CHICAGO (Reuters) - United Airlines' parent, UAL Corp. , four months out of bankruptcy, must hone its focus on additional cost cuts or risk losing its advantage over airlines currently restructuring under court protection, industry experts say.
For now, the company, which slashed costs by $7 billion a year, has a competitive edge in the industry, these analysts say. But restructurings by rivals Delta Air Lines and Northwest Airlines under Chapter 11 of the bankruptcy code could make UAL's savings seem less impressive.
Delta aims to cut costs and increase revenue by $3 billion annually, while Northwest seeks savings of $2.5 billion a year. Cost-cutting is vital in the airline industry where stiff competition often forces carriers to sell tickets at a loss.
"United's cost advantage is slowly diminishing as other bankruptcies move ahead with new cost-cutting plans," DePaul University transportation expert Joe Schwieterman said of the No. 2 U.S. airline.
He said that perception has contributed to a slump in UAL stock since its February launch on Nasdaq. Shares in the company have shed over 20 percent since then, compared with a nearly 3 percent drop in the Amex airlines index .
US airlines, hit by pricey fuel and low-fare competition, lost some $35 billion between 2001 and 2005.
In the last year, however, major carriers have cut the number of seats for sale and imposed fare increases to offset fuel costs. Some analysts think UAL may be ripe for merger with another airline, which could further cut market capacity.
Nevertheless, energy prices remain the primary menace for UAL and its rivals.
In its reorganization plan, UAL predicted an average oil price, directly linked to the price of jet fuel, of $50 a barrel over 5 years after its February bankruptcy exit.
NYNEX crude futures traded above $72 a barrel on Friday and haven't traded below $50 a barrel in a year.
UNIQUE CHALLENGES
Unlike major airlines that attempt direct competition directly with low-cost carriers like Southwest Airlines and JetBlue Airways , UAL courts passengers willing to pay more for in-flight perks such as food, drink and leg room.
This strategy presents UAL with a tough test, as it limits the places where expenses can be trimmed.
"My concern about United ... is that they still have a lot of work ahead of them to further reduce their unit costs structure," said Calyon Securities analyst Ray Neidl.
"It's going to be a little bit trickier," he said.
Rather than dilute services, the airline must control costs by streamlining operations and outsourcing. Last month, for example, UAL said it would consolidate its airport operations and cargo divisions.
"We lowered our unit costs by 20 percent, excluding fuel, and raised our productivity by 27 percent," said UAL's Chief Executive Glenn Tilton in a speech on Thursday to the American Chamber of Commerce in Japan.
"We have used the tools available to us to create a competitive platform for the future," he said.
MERGER OUTLOOK
As UAL neared its bankruptcy exit-- one of the largest corporate reorganizations in U.S. history -- speculation swirled that the carrier was ripe for merger with another airline. Tilton, himself, fueled the speculation by noting industry overcapacity and the benefits of consolidation.
While the CEO has denied that UAL is actively seeking a merger partner, some remain unconvinced.
"It's very clear the senior management wants to peddle it," said airline consultant Michael Boyd. "(Tilton) wants to engineer it into a merger."
One industry source familiar with airline planning said UAL has explored merger possibilities with Delta and Continental Airlines . UAL believes Continental would be a better fit operationally but Delta's huge Atlanta hub makes that carrier an attractive option, the source said.
Any proposed merger would have to clear U.S. regulatory and antitrust hurdles. In recent years, the government has approved airline deals in which one company was likely to liquidate, including last year's merger between bankrupt US Airways and America West Airlines to form a new US Airways .
UAL's attempt to merge with US Airways in a $4.3 billion cash deal failed in 2001 over government competition concerns.
"There's a buzz out there on United and Continental. United is looking hard at Delta, too," the source said.
(Additional reporting by John Crawley)
Copyright 2006 Reuters
For now, the company, which slashed costs by $7 billion a year, has a competitive edge in the industry, these analysts say. But restructurings by rivals Delta Air Lines and Northwest Airlines under Chapter 11 of the bankruptcy code could make UAL's savings seem less impressive.
Delta aims to cut costs and increase revenue by $3 billion annually, while Northwest seeks savings of $2.5 billion a year. Cost-cutting is vital in the airline industry where stiff competition often forces carriers to sell tickets at a loss.
"United's cost advantage is slowly diminishing as other bankruptcies move ahead with new cost-cutting plans," DePaul University transportation expert Joe Schwieterman said of the No. 2 U.S. airline.
He said that perception has contributed to a slump in UAL stock since its February launch on Nasdaq. Shares in the company have shed over 20 percent since then, compared with a nearly 3 percent drop in the Amex airlines index .
US airlines, hit by pricey fuel and low-fare competition, lost some $35 billion between 2001 and 2005.
In the last year, however, major carriers have cut the number of seats for sale and imposed fare increases to offset fuel costs. Some analysts think UAL may be ripe for merger with another airline, which could further cut market capacity.
Nevertheless, energy prices remain the primary menace for UAL and its rivals.
In its reorganization plan, UAL predicted an average oil price, directly linked to the price of jet fuel, of $50 a barrel over 5 years after its February bankruptcy exit.
NYNEX crude futures traded above $72 a barrel on Friday and haven't traded below $50 a barrel in a year.
UNIQUE CHALLENGES
Unlike major airlines that attempt direct competition directly with low-cost carriers like Southwest Airlines and JetBlue Airways , UAL courts passengers willing to pay more for in-flight perks such as food, drink and leg room.
This strategy presents UAL with a tough test, as it limits the places where expenses can be trimmed.
"My concern about United ... is that they still have a lot of work ahead of them to further reduce their unit costs structure," said Calyon Securities analyst Ray Neidl.
"It's going to be a little bit trickier," he said.
Rather than dilute services, the airline must control costs by streamlining operations and outsourcing. Last month, for example, UAL said it would consolidate its airport operations and cargo divisions.
"We lowered our unit costs by 20 percent, excluding fuel, and raised our productivity by 27 percent," said UAL's Chief Executive Glenn Tilton in a speech on Thursday to the American Chamber of Commerce in Japan.
"We have used the tools available to us to create a competitive platform for the future," he said.
MERGER OUTLOOK
As UAL neared its bankruptcy exit-- one of the largest corporate reorganizations in U.S. history -- speculation swirled that the carrier was ripe for merger with another airline. Tilton, himself, fueled the speculation by noting industry overcapacity and the benefits of consolidation.
While the CEO has denied that UAL is actively seeking a merger partner, some remain unconvinced.
"It's very clear the senior management wants to peddle it," said airline consultant Michael Boyd. "(Tilton) wants to engineer it into a merger."
One industry source familiar with airline planning said UAL has explored merger possibilities with Delta and Continental Airlines . UAL believes Continental would be a better fit operationally but Delta's huge Atlanta hub makes that carrier an attractive option, the source said.
Any proposed merger would have to clear U.S. regulatory and antitrust hurdles. In recent years, the government has approved airline deals in which one company was likely to liquidate, including last year's merger between bankrupt US Airways and America West Airlines to form a new US Airways .
UAL's attempt to merge with US Airways in a $4.3 billion cash deal failed in 2001 over government competition concerns.
"There's a buzz out there on United and Continental. United is looking hard at Delta, too," the source said.
(Additional reporting by John Crawley)
Copyright 2006 Reuters
