United faces tough call on bankruptcy
By James F. Peltz
Los Angeles Times
Unthinkable a year ago, a Chapter 11 filing is now a real prospect for United Airlines. So what might happen if the giant carrier does indeed land in Bankruptcy Court?
Bloomberg News Service
The airline will keep flying, but Chapter 11 is a treacherous, unpredictable process where creditors and the bankruptcy judge can impose huge changes. Yet it's almost certain that United would emerge from bankruptcy a smaller airline, which would have ripple effects for air travel nationwide, many analysts said.
United Airlines is the nation's second-largest airline, behind American, and handles about 17 percent of all domestic airline passengers each day. Filing for Chapter 11 would change that.
At the same time, some believe a leaner United could become more competitive — and force other airlines to take additional cost-cutting measures that might improve the overall health of the loss-ridden industry.
United, one of Hawai'i's major carriers, faces a severe cash crunch because of its high operating costs, inroads by low-fare rivals and the general slump in air travel, which took root before last Sept. 11 but was exacerbated by the terrorist attacks that involved two United planes.
Even as it held somber memorials last week for its lost crew and passengers, United is racing to secure wage concessions from its powerful unions, who along with United's other employees own 55 percent of the stock of United's holding company, UAL Corp.
The effort is being led by UAL's new CEO, Glenn Tilton. His predecessor, Jack Creighton, last month threatened to put the airline into Chapter 11 proceedings if the concessions weren't forthcoming. But Tilton still hopes to get the wage cuts quickly to stem United's losses, and to win a $1.8 billion federal loan guarantee so the airline can raise more cash from the financial markets.
"We're focused right now on recovery," said United spokesman Chris Brathwaite. But without the cost cuts, he said, "we might be in a position where we have no choice but to file."
And some analysts note the long-standing animosity between United's unions and management, and contend United is running out of time. They see United joining US Airways Group Inc. in seeking Chapter 11 bankruptcy protection, probably this fall.
Chapter 11 would allow United to keep operating while it works out a reorganization plan with creditors and stockholders, under the guidance of a bankruptcy judge. In the meantime, its pre-Chapter 11 debts would be frozen and creditors couldn't immediately seize its assets to satisfy their claims.
Several airlines have filed for Chapter 11 since the airlines were deregulated in 1978; a few have emerged to stay in business, but most didn't. The two main survivors today are Continental Airlines and America West.
"Once you let go of the end of the rope by filing, you never quite know if you're going to be able to grab it back," said Jonathan Rosenthal, a partner and bankruptcy specialist at investment firm Saybrook Capital in Santa Monica, Calif.
"One thing you can be sure of is that United has been planning the bankruptcy filing for many months," in which they've "speculated about every possible outcome," Rosenthal said. And yet "it's a mistake to speculate about what the reorganized (company) might look like. Anything can happen."
A United bankruptcy filing also would have far-reaching effects. Based in Elk Grove Village, Ill., United is the nation's second-largest airline behind AMR Corp.'s American, and it handles about 17 percent of all domestic airline passengers each day. United has 84,000 employees, makes 1,900 daily flights worldwide using 560 airplanes and operates major hubs in Chicago, Denver, San Francisco and Los Angeles.
United has about 20 flights a day out of Hawai'i, and employs about 1,569 in the state.
United's situation recalls Eastern Air Lines' crisis in the 1980s. With Eastern fast running out of cash, its CEO — former astronaut Frank Borman — demanded deep wage cuts from workers, who also owned a big chunk of the carrier's stock.
The workers, feeling they had sacrificed enough, refused. So Borman threatened to put the airline into Chapter 11. He sold Eastern instead. But in 1989, after its mechanics went on strike, Eastern did file for Chapter 11 bankruptcy and less than a year later was grounded forever.
To be sure, United is stronger despite its problems than was Eastern. But entering Chapter 11 likely would bring huge changes to United.
Its already battered stock could become worthless because United's lenders, suppliers and other creditors get first crack at its assets.
Usually, there aren't enough assets left over for shareholders. That event would then dilute the voice of United's pilots and mechanics unions, which each have seats on UAL's board because of their workers' ownership of UAL stock.
UAL's stock was trading in the $2.50 a share-range last week on the New York Stock Exchange. UAL's entire market value is now only $156 million.
The creditors also might press to scuttle the unions' existing contracts to free up more cash for the creditors' claims. Planes and airport slots could be sold for the same reason. So could some of United's global-reaching routes.
Some top executives also might flee to find more secure work elsewhere.
"The tool-bag that the bankruptcy code gives companies is the ability to jettison unproductive assets," said Martin Zohn, a bankruptcy lawyer with the firm Proskauer Rose in Los Angeles. "A bankruptcy allows you to pare down the company to the profitable, to allow it to attract new investors, and that's the key."
Paring United's schedule would mean fewer choices for passengers, though United likely would retain its frequent-flier mileage program. Airports and their muni-cipalities also could feel the impact of less revenues from taxes and landing fees. United is the biggest operator at Los Angeles International Airport, handling about 20 percent of the airport's traffic.
A smaller United also would send ripples across several industries, reducing prospects for aircraft manufacturers and their parts suppliers, food-service firms, travel agencies and jet-fuel providers.
Yet a United bankruptcy also would help the industry despite causing pain for United's workers and others, some argue. United's size and labor expenses would be pared to better match today's travel market, making United more competitive with thriving lower-cost, low-fare carriers such as Southwest Airlines, they say.
