United Warns of Bankruptcy, Blames Costs
United Airlines, the nation’s second-largest carrier, said Wednesday that it would file for bankruptcy reorganization this fall if its unions, suppliers and creditors failed to make deeper concessions in the next 30 days to stem the company’s cash drain.
United said it needs the cuts to secure a $1.8-billion federal loan guarantee and ensure its long-term survival, and its statement clearly was aimed at putting pressure on labor and the others to quickly agree to terms. But it won’t be easy: Employees own 55% of United, and its pilots’ and mechanics’ unions have powerful board seats that give labor veto power over major corporate decisions, such as filing for bankruptcy protection.
“Unless we lower our costs dramatically, filing for bankruptcy protection will be the only way we can ensure the company’s future and the continued operation of our airline,” said Jack Creighton, chairman of United and its parent, UAL Corp. United flies more than 200,000 people on a busy day and is the biggest operator at Los Angeles International Airport.
The prospect of a United bankruptcy intensified a week of enormous upheaval in the airline business, in which US Airways sought protection under the bankruptcy laws and industry leader American Airlines, a unit of AMR Corp., unveiled plans to slash operations by 9% and eliminate 7,000 jobs.
Speculation also soared that United was teetering toward Bankruptcy Court because the prolonged slump in air travel and the carrier’s relatively high costs, including labor, keep causing massive losses at the airline. UAL lost an industry record $2.1 billion last year and is expected to lose more than $1 billion this year.
Prices of UAL’s stock and bonds have plunged on Wall Street this week. The stock fell 29 cents a share, or 11%, to $2.45 in New York Stock Exchange trading Wednesday and was selling for $2.10 in after-hours trading.
United would be the largest airline bankruptcy reorganization in a decade. Pan American World Airways and Eastern Air Lines tried to reorganize in the early 1990s but ultimately collapsed. Smaller carriers, such as Continental Airlines, later went through bankruptcy and emerged stronger.
United’s threatened filing also will further unsettle the traveling public, which already is struggling with the weak economy and post-Sept. 11 skittishness about flying and heightened airport security, analysts said.
But others said the structured reorganization of a Chapter 11 filing is preferable to the uncertainty now swirling about United. Under Chapter 11, a company keeps operating but its debts are frozen and the company is protected from creditors’ claims while it works out a restructuring plan under the guidance of a bankruptcy judge.
If United files, it “might be able to come out leaner and meaner,” said David Stempler, president of the Air Travelers Assn., a passenger trade group.
But there’s also the likelihood that Chapter 11 “would involve cutting back on schedules that are unprofitable or underutilized,” said Martin Zohn, a bankruptcy specialist at law firm Proskauer Rose in Los Angeles. “That’s inconvenient, but that’s part of their rehabilitation.”
Dexter Koehl, a spokesman for the Travel Industry Assn., said, “Intellectually, people know that even if an airline goes into bankruptcy it will continue operating. But psychologically, the impact could be much different. Bankruptcies don’t feel very stable, and that is not what this industry needs right now.”
It’s also commonplace that, after a company enters Chapter 11, its existing stock becomes worthless because lenders and other creditors have first claim on the company’s assets. United’s employees thus could see their ownership of the airline vanish.
Elk Grove Village, Ill.-based United has more than $2 billion in cash on hand. But it’s losing more than $1 million a day, and it faces nearly $900 million in debt payments due this year. Some Wall Street analysts say United’s cash level will fall perilously low in a few months without the government’s help.
The company has applied for a $1.8-billion loan guarantee that’s part of the post-Sept. 11 bailout of the industry. But the agency running the program, the Air Transportation Stabilization Board, has indicated that United first must gain bigger concessions.
“Revenue isn’t coming back the way the industry expected,” Creighton said. “Demand isn’t returning, fares are low, and the industry is grappling with how to respond.”
(Separately Wednesday, the ATSB denied a request by National Airlines Inc. for a $50.5-million loan guarantee, saying the privately held Las Vegas-based carrier failed to provide a reasonable assurance of repayment.)
United’s statement raises the already contentious relations between it and its unionized employees. United for months has sought wage cuts and other concessions from the unions representing pilots, mechanics and flight attendants. But only the pilots have agreed to givebacks, and the other two didn’t sound more receptive to concessions Wednesday.
The International Assn. of Machinists, which represents 35,000 mechanics and other United ground workers, said it’s “ready to continue discussions” but made no specific comment about cuts.
Jeff Zack, a spokesman for the Assn. of Flight Attendants, said United has refused to address some of the union’s concerns about its members’ pay levels, which the union deems necessary before negotiating any future concessions.
But even United’s pilots are frustrated that the other groups aren’t cooperating more, said Steve Derebey, a spokesman for the Air Line Pilots Assn. “We just wish that the other employee groups would get on board as we have and face reality,” he said.
*
Times staff writer Bonnie Harris contributed to this report.
