dollars.
United also could apply for a share of the $10 billion in government-backed loans that are part of the $15-billion federal bailout the industry won after the Sept. 11 terrorist attacks.
Some forecasts also foresee the U.S. economy rebounding enough that the airlines could start breaking even next summer.
But United already is saddled with more debt than many of its rivals--about $8.2 billion of long-term debt and lease obligations as of Sept. 30--so borrowing even more cash would lift the carrier’s costs further.
United also is being particularly hard-hit by the recession, which has caused a severe drop in much-needed business travel because of its West Coast exposure, where United has hubs in Los Angeles, San Francisco and Denver, Higgins said. The West “is filled with industries that look to have some long weakness ahead, like telecommunications and technology,” he noted.
The carrier, based in the Chicago suburb of Elk Grove Village, has slashed its daily flights to about 1,650 from nearly 2,400 before Sept. 11--a day when two of United’s jetliners were hijacked and used in the attacks, killing all their passengers and crew members. The airline even scrapped its frequent United Shuttle service in the West but still has about 600 jets flying to 130 cities worldwide.
Still, United’s costs aren’t dropping as fast as its revenue--so the airline keeps losing money. Raising fares to increase revenue is practically out of the question, given the persistent slump in travel. So the carrier must seek help from its employees, Higgins said.
“If labor wants there to be any longer-term growth, they’re going to have to help this company out,” he said.
Yet the unions helped United before, in the early 1990s, by accepting deep wage concessions in exchange for company stock, which is how United’s employees came to own 55% of the carrier. Starting with the pilots’ new contract last year, which provided them with double-digit pay hikes, United’s workers are aiming to bring their wages at least up to current industry levels.
Goodwin quit after a firestorm of controversy erupted over a letter he wrote to employees, in which he warned that United might “perish” in 2002 unless it quickly found a way to bolster its finances. But Goodwin also presided over a series of missteps at United that are the foundation for its workers’ gripes and factors in its current troubles.
For example, United’s management has been criticized for spending more than a year of its attention trying to complete the purchase of troubled US Airways Group for $4.3 billion, only to have the Justice Department block the merger five months ago on antitrust grounds.
United also has been chided by some analysts for agreeing to a lucrative new contract for its pilots in 2000, which swelled United’s costs. The pact came after a horrendous travel period that summer, when thousands of United and other airline flights were delayed or canceled in good part because of legal work actions by the pilots to protest their contract talks.
With United now on its back, “some form of fair wage concession is going to have to be made” by the pilots and other workers to help the company trim its expenses, said a senior executive inside United.
But the pilots are unwilling to surrender any part of their newly won contract until they see Creighton take other steps to improve United’s condition, said Rick Dubinsky, head of the United division of the Air Line Pilots Assn. and one of UAL’s board members.
“We will not just take a pay cut and show up on Monday morning,” Dubinsky said. “We’re going to get something valuable in exchange for it.” He declined to be more specific but said certain unidentified United executives “have to be replaced. He [Creighton] should take them out.”
