Would a Stronger United Mean a Weaker
Industry?
Associated Press
As United Airlines awaits word on
federal loan guarantees, Glenn F.
Tilton, chief of its parent, UAL, has
spoken out about cost cuts he has
achieved. Most have come from employees
like those at a ceremony in San
Francisco.
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By MICHELINE MAYNARD
 HE
wounded on the battlefield are the most
dangerous, according to the old saying, because
they distract attention. Though said about war,
it could apply to the airline industry, too,
where the competitors of United Airlines face
just such a hazard.
United, which filed for bankruptcy protection
in December 2002, is expected to receive an
answer soon on its application for $1.6 billion
in federal loan guarantees. Though United says
its bid for approval appears on track, some
analysts have begun questioning whether its case
is strong enough, given the cloudy atmosphere
surrounding the troubled industry. Whether
United wins or loses, competition among airlines
will only become tougher, whether in fare wars
or in the search for badly needed financing.
Industry officials, including those at
United, are nervous because they have no way to
know when the Air Transportation Stabilization
Board will rule - or what it will decide.
Since its creation in 2001, the board, whose
three members are from the Treasury Department,
the Transportation Department and the Federal
Reserve, has operated mostly in secrecy. It
emerges only when it issues a ruling or, in rare
cases, seeks more information from an airline
seeking its assistance.
The board, which turned down United's
original application for $1.8 billion in loans,
sending it into bankruptcy protection, may be
preparing to make its final decision about the
airline. Its staff, though still seeking
information from United, a unit of the UAL
Corporation, has competed a number of interviews
with industry officials and experts.
Just a month ago, the prevailing wisdom was
that United's request for loan guarantees would
be granted, with conditions. That thinking was
spurred as much by politics as by the steps
United had taken to streamline its operations.
Its bid has had the tireless support of J.
Dennis Hastert, the House speaker and a
Republican of Illinois, the airline's home
state.
Perhaps emboldened by expectation, UAL's
chief executive, Glenn F. Tilton, and his
management team set off on a barnstorming
publicity tour in May. Mr. Tilton said
repeatedly that the airline had met the
requirements for a loan - and that it deserved
it, given that it had cut labor costs $2.5
billion a year and had saved billions more in
operating costs.
But that may have been a premature victory
lap. United also disclosed last month that fuel
costs in 2004 would be $750 million more than it
had projected. That news came only months after
US Airways, which received a $900 million loan
guarantee, the biggest so far, fell technically
into default on its loans and was forced to
renegotiate their terms.
Moreover, United remains in a court battle
with unsecured creditors over prices it pays to
suppliers, although it reached agreement with
its unions last week on another thorny issue,
health care cuts for retirees.
A bankruptcy judge, Eugene C. Wedoff, is
expected to act on United's request for more
time to put its emergency plan in place. Mr.
Tilton, who once said United might be able to
exit bankruptcy protection by December 2003, now
says this fall is more likely, assuming the loan
application is approved.
Approval is still the most likely outcome,
industry officials grudgingly acknowledge,
because United is a powerful economic force. It
has 80,000 employees, many at its big operations
in Chicago, Washington, San Francisco and
Denver.
If the loan guarantee is approved, the
greatest impact may be on American Airlines,
which is in a cutthroat battle with United at
O'Hare International Airport in Chicago, where
together they control 80 percent of the traffic.
Both have had their wrists slapped by the
Transportation Department for packing in too
many flights, prompting modest cutbacks.
Yet American is in better shape, having cut
its costs over the last year and wrested
concessions from its unions on the threat of
bankruptcy. Its operating costs are now lower
than United's, according to an estimate by
Standard & Poor's Ratings Services.
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Philip A. Baggaley, an airline analyst at S.& P., said he saw
a strong possibility that United would have to make further cost
cuts even if it got the loan guarantee, given the stiff
competition from low-fare airlines.
Those carriers have raised deep concerns about United's
application, saying it would provide an unfair advantage. A
replenished United would have more resources to battle them
through its low-fare service, Ted, and cheaper tickets on
mainline routes.
Executives at one airline, who insisted on anonymity, voiced
alarm at some United fare cuts, which, for instance, have meant
$60 one-way tickets between Salt Lake City and Cody, Wyo., a
low-volume route that normally fetches top-dollar fares.
These executives said United could hurt itself and rivals on
routes that could be lucrative. Indeed, many in the industry say
rising fuel expenses alone could cost United its bid for a loan,
because it cannot offset those expenses elsewhere.
If its bid does fail, one thing is clear: United will not
vanish anytime soon. Airlines have hung on for years in
bankruptcy protection, even surviving several filings;
Continental sought protection twice, in the 1980's and early
1990's.
In an interview last month, Mr. Tilton suggested that
competitors might face a worse situation if United stayed in
bankruptcy protection, where it is shielded from certain
expenses and can always cut costs further.
United says it has no Plan B. It must take that position
publicly; otherwise it would technically not be eligible for a
loan guarantee, reserved for airlines without access to capital
markets. Yet it has undoubtedly been considering its
alternatives. Mr. Tilton and UAL's chief financial officer,
Frederic F. Brace III, have said United will emerge from
bankruptcy "one way or another."
To do so, it will eventually have to find capital. Its
bankruptcy financing, already extended once, runs out at the end
of this year, and it needs to come up with at least $2 billion
to emerge on its own.
A prospective lender could dictate severe cuts at the
airline, which has steadfastly clung to its assets, even though
Eastern, T.W.A. and others had to shed routes and operations in
their ultimately unsuccessful struggle to survive.
United's drive to become solvent is also likely to threaten
Delta Air Lines, which has warned that it, too, may have to
seek bankruptcy protection unless its pilots' union agrees to
cuts. There is no line of investors waiting to snap up airlines,
so United and Delta could be dueling for risk takers.
And a desperate but still-breathing United means that the
rest of the industry reaps no benefit from a reduction in
capacity, something that economists say is long overdue. In an
interview last month, the chairman of
Southwest Airlines, Herbert D. Kelleher, said the loan board
had distorted the industry by interfering with supply and
demand.
As it tries to bounce back, United will face ever more
treacherous skies, given the relentless push by low-fare
airlines. Last week,
JetBlue picked up options to buy 30 more Airbus planes, on
top of 100
Embraer regional jets that it will add in coming months.
Southwest is taking delivery of a dozen planes a month over
the next few years, while
AirTran, Spirit and others have new planes on the way.
Mr. Kelleher, whose airline has not taken a stand on United's
application, refused to discuss its prospects. But he said it
would be dangerous for any airline to go into bankruptcy
protection more than once.
"You soon run out of assets to finance outside," he said,
"and then it may become a question of what you have left."
That is a situation United hopes to avoid. Otherwise, instead
of simply being an injured player, it could become the next
victim.
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