United Bankruptcy Case Would Have Wide Effect
Unthinkable a year ago, a Chapter 11 filing now is a real prospect for United Airlines. So what might happen if the giant carrier does indeed land in Bankruptcy Court?
The airline will keep flying, but Chapter 11 is a treacherous, unpredictable process in which creditors and the bankruptcy judge can impose huge changes. Yet it’s almost certain that United would emerge from bankruptcy a smaller airline, which would have ripple effects for air travel nationwide, many analysts said.
At the same time, some believe a leaner United could become more competitive--and force other airlines to take additional cost-cutting measures that might improve the overall health of the loss-ridden industry.
United faces a severe cash crunch because of its high operating costs, inroads by low-fare rivals and the general slump in air travel, which took root before last Sept. 11 but was exacerbated by the terrorist attacks that involved two hijacked United jetliners.
Even as it holds somber anniversary memorials today for its lost crew and passengers, United is racing to secure wage concessions from its powerful unions, which along with United’s other employees own 55% of the stock of United’s holding company, UAL Corp.
The effort is being led by UAL’s new chief executive, Glenn Tilton. His predecessor, Jack Creighton, last month threatened to put the airline into Chapter 11 proceedings if the concessions weren’t forthcoming.
But Tilton still hopes to quickly get the wage cuts to stem United’s losses, and to win a $1.8-billion federal loan guarantee so the airline can raise more cash from the financial markets.
“We’re focused right now on recovery,” said United spokesman Chris Brathwaite. But without the cost cuts, he said, “we might be in a position where we have no choice but to file.”
And some analysts note the long-standing animosity between United’s unions and management and contend United is running out of time. They see United joining US Airways Group Inc. and seeking Chapter 11 bankruptcy protection, probably this fall.
Chapter 11 would allow United to keep operating while it works out a reorganization plan with committees of United’s creditors and its stockholders, under the guidance of a bankruptcy judge. In the meantime, its pre-Chapter 11 debts would be frozen and creditors couldn’t immediately seize its assets to satisfy their claims.
Several airlines have filed for Chapter 11 since the airlines were deregulated in 1978; a few have emerged to stay in business, but most didn’t. The two main survivors today are Continental Airlines Inc. and America West.
“Once you let go of the end of the rope by filing, you never quite know if you’re going to be able to grab it back,” said Jonathan Rosenthal, a partner and bankruptcy specialist at the Santa Monica investment firm Saybrook Capital.
“One thing you can be sure of is that United has been planning the bankruptcy filing for many months,” in which it’s “speculated about every possible outcome,” Rosenthal said. And yet “it’s a mistake to speculate about what the reorganized [company] might look like. Anything can happen.”
A United bankruptcy filing also would have far-reaching effects. Based in Elk Grove Village, Ill., United is the nation’s second-largest airline behind AMR Corp.’s American, and it handles about 17% of all domestic airline passengers each day. United has 84,000 employees; makes 1,900 daily flights worldwide with 560 airplanes; and operates major hubs in Chicago, Denver, San Francisco and Los Angeles.
United’s situation recalls Eastern Air Lines’ crisis in the 1980s. With Eastern fast running out of cash, its CEO--former astronaut Frank Borman--demanded deep wage cuts from workers, who also owned a big chunk of the carrier’s stock.
The workers, feeling they had sacrificed enough, refused, so Borman threatened to put the airline into Chapter 11. He sold Eastern instead. But in 1989, after its mechanics went on strike, Eastern did file for Chapter 11 bankruptcy and less than a year later was grounded forever.
Despite its problems, United is stronger than was Eastern. But entering Chapter 11 probably would bring huge changes.
Its already battered stock could become worthless, because United’s lenders, suppliers and other creditors get first crack at its assets. Usually, there aren’t enough assets left over for shareholders. That event would then dilute the voice of the unions for United’s pilots and mechanics, which each have seats on UAL’s board because of their workers’ ownership of UAL stock.
UAL’s stock dropped 16 cents, or 6%, to $2.58 on Tuesday on the New York Stock Exchange. UAL’s entire market value now is a paltry $156 million.
The creditors also might press to scuttle the unions’ existing contracts to free up more cash for the creditors’ claims. Planes and airport slots could be sold for the same reason. So could some of United’s global-reaching routes.
Some top executives also might flee to find more secure work elsewhere.
“The tool bag that the bankruptcy code gives companies is the ability to jettison unproductive assets,” said Martin Zohn, a bankruptcy lawyer with the firm Proskauer Rose in Los Angeles. “A bankruptcy allows you to pare down the company to the profitable, to allow it to attract new investors, and that’s the key.”
Paring United’s schedule would mean fewer choices for passengers, though United probably would retain its frequent-flier mileage program. Airports and their municipalities also could feel the effect of less revenue from taxes and landing fees. United is the biggest operator at Los Angeles International Airport, with about 20% of the airport’s traffic.
A smaller United also would send ripples across several industries, reducing prospects for aircraft manufacturers and their parts suppliers, food-service firms, travel agencies and jet-fuel providers.
Yet a United bankruptcy also would help the industry despite causing pain for United’s workers and others, some argue. United’s size and labor expenses would be pared to better match today’s travel market, making United more competitive with thriving lower-cost, low-fare carriers such as Southwest Airlines Co., they say.
A reorganized United also could force other big network carriers, such as American, to retrench further to stay competitive with United. With their costs more in line with revenues, the airlines could start making money again.
UAL is currently solvent; its main problem is debt payments of about $1 billion that are looming in the coming months, which the airline fears will reduce its cash position to an unbearably low level.
And United and its unions still hope to avoid Bankruptcy Court by agreeing among themselves on a concessions package, perhaps within the next week or two. Creighton, the interim CEO who was succeeded by Tilton on Labor Day, had given both sides until Monday to strike a deal that would preclude that step.
Although the deadline still is in effect, United’s pilots union says the company is prepared to extend it.
