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United Airlines’ Struggle

June 10, 2004 at 12:00 AM EDT


ELIZABETH BRACKETT: A year ago, many industry analysts gave United Airlines only about a 50/50 chance of survival. Now the airline says it’s on track to emerge from bankruptcy within the next six months.

JAKE BRACE: We’re on the path to achieving $5 billion of cost savings. We think that that level of cost savings will put our costs at a very competitive level industry, and I think we’re on the path to emerge.

ELIZABETH BRACKETT: United, the nation’s number-two airline, has been in financial trouble for nearly a decade. Expensive labor contracts, particularly with pilots, made it tough for the airline to turn a profit. With the drop-off in travel after 9/11, united began reporting losses as high as $22 million a day. In December of 2002, the airline filed for bankruptcy.

SPOKESPERSON: That will be at 2:10.

ELIZABETH BRACKETT: Since then, United’s unions have agreed to $2.5 billion in cuts in wages and benefits. Airplane leasing contracts have been lowered, and contracts with its United Express regional carriers have been renegotiated, resulting in significant cost savings. Consultant Michael Kayman, who specializes in restructuring companies, says United has made the right moves.

MICHAEL KAYMAN: United has done an excellent job taking advantage of all of the benefits of bankruptcy. They have stayed in bankruptcy through their efforts to cut costs, very successfully; reduced overhead substantially; continued improvement in their financial position.

ELIZABETH BRACKETT: But despite the good financial news and the substantial cuts, the red ink is still flowing at the airline. United suffered a net loss of $2.81 billion in 2003. Transportation expert Joe Schwieterman says united is getting hurt by its low-cost competition and by escalating fuel costs. He says Southwest, Jet Blue, and other low-cost carriers still have a better cost structure than United.

JOE SCHWIETERMAN: United got its cost down. It has new a labor contracts. It’s got a more lean operation. But they’re competing with some very severe discount competition. Right now, it appears that the cost cuts they’ve made have not been enough to put the company on stable financial footing.

ELIZABETH BRACKETT: In fighting its way back to financial stability, United has rolled out new marketing strategies to enhance the United brand: A sleek new paint job for its mainline airplanes– white tops instead of gray– and a new ad campaign aimed at regaining the sector of the market the airline says it needs to become profitable– the business traveler.

UNITED COMMERICAL ANNOUNCER: Where you go in life is up to you. There’s one airline that can take you there: United. It’s time to fly.

ELIZABETH BRACKETT: In February, United revealed its answer to competition from the low-cost airlines: A low-cost operation of its own. “Ted,” short for “United,” is aimed at the leisure market, with lower fares and perks such as Tedvision and Tedtunes, free overhead video and music programming. Based in Denver, Ted plans to have 160 daily flights by the end of the year. But it’s not the completely separate low-cost airline with a separate wage structure that United was touting as its way out of bankruptcy last year. United’s vice president of operations, Peter McDonald:

PETER McDONALD: A year ago, we were looking at a different low-cost operation that would actually be separate from United. We have to come to agreement with our employees on something different, which is Ted, we have today, and we’re making very good use of it. It’s lower cost than our… significantly lower cost than our mainline operation, and we’re finding it’s being received extremely well by our customers.

ELIZABETH BRACKETT: But since United’s unions wouldn’t agree to take lower wages to fly Ted, the low- cost operation may not do much for United’s bottom line. Ed Faberman’s organization, the Air Carriers Association of America, represents low-cost carriers who are in competition with United.

ED FABERMAN: All Ted is, is they’ve taken some of their own planes, using their same crewmembers, using the same ground people who are making the same amount of money they’re making when they operate United’s flights, and putting them on a newly configured aircraft with new paint schemes called Ted. And they’re offering $99… $49 fares out of Dulles Airport. They’re offering low fares out of Denver and Chicago and other markets. Well, if United can’t make money as United, at the rates they’re charging, it’s hard for us to see how in the long run they’re going to make money as Ted.

ELIZABETH BRACKETT: Regardless of Ted’s impact, United will have a tough time emerging from bankruptcy without the $2 billion loan guarantee it has applied for from the air transportation stabilization board, the ATSB. Discount airlines represented by the Air Carrier Association have publicly objected to the loan guarantee for United.

SPOKESMAN: None of us believe, quite frankly, that what United is bringing forward today is solely a result of 9/11. And while we have no hard feelings against United, while we certainly want to see every carrier survive, we don’t want to see a carrier take funds and use those funds to combat their competitors in what’s supposed to be a very open and tough marketplace.

ELIZABETH BRACKETT: United’s labor force has played a key role in the airline’s plan to emerge from bankruptcy by agreeing to significant cuts in pay and benefits. But now Machinist Union leader Karen Asuncion says the good will built up as labor and management struggled together to save the airline is gone.

KAREN ASUNCION: I can’t, you know, speak for any other airline but United Airlines employees. They’re very cynical. They’re very mistrusting of management, and they put their heart and soul into, you know, making this airline work and succeed, and right now they’re just tired. It’s like they’ve been beaten with a stick, and they just can’t go any more. You know, they can’t continue to work like that.

ELIZABETH BRACKETT: Labor peace was shattered in January when united asked its retirees to pay substantially more for their health benefits. Thousands of employees, including 2,500 flight attendants, took the company’s offer of early retirement last year primarily to protect those health benefits. Now they are furious. Flight attendants were so angry about the proposed health benefit cutbacks for retirees, they picketed the launch of Ted with signs that read “chea-Ted.” The president of the flight attendants union, Greg Davidowitch, says workers feel they were double-crossed by management.

GREG DAVIDOWITCH: I think the company lied to us. I think 2,500 people believed something to be true prior to July 1, and they made a decision upon what they believed– not ten people, not 20 people, not a hundred people; 2,500 people believed that if they left prior to July 1, their medical benefits were going to be protected, only to find out in short order that that was not true, and I would call that a lie.

PETER McDONALD: We didn’t double-cross anyone. We were very clear from the outset, going back to the time we filed our case, that we may have to restructure our retiree medical benefits. What’s important here is that these savings through the restructuring of the retiree medical benefits is absolutely essential to our emergence, okay? And unless we have a healthy United Airlines, we’re not going to be able to provide pensions or retiree medical.

ELIZABETH BRACKETT: A court-appoint monitor found that united did not mislead employees and did not make the decision to ask for cuts in retirees’ benefits until six months after the July 1 retirement date. But the court noted an unfortunate failure to communicate between United and the flight attendants. And the bankruptcy judge warned that there has to be an effective working relationship between the company and its workers if the airline is to emerge from bankruptcy.