United Vows to Maintain California Presence
The parent of United Airlines filed for bankruptcy reorganization Monday, setting in motion a major overhaul of the loss- ridden carrier. Nonetheless, the company’s chief executive said the airline would maintain a strong presence in California because the state is a key asset.
The Chapter 11 filing, the largest in airline history, means United will keep operating while it develops a plan to pay back its creditors. For now, the No. 2 airline behind American has vowed to keep flying its current schedule and maintain its frequent-flier program.
But in coming months, the carrier and parent UAL Corp. are expected to undergo significant changes that could include shrinking the airline and selling off routes and other assets to raise badly needed cash. Those changes, in turn, are likely to trigger major shifts throughout the airline industry and in the choices available to travelers.
Regardless, United will maintain a major presence in California even if the carrier drops some unprofitable routes, said Glenn Tilton, UAL’s chairman and CEO.
“The West Coast is a real core strength for United and obviously is our window to the Pacific,” where United has widespread service, Tilton said in an interview. “Even if we had to prune a route ... we would protect the region.”
United is the biggest airline at the Los Angeles and San Francisco airports, and several of its most heavily traveled routes involve the two cities. More than a quarter of United’s nearly 1,800 daily departures originate from a California airport, and nearly 23,000 of United’s 82,700 employees are in the state.
As United works its way through bankruptcy proceedings, each flight in California and elsewhere will be put to a “stress test” to measure its profitability and popularity with travelers, Tilton said. But even if some flights fail that test, overall service in California “is central, pivotal going forward,” he said.
United, the most powerful and profitable airline only a few years ago, is awash in red ink and unable to make payments on its $21 billion of debt. Its Chapter 11 filing culminated a grueling downturn at the company in the last two years that produced record losses, eroded service, alienated many passengers and sapped employees’ morale.
Compounding United’s problems is the deep slump in air travel that was exacerbated by last year’s terrorist attacks, which included two hijacked United jetliners. The slowdown slashed United’s income and helped low-cost, low-fare carriers such as Southwest Airlines eat away at the market share of United and other airlines.
But many analysts contend that the post-Sept. 11 trauma to the industry mainly exposed structural weaknesses at United, namely that its lofty operating costs were badly out of sync with the downward trend in fares.
At the center of United’s downfall was an acrimonious tug of war between the carrier and its powerful labor unions. Each side blamed the other for much of the airline’s swoon, which has left it unable to fund nearly $1 billion of debt payments that are now due.
Together, they staged a last-gasp effort to produce a recovery plan and keep the airline out of Bankruptcy Court. But it failed. Last week, the Bush administration rejected United’s bid for a $1.8-billion loan guarantee, making a bankruptcy filing inevitable.
Although passengers won’t immediately notice much change at United, analysts said the Elk Grove Township, Ill.-based airline -- which carried 75 million passengers last year -- probably will shrink and lay off more workers as it reorganizes under Chapter 11.
United began the process Monday with an announcement of wage cuts for salaried personnel starting next week, including an 11% cut in executives’ base pay.
There also is the prospect that large pieces of United, or even the whole airline, could be sold. Some of United’s routes, airport gates, aircraft and other assets could be divested to raise cash for the airline’s lenders and other creditors. Even a liquidation of United is not out of the question, analysts said.
At Los Angeles International Airport, where it was business as usual Monday at United’s terminal, passengers said they expected United to keep flying but were bracing for disruptions.
“I’m concerned that the flights to lesser-populated cities will be cut,” said Michael Ker of Aliso Viejo.
Like most airlines, United already has slashed its operations -- by about one-fifth in this case -- to cope with the travel downturn. United has about 1,775 daily flights around the world and 550 aircraft. Another major airline, US Airways, has been operating under bankruptcy protection since August.
One immediate concern is how United’s employees will react to the turmoil of a bankruptcy case and whether they can maintain a level of service that appeals to travelers.
“Thousands of customer-service employees are likely to be distracted, angry and worried about their jobs and retirements,” said Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group for business fliers.
After the Chapter 11 filing Monday morning in Chicago, CEO Tilton strolled through United’s terminal at O’Hare International Airport, hugging employees and urging them to stay the course. He handed them buttons bearing the words “United Will Stand.”
In the air, pilots offered reassurance to passengers. “The pilots want this company to succeed, not just survive,” said Paul Whiteford, head of the United branch of the Air Line Pilots Assn.
The morale issue is acute at United because its employees own 55% of UAL’s stock, yet those shares stand a good chance of becoming worthless with the company in Chapter 11. The stock finished unchanged at 93 cents a share Monday on the New York Stock Exchange.
