De ja vu all over again!
http://www.rockymountainnews.com/drmn/business/article/0,1299,DRMN_4_3687142,00.html
United looking at home stretch
Battles await as airline tries to exit bankruptcy
By Chris Walsh, Rocky Mountain News
April 9, 2005
There will be battles over pensions and wages, tense negotiations and high-profile court hearings.
In the next few months, United Airlines faces a flurry of challenges as it seeks to cut $2 billion in annual expenses and emerge from what will be nearly three years of operating under bankruptcy protection.
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http://www.rockymountainnews.com/drmn/images/spacers/spacer.gifhttp://www.rockymountainnews.com/drmn/images/spacers/spacer.gifWhile acknowledging that it won't be easy, United and its primary creditors are confident the airline can exit bankruptcy this fall as planned.
"We're enthusiastic about the prog- ress they've made," said Bill Repko, managing director at J.P. Morgan Chase & Co., United's lead provider of bankruptcy financing. "I think the challenges are not to be underestimated, but within reasonable expectations, they are likely to be met."
Some industry watchers, though, think the process could drag on much longer, while others aren't convinced the nation's second-biggest airline will make it through at all.
United, the largest carrier in Denver, with 6,000 employees, still must resolve a contentious battle with its workers over pensions - an issue several industry experts say could present the biggest obstacle to its emergence from bankruptcy.
The airline continues to hemorrhage money, losing $664 million in the fourth quarter alone as soaring fuel prices, intense competition and low fares hammer the industry.
Wall Street remains skeptical that United's business plan will resurrect the carrier's financial condition. The airline already has missed several dates to emerge from what is now its 29th month in bankruptcy.
"The rumors of an imminent emergence this fall are just flat hooey," said Bill Brandt, president of Chicago-based restructuring firm Development Specialists Inc. "They don't have their house in order, they aren't making money, and it's becoming clear that the business model they've chosen is the wrong one."
Long way from profitability
Since filing for Chapter 11 bankruptcy protection in December 2002, United has wrangled about $5 billion in annual cost cuts through wage and benefit reductions and a host of operational changes, including the creation last year of a new low-cost carrier called Ted.
The moves helped United - a unit of Chicago-based UAL Corp. - shift from a $2.8 billion loss in 2003 to a $1.6 billion loss last year.
Although that marks a significant financial improvement, the airline remains a long way from profitability.
Things aren't looking much better this year. In February, United lost an average of $10 million a day, or $291 million for the month.
Until the airline gets closer to profitability, it likely will remain in bankruptcy, analysts said.
"They have to show they can break even or at least that they are cash-flow positive and can pay their own bills," said Stuart Klaskin, a principal at KKC Aviation Consulting in Miami. "I'm not certain they're at that point. They need to be much closer to self-sustainment to get out."
Part of United's plan to emerge involves shifting more of its planes to Ted, continuing to cut costs and increasing its more profitable international routes while scaling back on domestic capacity.
This week, United further reduced expenses by announcing the closure of a 400-employee call center in Washington. The airline also decided to stop contracting with Air Wisconsin Airlines Corp. for United Express commuter flights, which also will lower costs.
Challenging issues remain
Some of the airline's larger challenges will play out in coming months as United looks to enter the home stretch of its stint in bankruptcy:
• Leases: United is trying to restructure contracts it has for leases on 100 aircraft. The airline says it is paying above-market rates in a time when prices have dropped because of industry turmoil. United hasn't determined how much it would save by renegotiating leases but said the move is vital to its emergence from bankruptcy.
• Pensions: United insists it needs to eliminate its four employee pension plans and replace them with 401(k)-style retirement plans, a move that would save the airline $640 million annually. The carrier's union groups, however, vehemently oppose the idea, and several have threatened to strike.
"We will not reach any agreement with United that includes pension termination," said Joe Tiberi, spokesman for the International Association of Machinists, which represents nearly 30,000 active and retired United baggage handlers and customer service agents. "We're trying to work with United to find a middle ground. But if pensions are terminated, we are prepared to strike."
• Concessions: United still is trying to get two of its largest unions to agree to wage and benefit reductions. The airline says it needs about $725 million in such cuts from all its worker groups. Earlier this year, it came to agreements with pilots and flight attendants that will save $311 million annually. United also cemented similar concessions with two smaller unions.
But it wasn't able to get concessions from the Aircraft Mechanics Fraternal Association, which represents 7,000 United mechanics and aircraft cleaners, and the IAM.
United received court permission to impose temporary wage reductions on the groups through May 31.
• Financing: United still needs to secure financing to exit bankruptcy. The airline said it has offers from four institutions, but the financing depends on whether United is successful in meeting cost-savings goals in its business plan.
• External factors: All airlines have been battered by intense competition that has kept fares low. High oil prices and excess domestic capacity also have hit the industry's bottom line, leading most carriers to post financial losses last year.
"We've identified a number of things we need to finish to exit bankruptcy," said Jean Medina, a spokeswoman for United. "There is significant work that needs to continue between now and then."
Long-term picture
Some observers are skeptical about when - and if - United will get out of bankruptcy.
The airline initially had hoped to emerge in the latter half of 2003 but subsequently has pushed the date back several times. And while there's little argument that United has made strides by cutting costs and reorganizing part of its operations, some observers say the airline hasn't truly restructured its business to maintain long-term financial health.
"What United doesn't have is a morale problem or a service problem," said Mike Boyd, an Evergreen-based aviation consultant. "They excel in those areas, and even people at other airlines would probably tell you that. But their strategic direction is as weak as can be."
United, some analyst say, remains saddled with high costs and can't compete effectively on domestic routes with discount carriers such as Denver-based Frontier. The airline also risks immeasurable damage as its relationship with workers dissolves over wage and pension cuts.
Even if United eventually does emerge from bankruptcy, some question its potential to succeed in the long term, especially if it is still losing heaps of money.
"A victory can't be declared until a couple years post-bankruptcy," aviation consultant Klaskin said. "Getting out of bankruptcy is like the first day out of a detox clinic. Congratulations, you got through the course. Now you gotta live your life that way. I don't think United, as structured now, can live its life that way."
Checking the calendar
Important upcoming dates for United Airlines:
• April 30: Expiration of United's exclusive right to file a reorganization plan with the bankruptcy court. As it stands now, after April 30 other parties will be able to file their own reorganization plans, although United is seeking to extend the exclusivity period. It has requested an April 22 hearing on the matter.
• May 11: Trial date for United and its unions on pensions issues. United says it needs to eliminate its worker pension plans to emerge from bankruptcy, while the airline's unions strongly oppose such moves. If United can't come to an agreement with the unions, it will go to trial May 11.
• May 31: Temporary concessions imposed on two of United's largest unions - the Aircraft Mechanics Fraternal Association and the International Association of Machinists - expire.
• Sometime this fall: United plans to emerge from bankruptcy.
