United's loan-guarantee fiasco may be blessing for industry

Anticipated bankruptcy may force carrier, rivals to streamline operations

December 06, 2002|By Paul Adams | Paul Adams,SUN STAFF

A widely anticipated bankruptcy filing by United Airlines could provide the industry with the catalyst it needs to slash costs, renegotiate union contracts and eliminate unprofitable flights as part of an industrywide restructuring aimed at stemming record-setting losses.

When it's over, labor unions will have less influence and consumers will enjoy fewer perks as airlines start to look and behave more like their low-cost, no-frills competitors, analysts said yesterday.

A few airlines, such as Arlington, Va.-based US Airways, may not survive the shakeout, some added.

But it all depends on whether United successfully uses Chapter 11 bankruptcy proceedings to drastically cut costs and force the entire industry in a new direction that reverses years of excesses driven by the stock market boom of the late 1990s.

"The irony of the bankruptcy is that, through it, United stands the potential of defining the cost structure and efficiency level of the whole industry - if they do it right," said Henry H. Harteveldt, an industry analyst for Forrester Research Inc.

The Associated Press, quoting anonymous sources, said United was preparing to file for bankruptcy protection Sunday. The carrier was in negotiations with lenders on the terms of a $1.5 billion debtor-in-possession loan, AP's sources said. The loan would enable the airline to keep flying while in bankruptcy proceedings.

The lead lenders involved in the negotiations are J.P. Morgan, Citigroup, Bank One and GE Capital, a unit of General Electric Co., the sources said.

A day after losing its bid for government assistance, United executives also met with union leaders and consulted with a key airline ally overseas, the wire service reported.

Earlier yesterday, shares of beleaguered UAL Corp., the airline's parent, slid nearly 68 percent to close at $1 after trading was halted for four hours while the New York Stock Exchange reviewed UAL's qualifications to continue being listed.

Because of the stock plunge, Dow Jones & Co. removed UAL from the Dow Jones transportation average and replaced it with United Parcel Service Inc.

And Standard & Poor's further downgraded United's corporate credit ratings after the "disappearance of any realistic possibility" of paying off deferred debt and avoiding bankruptcy.

The battering came a day after the Bush administration rejected the airline's plea for a federal loan guarantee considered crucial to its plans to avoid bankruptcy.

A bankruptcy filing would make the company's shares all but worthless.

United, based in the Chicago suburb of Elk Grove Village, declined to say if it will file for Chapter 11 protection, but analysts said such a move seems inevitable unless the carrier comes up with nearly $2 billion in financing on its own.

The carrier still has the option of resubmitting its loan application to the federal Air Transportation Stabilization Board, which was set up after the Sept. 11 terrorist attacks to help struggling airlines.

Consumers aren't likely to feel any immediate impact if the company files. United would continue to fly in bankruptcy, just as US Airways has since it filed for bankruptcy in August.

Analysts said a bankruptcy filing would give United considerable leverage in negotiating with its banks, vendors and unions as it tries to squeeze more costs out of its system.

A smaller United Airlines also would be beneficial to competitors.

American Airlines, Northwest Airlines, Delta Air Lines Inc. and Continental Airlines Inc. could pick up market share as United shrinks and consumers flee to the competition. Those airlines could also have an easier time raising ticket prices as their market share grows.

"There's blood in the water; they can smell it," said Bill Oliver, an aviation analyst with the Boyd Group, an Evergreen, Colo., consulting firm. "They see this as an opportunity to enhance their own revenue by attracting passengers away from United."

Part of the problem is that United has some of the highest costs in the industry, spending about 11.3 cents to fly one airline seat a mile, a key industry measure.

That's almost 20 percent more than some of its main competitors and comes largely as a result of expensive labor contracts negotiated in the mid-1990s.

United's generosity emboldened unions at rival carriers, analysts said, contributing to spiraling labor costs throughout the industry.

"Many [airline executives] feel United caused this problem," said Ray Neidl, an airline analyst with Blaylock & Partners.

But a bankrupt United could help solve it. As it cuts costs as part of a restructuring, other carriers may soon find themselves playing catch-up again.

American, which passed United last year to become the world's largest carrier, would be the most vulnerable. It spends about 11.5 cents to fly one seat a mile.

By contrast, low-fare leader Southwest Airlines, the only airline to post a profit this year, spends between 7 cents and 8 cents. Southwest is Baltimore-Washington International Airport's dominant carrier.

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