Friendlier Skies: United Applies for Court Protection

Struggling carrier files for Chapter 11 protection. The question: Is this such a bad thing for United?
John GoffDecember 9, 2002

In a move that surprised few observers, struggling UAL Corp. filed for Chapter 11 bankruptcy protection on Monday. The filing, which includes subsidiary United Airlines and other UAL operating units, marks the largest bankruptcy in the history of U.S. airlines.

United management said it expects the airline to come out of bankruptcy in eighteen months or so. The company claims service will remain the same during that time. Reportedly, United has hired two marketing firms to help drive home that point with the air-traveling public.

Whether United can live up to the claim remains to be seen. Indeed, in a press release announcing the Ch. 11 filing, United CEO Glenn Tilton noted: “During the Chapter 11 process, we will go further and deeper in our efforts to reduce our costs.” he said. “We are developing a very compelling plan of reorganization that will enable us to successfully emerge as a stronger company with a competitive cost structure.”

United’s current cost structure is decidedly uncompetitive. The carrier only rates a 43 score in the CFO PeerMetrix cost management index (CMI). By comparison, the median CMI for all U.S. airlines is 41 (a lower score is better).

Both AMR Corp. — the parent of American Airlines — and Continental Airlines have CMI scores below 41. Moreover, United’s management team will have their work cut out getting costs in line with rival Delta Air Lines, which gets a CFO PeerMetrix CMI score of 31.6. (To see the cost management index for U.S. airlines, click here.)

Is This Good News?

It’s not clear if United’s employees, who own 55 percent of the company, will be willing to make substantial concessions to make the airline more competitive. Admittedly, those workers took a substantial paycut a decade ago in exchange for a controlling stake in the company. But some observers have questioned whether United’s employee-owners workers see beyond their own paychecks to help protect the interests of minority shareholders.

In a statement today, the International Association of Machinists, representing about 37,500 workers, said it expects sacrifices for workers during the reorganization. But the IAM’s leadership also noted that the union plans to play a sizeable role in the bankruptcy.

“Though bankruptcy may be new for our United Airlines members, the IAM has resources and experience in this area. We do not intend to be passive participants in United’s bankruptcy. Actually, we are primed to play an active role.”

That may or may not be good news for United management. As Reuters reported, heads of the carrier’s various unions had agreed to a total of $5.2 billion in wage cuts (over a 5-1/2 period). But on Nov. 27, rank-and-file mechanics rejected their $700 million give-back — a move which crippled the airline’s attempts to steer clear of Ch. 11.

Bankruptcy Part of the Flight Plan?

Of course, United isn’t the only airline hitting some serious turbulence these days. US Airways Group filed for Ch. 11 protection in August, and other major carriers have struggled to stanch red ink during the recent economic downturn.

And in reality, bankruptcy is not the black mark it used to be — particularly in the airline business. Since the industry was deregulated in 1978, eleven carriers have filed for Ch. 11 protection. That works out to about one bankruptcy every other year — hardly a rare sighting.

In fact, some industry watchers say a Ch.11 filing can provide something of a competitive advantage for a carrier. Bankruptcy enables a company to reduce its debt load, extract concessions from unions, and eliminate potential liabilities (such as lawsuits). What’s more, a Ch. 11 filing generally enables existing management to stay in place.

Indeed, Continental Airlines declared bankrutpcy in 1990 (and in 1983 for that matter), and the carrier is now one of the stalwarts in the U.S. airline business. It appears United is set to retrace that route.