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Implications for United Airlines Bankruptcy - 2002-12-06

United Airlines in a big financial trouble, and the U.S. government didn't help when it declined to provide loan guarantees. It is widely expected that Chicago based United, which is mainly owned by its employees, will be forced to seek protection from its creditors under U.S. bankruptcy laws.

Most of the world's airlines are currently losing money as air travel has plummeted in the aftermath of last year's terrorist attacks in New York and Washington. But United had trouble making profits even in the best of times. It has the highest cost structure of any U.S. carrier and its employee owners have been reluctant to give management the kind of flexibility over work rules and procedures that characterize new low-cost airlines like Southwest and JetBlue. Those upstart airlines are the only U.S. airlines that will be profitable in 2002.

Ron Kuhlmann, a San Francisco based consultant to the airline industry, believes United's bankruptcy would have far-reaching implications. "What United has do if it is to survive [after bankruptcy] is profitably supply transportation at fare levels that people are willing to pay," he says. "Right now we've just done some statisticsthat something over 50 percent of United's traffic right now is traveling on very low fares. Of course the problem is that they can't make any money on those low fares because their costs are too high."

Mr. Kuhlmann believes that if United is operating under bankruptcy protection it will have the freedom to slash costs, something currently not permitted under union contracts.

United is huge, flying several hundred airplanes to more than 120 cities worldwide. It employs 81,000 people. The company, which has been losing more than $1 million a day, had sought $1.8 billion in loan guarantees from the government.

Nicholas Owens, an analyst with Morningstar financial in Chicago, says United's employees would be hit hard by bankruptcy as the company's shareswhich they ownwould likely become worthless. "The problem at United is that the employees own more than half the company," he says. "They're all shareholders and they're going to be very disappointed at the time of a Chapter 11 filing to see their shares end up worthless. So there is going to be a lot of acrimony they're going to have to work through."

United's shares were worth $100 in 1997. Today they sell for barely more than $1.

Rick Malone, a stock broker in suburban Washington, says a bankruptcy filing should not immediately change the day-to-day operations of the company. "I doubt that it means very much, if they continue to fly, which is extremely likely. I would put that at a 98 percent chance. It will have virtually no other effect except for the psychological impact of further layoffs, which are likely to occur. And that a major U.S. icon has now gone bankrupt," he says.

In an effort to prevent bankruptcy, United's employees agreed to significant wage reductions. However, the three-person Air Transportation Stabilization Board decided late Wednesday that the concessions were probably inadequate and that United's management did not have a business plan that would assure long-term financial solvency.

Airline industry consultant Kuhlmann believes the world airline industry is in the throes of profound change. He says big companies like British Airways and Japan Airlines will inevitably have to emulate the low cost carriers in reducing costs and reducing fares. "What [low cost U.S. based carrier] Jet Blue has shown is that people are willing to forego amenities [like food] on long distance flights in order to have a lower fare," he says. "And it is just a matter of time before somebody says, gee, if they are willing to fly five and a half hours across the United States [without food], I'll bet they're willing to fly six hours across the north Atlantic. And when that happens all the understandings of how things have been put together for the past several decades are going to go out the window."

The other major U.S. airlines competing with United generally applaud the decision of the government agency to deny UAL a cash bailout. A cash infusion, says Continental chief executive Gordon Bethune, would have been a subsidy that would have given United an unfair competitive advantage.