United Airlines: Bankrupt
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RAY SUAREZ: United Airlines is the largest carrier ever to file for federal bankruptcy protection. Now what?
To tell us about what could happen to United during reorganization and beyond, we’re joined by Elizabeth Warren, a professor of law at Harvard University who specializes in bankruptcy and commercial law; and Paul Stephen Dempsey, professor of law, and director of the institute of air and space law at McGill University in Montreal.
Professor Warren, who’s around the table now? Who gets a say-so in the restructuring of United Airlines?
ELIZABETH WARREN: Well, what changes now that the company is in chapter 11 is that the creditors, all of the creditors of United and the unions have to come to the table in sort of a joint negotiation. They’re the ones ultimately who will determine the fate of United. It’s no longer up to the management alone or up to the management and its shareholders. The creditors and the unions will decide what happens to this company.
RAY SUAREZ: It sounds like that table could be a little crowded. I mean, the creditors are numerous and run the… run probably a great range from very small interests to companies that United owes an awful lot of money.
ELIZABETH WARREN: Well, that’s true. And the way it works is that a few of the biggest creditors who are secured will do their negotiations with the management team, but the big number of creditors, including those who have only small amounts of money that they’re owed, all the way up to large amounts, will be represented by a committee. That’s part of what makes the negotiations in chapter 11 so interesting. Instead of having to go to each creditor and try to get each one to take a little less, to stretch out payment terms, to lend a little more in the future, the creditors’ committee acts on their behalf saving all of the creditors the cost, expense, time of negotiating with the debtor and in effect tries to work out what they think will be the best deal, best deal for payment of past debt and best deal for this company surviving and paying something on into the future.
RAY SUAREZ: Professor Dempsey, what is it that keeps them working on it to come up with a viable plan? Do they really need each other to end up holding something at the end of the process?
PAUL STEPHEN DEMPSEY: Well, they do. As long as they have faith that the company can be reorganized, the likelihood is that they’ll be paid better, more cents on the dollar through that process than through liquidation. However, what is likely to occur is that many of the creditors will end up at the end of the day — if they’re unsecured — holding stock in the company as opposed to being paid 100 cents on the dollar on their debts, what is also likely is that in this case– this is the world’s largest employee-owned company– 55 percent of the shares are owned by the employees. They are likely to have their stock interest wiped out, their equity interest totally obliterated which would change very significantly the way the company does business because it’s largest shareholder will no longer be the employees and very significantly run the risk of injuring relations with the employee groups who are so vitally important in this industry. This is a service industry, after all. And the employees are largely unsupervised.
RAY SUAREZ: So what if they can’t agree? Is there a referee?
PAUL STEPHEN DEMPSEY: Well, ultimately it’s the bankruptcy judge that will… who will make the decision. One particularly difficult part of these negotiations is over wages and work rules. The company has tried to engender concessions, the concessions that were offered up by the employees and demanded by labor… by management were deemed by the federal government to be inadequate to fully make United Airlines sustainable.
It is a very difficult process in the bankruptcy proceeding to go forward with ripping up of the collective bargaining agreement. That was done by Frank Lorenzo when Continental Airlines went bankrupt in 1983 but Congress has since changed the law and it now requires good faith negotiations, a plan for reorganization that’s feasible, a judge who is convinced that the employee groups are being unreasonable in not agreeing to the plan and he also must conclude that the equities lie with the decision to change the collective bargaining agreement, so wages and work rules will not be easily changed here. And they need to change very significantly if the company is to be sustainable in the long term.
RAY SUAREZ: Well, Professor Warren, you just heard what Professor Dempsey said. Do the 80,000-plus workers of United Airlines simply no longer have the clout of majority owners? Are they just the unionized workers now? Have they sort of lost one of their hats when it comes to this negotiation?
ELIZABETH WARREN: I don’t think so. I think the way I see this is that the unions and the management have loaded guns pointed straight at each other. It is possible that they can start blazing away. They can get rid of the company. They can make sure that management gets nothing, that no deal is struck, that there’s no undercutting of union rights as such. Of course, the employees can end up with no jobs so that they are not only no longer shareholders; they are no longer employees for United Airlines.
PAUL STEPHEN DEMPSEY: She’s right. That’s precisely what happened at Eastern Airlines about 10, 12 years ago.
ELIZABETH WARREN: Right. But the important thing to remember here is it’s not a change in the formal law that’s going to make the big difference. What’s really going to matter is the practical reality. And that is, can these parties come to the bargaining table and can they find a way to reshape a United Airlines for the future because I think what’s on the table right now is every range of possibility. We could see a United emerge from this that looks very much like the current United, this hub-and-spokes major airline that’s huge. With, you know, having trimmed a little fat. Lost a few pounds, cut back on some expenses, gotten rid of some routes that weren’t successful, gotten rid of a few agreements with its creditors and with its suppliers that didn’t make sense. We could see it going all the way to the other end. That is, this could be an airline that could be liquidated, it could be acquired by someone else or we could end up some place in the middle. It could be broken into several parts. There could be regional carriers that emerge from this or an entirely reshaped new low-cost carrier.
All of the possibilities are on the table. And while the focus right now is on labor and on management, how they’re going to negotiate with each other, we must not remember that the creditors are also a huge part of this, and they may be asked to take on some of the pain here as well in this reorganization. And I think in part whether or not management can persuade the unions that they’re not the only ones in the cross hairs here, bankruptcy is after all about the shared pain, then there’s a greater likelihood that something will emerge that’s a more intact company.
RAY SUAREZ: Professor Dempsey, CEO Glen Tilton promises that the United that emerges at the end of this is going to be a full service global airline, afternoon as it is today. But he also said the only way the airline can survive is to have a cheaper cost structure. What makes it more expensive to be United Airlines today than some of its other competitors?
PAUL STEPHEN DEMPSEY: Well, if you take a look at United’s root structure, if you’ve ever seen a printed map in the back of the magazine it looks like a great fur ball. The company has an extremely complex route structure. It is a huge, huge very complicated airline, the biggest of the network carriers until American Airlines acquired TWA. Also it has signed labor agreements that frankly are not sustainable. Under Jim Goodwin, the former CEO, the company was focused on trying to acquire U.S. Airways; it was focused on a corporate jet effort. Both of these distracted it from its core business. In order to secure labor approval of that acquisition, it signed an agreement which was… it blew the lid off of all salary expectations I think for all employee groups throughout the industry. And United Airlines is going to be a very complicated route structure no matter what unless it begins to pare down.
If you take a look at prior bankruptcies, Pan Am sold off the trans Pacific and trans Atlantic Division; TWA sold off authority to Heathrow, United Airlines if it needs cash can… does have some very significant assets that can be sold. However, once it ceases to become the network carrier that it is, it loses its strategic advantage. Its cost structure on the labor side is about 66 percent higher than Southwest’s. So it really cannot shrink down to a domestic carrier and be viable unless it is linked to a global network whereby it is fed traffic with a bunch of partner airlines who, as United shrinks will become much less interested in it as a leading dominant mega carrier in an alliance.
RAY SUAREZ: Well, Professor Dempsey, thanks a lot for being with us, Professor Warren, you too. Thanks.