UAL faces debt deadline
By Keith L. Alexander
Washington Post
Executives at United Airlines' parent company, UAL Corp., are wrestling with whether to pay a $375 million debt due Monday, enact a 10-day grace period for that payment or file for Chapter 11 bankruptcy protection, sources close to the airline said yesterday.
On Wednesday, a majority of United's mechanics rejected $700 million in proposed annual pay cuts. Without their concessions, the airline falls short of the $5.2 billion in employee pay cuts that the airline needed to help secure $1.8 billion in federal loan guarantees.
United executives have said they would be forced to file for Chapter 11 without the loan guarantees. Such a filing would make United the largest airline ever to file for bankruptcy reorganization.
Shares of United declined as much as 52 percent yesterday. They closed at $2.51 — down $1.12, or about 31 percent.
United executives and leaders of the mechanics' union, the International Association of Machinists, tried yesterday to determine when to reschedule labor talks.
United spokesman Rich Nelson said the airline was in touch with union leaders, but formal talks have not yet been set. "We have to come up with an alternative," he said. "We need the IAM to come in at their committed level. How we get there is something we can discuss with them."
The mechanics' vote also jeopardized the airline's overall restructuring efforts. Clauses within United's pay-cut agreements with other major unions, such as its pilots and flight attendants, provide that the cuts were contingent upon every union agreeing to accept their share of concessions.
The Air Transportation Stabilization Board is expected to rule by the end of the year, but airline analyst Raymond Neidl of Blaylock & Partners L.P. said it was "impossible for UAL to secure a loan guarantee in time to avoid a bankruptcy filing."
Analysts estimate that United is losing between $7 million and $9 million a day. At the end of the third quarter, United had about $1.65 billion in cash. The airline lost a record $2.1 billion last year. Monday's bond payment could reduce United's cash levels to about $1 billion. Industry sources said an airline the size of United needs to have at least $800 million in cash to continue operating while reorganizing.
Industry watchers said while Wednesday's mechanics vote doesn't immediately negate the airline's chances of being approved for the loan guarantee by the Air Transportation Stabilization Board, it does make it more difficult. However, some sources said the ATSB could conditionally approve United for the loan guarantee, only if it gets an agreement with the mechanics. That was the condition under which Arlington, Va.-based US Airways — operating under Chapter 11 — was approved for its $800 million loan guarantee this past summer.
Some United executives have said a stint in bankruptcy could be detrimental to the airline, especially since employees own 55 percent of the company's outstanding shares. In 1994, United's employees gave up about 20 percent of their income in exchange for stock, whose value would likely be wiped out by a bankruptcy filing.
The airline has already seen what could happen when its employees are angry over their contract situation.
In 2000, when United's pilots became bitter over a contract dispute, they refused to work overtime, causing the airline to cancel hundreds of flights and inconveniencing thousands of United frequent fliers.
Aviation expert Darryl Jenkins, head of George Washington University Aviation Institute, said United's problems with its mechanics are reminiscent of Eastern Airlines' bitter management-labor relations, which ultimately lead to Eastern's bankruptcy and liquidation in 1991. Jenkins said United executives have to be careful, in dealing with its mechanics, not to repeat Eastern's mistakes.
"If United tries to strong-arm the mechanics, they will shut down the airline. They did it with Eastern; they'll do it again," he said.
