Shock Waves Likely From United Chapter 11
United Airlines’ likely bankruptcy filing would be the most dramatic step yet in a restructuring of the airline business that could affect passengers no matter which carrier they fly.
The changes won’t be immediate. United vowed to keep flying its current schedule and honor frequent-flier miles even if it seeks Chapter 11 bankruptcy protection in the coming days, as most industry observers expect.
But over the next several months, as United is reorganized and rivals shift gears in response, travelers are likely to see substantial changes in the number of available flights, ticket prices and perhaps even the number of airlines from which they can choose.
United, which already was scaling back, is expected to pare even more service to rid itself of unprofitable flights. Other airlines might take over those flights, but if they don’t some travelers would be left with less convenient service. Fares are likely to rise over the long term, after United and the rest of the industry reduces its size to match passenger demand, some observers said.
“There aren’t going to be any better deals than there are right now” for fares, said Robert Mann, president of the consulting firm R.W. Mann & Co. “Prices are inevitably going to rise” because nearly all the airlines are losing money.
Air service nationwide also could be shuffled if parts of United’s route system -- or the whole airline -- is bought while the carrier is under Bankruptcy Court protection. “Another carrier or investors who have designs on some of the plums of United’s operations may be making offers,” said Chester Salomon, a bankruptcy lawyer in New York.
“There will be profound consequences to the industry,” Salomon added. There have been past airline bankruptcies, but none “as big as United, with its multiple routes and international connections.”
It is in the bankruptcy process in which the dynamics of the whole airline industry will be altered, experts said.
As United scales back and slashes costs as part of a likely Chapter 11 reorganization, it will put pressure on the other “hub-and-spoke” network carriers such American, Delta and Northwest to do the same. It also will make United a stronger competitor to discount carriers such as Southwest and JetBlue, which operate with lower costs and whose cheap fares are grabbing an increasing number of passengers from larger airlines.
Simultaneously, all other carriers will be watching to see if they can snatch up service that United abandons. “Airlines like American and Continental are going to move in and try to take advantage of this turmoil” at United, said Fred Allvine, a marketing professor at the Georgia Institute of Technology.
United, a unit of Elk Grove Village, Ill.-based UAL Corp., is the second-largest U.S. airline behind American. It operates about 1,800 flights a day. It is the biggest carrier at Los Angeles and San Francisco international airports, and has an enormous presence in Chicago, Denver and Tokyo. It has valuable transpacific, transatlantic and Latin American routes, and on a busy day its planes carry a quarter of a million passengers.
Only a few years ago, United was the most powerful U.S. airline and perhaps the favorite choice for business travelers. Its “friendly skies” advertising slogan was a household phrase.
But with the airline now saddled with high operating costs, the persistent travel slump and passengers refusing to pay the high fares of the late 1990s, United is running out of cash to pay its bills. On Wednesday, a United bankruptcy filing became nearly inevitable after the carrier’s bid for a $1.8-billion federal loan guarantee was rejected by the Bush administration.
“We believe a Chapter 11 filing by Sunday is almost certain,” James Higgins, an analyst at the investment firm Credit Suisse First Boston, said in a note to clients.
In response, UAL’s battered stock plunged $2.12, or 68%, to close at $1 a share after a delayed opening on the New York Stock Exchange. UAL is 55% controlled by its employees, but the stock probably would become worthless if United files for bankruptcy protection, wiping out the workers’ investment.
The U.S. Air Transportation Stabilization Board said it rejected United’s request for a loan guarantee because the carrier’s blueprint for recovery, which includes labor concessions of $5.2 billion, still was not a “sound business plan.” The panel concluded that if it guaranteed the loan, taxpayers would be at risk if United were to default.
Once in Bankruptcy Court, United and its creditors probably will use the cost-cutting plan it had presented to the ATSB as a base from which to seek even bigger reductions in its operating expenses. That could set the stage for flying profitably again.
If United survives mostly intact as a stronger, more efficient airline, it should help rationalize the entire industry. “Any of us who fly a lot know there are still lots of planes out there that are half-empty,” said Meg VanDeWeghe, an executive-in-residence at the University of Maryland’s business school.
Once the supply of airline seats is reduced to match passengers’ demand for them, VanDeWeghe said, “it will probably make flying somewhat more expensive” as carriers drop their fare sales. “But in the long run, we’ll have a much healthier airline industry.”
