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The Honolulu Advertiser
Posted on: Saturday, September 17, 2005

Bankrupt United now model for ailing rivals

By Dave Carpenter
Associated Press

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CHICAGO — Costly, contentious and twice as long as expected, United Airlines' bankruptcy restructuring seems an unlikely role model for Delta Air Lines Inc. and Northwest Airlines Corp. as they begin their overhauls in Chapter 11.

United has run up $7.5 billion in losses in a 33-month bankruptcy process bloated by legal and consulting fees, for a staggering total of $12.5 billion lost since 2000. Its forecast for a profit in 2006 is dismissed by some as too rosy since it anticipates a drop in oil prices to $50 a barrel, from around $63 a barrel now.

Nonetheless, the makeover of the nation's second-largest carrier serves as a likely blueprint for its two ailing rivals, which are expected to try to copy much of what United has done. Analysts say they have little choice but to follow the bankruptcy "leader" to keep up — and stay in business.

"I think they looked at United and saw how United was able to shed pension liabilities ... and shed a lot of contracts that were burdening them and prohibiting them from making a profit," said George Novak, an airline consultant for The Metis Group. "United is showing that you can use bankruptcy in an intelligent manner to restructure."

Delta and Northwest joined the parent companies of United and US Airways in Chapter 11 on Wednesday, making for four major network carriers operating with federal protection from their creditors, though US Airways was given approval yesterday to exit bankruptcy. The moves were prompted by near-record fuel prices and heavy debt and pension obligations.

Similar pressures sent United into bankruptcy on Dec. 9, 2002, when its attorney James Sprayregen stood before a judge and warned that the nation's No. 2 airline was about to undergo "profound and agonizing change."

It was no exaggeration. United, a unit of UAL Corp., has used the leverage of federal bankruptcy law to lop $7 billion off its annual expenditures — extracting heavy concessions from its unions, dumping its defined-benefit pension plans, squeezing billions of dollars in savings from equipment lessors and eliminating 20,000 jobs.

While the toll on employees has been immense, United is far less costly to run and its operating costs are among the lowest of the major carriers.

United, which is targeting a Feb. 1 exit from bankruptcy, has simplified its fleet to five aircraft types from 10, reduced to 455 aircraft from 567, cut U.S. capacity and added more international routes, which now provide half its passenger revenue.

Fees for attorneys, consultants and accountants have cost United about $10 million a month throughout its bankruptcy. It spent $260 million on fees from the date of its filing through June, according to a Rocky Mountain News review.

United spokeswoman Jean Medina says there was no shortcut in the restructuring: "Without the hard work that we have done over the last several years to reduce our costs, improve our revenue and restructure the way we do business, United would not be positioned to compete with the strongest network carriers."