Thus, not only are many United employees in jeopardy of losing their jobs, but their investment in the carrier also could be wiped out. The employees obtained their controlling stake in United eight years ago, when they made wage concessions in exchange for company stock and -- in the case of its pilots and mechanics -- seats on UAL’s board of directors.
Now, the employees will be asked to make new concessions that are even deeper than the $5.2 billion in total labor cuts that United proposed in its bid to get the federal loan guarantee. In addition to wage cuts for salaried personnel, the airline said it would soon seek wage cuts from union workers.
But this time, Tilton said, “I’m going to go at it in a very different way.” Rather than having management draw up a new recovery plan to present to labor, “I want it consensual on the front end,” with United’s unions helping to devise the effort, he said.
“I now have the time and protection in [Chapter] 11 to have this dialogue,” he added.
Avoiding more management-labor squabbles will be crucial, because history shows passengers will keep boarding an airline in Chapter 11 if its service doesn’t falter, said William Rochelle, a partner at the law firm Fulbright & Jaworski who has handled airline bankruptcies.
“After all,” he said, “Continental did it twice and used the second one quite successfully.”
United’s bankruptcy filing is an ignominious chapter for an airline that was once the nation’s largest and most profitable, a carrier whose “Friendly Skies” advertising jingle was nearly a household phrase. By the late 1990s, United not only boasted one of the best route systems in the world -- with hubs in California, Chicago, Denver and Tokyo, among others -- but it also was riding the strong economy.
United was the airline of choice for business travelers, who thought little of paying $2,000 for a one-way domestic ticket to make a business meeting. That was especially true in California, as United exploited the fortunes of Silicon Valley computer companies and the plethora of dot-com firms that populated the state.
At its peak in 1998, United earned an operating profit (before one-time gains or charges) of nearly $1.5 billion on revenue of $17.6 billion. But as the new millennium dawned, the economy weakened and the technology “bubble” began to burst. Business travel began a prolonged skid whose severity surprised even veteran airline executives.
Ultimately, it was obvious that United’s labor and other costs remained too high given the now-reduced level of travel -- and the much lower fares that business travelers and even leisure passengers were willing to pay. Of every dollar that United spends, 41 cents goes to labor.
When 2001 was over, United had lost an industry record $2.1 billion on revenue of $16 billion, and the airline has lost an additional $1.7 billion in the first nine months of this year. UAL listed assets of $22.8 billion -- by far the largest for an airline Chapter 11 filing -- and debts totaling $21.2 billion.
Even though Tilton and the unions reached the last-minute agreement on wage cuts in hopes of winning the federal loan guarantee, the plan still fell short in the eyes of the U.S. Air Transportation Stabilization Board.
The board’s decision was the last straw, because United faced $920 million in debt payments due Dec. 2 and could no longer borrow from the financial markets on its own. Chapter 11 became its only recourse.
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Major airline bankruptcy filings
With United Airlines entering Chapter 11, here is a look at past major airline bankruptcy filings since 1990:
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America West: Filed for bankruptcy protection in June 1991. Listed assets of $1.69 billion and liabilities of $1.28 billion. Emerged in August 1994. Received a $380-million federal loan guarantee earlier this year.
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Braniff International Airlines: Closed in 1992 after filing for bankruptcy the year beforeNthe third time Braniff entered Chapter 11.
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Continental: Sought bankruptcy protection in December 1990. Listed assets of $4.77 billion and liabilities of $5.86 billion. Emerged in April 1993. Recently said it would reduce capacity 4% by August 2003 to cut costs.
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Eastern: Stopped flying in January 1991, almost two years after it entered bankruptcy proceedings and was unable to meet its liabilities by about $1 billion.
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Midway Airlines: Filed for bankruptcy in March 1991. Listed assets of $330.8 million and liabilities of $359.4 million, excluding Series D preferred stock. Liquidated in November 1991.
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Pan Am: Filed for bankruptcy in January 1991. Listed assets of $2.1 billion and liabilities of $2.8 billion. Shuttered in December 1991. A smaller version of Pan Am started flying in 1996 but filed for bankruptcy in February 1998. At that time, the company listed assets of $50 million and liabilities of $147 million. The remainder of the company was sold to Guilford Transportation Industries for $29 million in June 1998.
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TWA: Declared bankruptcy in January 1992. Listed assets of $2.68 billion and liabilities of $3.47 billion. TWA spent several months in 1995 in prepackaged bankruptcy protection to cut costs. Filed for bankruptcy protection in January 2001 while simultaneously a buyout from American Airlines, which paid $742 million for the airline.
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US Airways: Filed for Chapter 11 in August. Listed assets of $7.81 billion and liabilities of $7.83 billion.
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Researched by Times librarian John Jackson
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Source: Times research, company reports, BankruptcyData.com
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Times staff writer Glenda McCarthy contributed to this report, and Times wire services were used in compiling it.
