Source: Chicago Tribune
Author: Mark Skertic

Tilton expects vastly changed airline to emerge from bankruptcy in the fall

Glenn Tilton can see the light at the end of the runway.

United Airlines' chief executive said elements are coming together to ensure the airline won't celebrate a third anniversary under Chapter 11 protection. It's also an airline that has changed dramatically since declaring bankruptcy nearly 26 months ago.

United has cut $7 billion in costs. Its workforce has shrunk by about a fourth, to 6,200, and pay is down across the board. Pilots spend more hours in the cockpit, while more work is outsourced.

The carrier created its own low-cost airline, Ted, which will fly out of O'Hare and Midway airports. It added the Embraer 170 to its fleet, a regional jet with room for first-class seats. And United has shifted more resources to profitable international markets, including Shanghai and Vietnam.

United, Tilton told the Tribune last week, will emerge from bankruptcy in the fall a different company.

But critical work remains.

Union workers have to ratify contracts that will cut their wages and benefits. Then, United must successfully terminate pension programs, a move it hopes to accomplish by the spring. Finally, an exit plan must be completed, and the financing to pay for it found.

Tilton and others have made optimistic--and wrong--forecasts before. But things are falling into place, he said, for a day he is clearly looking forward to.

"It's going to be a rush, it's going to be an absolute rush," he said Thursday, the same day he outlined United's efforts for members of the Chicagoland Chamber of Commerce's board of directors. "Our employees will be able to turn all their attention to the consumer, to the customer, to competition."

The bankruptcy has gone on months longer than many had anticipated. Tilton originally envisioned an 18-month process. It's taken more time because of unexpected roadblocks coupled with efforts to fundamentally change the airline for the long haul, he said.

United has lost more than $4 billion since entering bankruptcy. Deep cuts in wages and benefits have poised United to return to profitability, but many critics believe that more aggressive leadership could have accomplished that months ago.

They argue that United has been shielded by the protection of the bankruptcy court for too long, that the airline's time to be the sole engineer of its exit from Chapter 11--a period called exclusivity--should be ended, and others be allowed to present plans to save the carrier.

"They had the wrong guy bringing them into bankruptcy, and he's no better to bring them out of bankruptcy," said William Brandt, a turnaround expert with Chicago-based Development Specialists Inc., which provides management and consulting services to financially troubled businesses.

All but Tilton's first two months running United have been spent operating under the onus of Chapter 11.

"They need to rethink this whole thing top to bottom, probably change the board," Brandt said. "They need a fresh look. And, for my money, they need a lot of fresh equity capital.

"And it is certain that a lot of fresh equity capital that's out there will come with terms and conditions that some will find onerous. But, frankly, people who put real money at risk probably have a better sense of what they need to make the airline work than continuing to burn through debt."

At a bankruptcy hearing Friday, the court extended United's exclusivity period another 90 days. That's too much, said Aaron Gellman, a professor at the Transportation Center in the Kellogg School of Management at Northwestern University.

"I'm an economist and I believe in competition," he said. "They need to bring in competition to get everyone to sit up and take notice. Why continue it? How much time do you give a company to come up with a viable plan?"

A time to reposition

While its competitors struggle with the changing marketplace, Tilton said, United has used its time in bankruptcy to reposition itself. For example, fare wars erupted in many markets when Delta Air Lines unveiled a simpler pricing structure this month, a move that dramatically lowered prices and eliminated penalties for last-minute ticket purchases,

"We're in far better shape today to deal with Delta's Simplifares than we would have been two years ago," Tilton said. "We're in better shape because over the last two years we've learned this is not a short-term phenomenon, and we're going to have to compete on the basis of fare-value for business."

Freed from bankruptcy, United will be able to begin changing other areas of its operations.

"There will be a shift in focus to those things that are value-enhancing for the customers, because we will have both the financial resources and the time and energy to dedicate our attention to them completely," Tilton said.

That means everything from planes to extras like onboard entertainment systems.

The choices Tilton is making involve more than deciding what is needed to pull the airline out of bankruptcy. A decade from now, his team's efforts won't be judged on what they did to ensure United's short-term survival, he said.

Rather, he said, it will be, "Did you make the decisions that anticipated the future? Did you make the decisions in restructuring that anticipated how difficult the market's going to be?"

Gellman is among the critics who argue enough hasn't changed, that Ted and other moves are inadequate to meet long-term needs. More wage and benefit givebacks from unions likely are needed, he said.

United has been wise to increase its presence in lucrative overseas markets, but those profits could shrink over time, he said.

"International fares are profitable, but even that's not going to last forever," Gellman warned.

Bankruptcy expert Douglas Baird, a University of Chicago law professor, said that early on he thought United might never exit bankruptcy. Some of the changes, particularly efforts to reduce labor costs, have been impressive, he said.

What no one can say with certainty is whether the cuts United has made are enough.

"It's really not known" Baird said. "We don't know in this post-regulatory environment, once the impact of 9/11 is over, and SARS is over; once traffic comes back to normal, and we see what the steady price is going to be on fuel and so forth. Nobody really knows if the country can support more than one hub-and-spoke carrier."

Success not assured

A successful exit from bankruptcy won't guarantee an airline's survival, said Gordon Bethune, who retired as Continental Airlines' CEO last month. Bethune took over in 1995, after Continental had been through two bankruptcies.

"Bankruptcy court won't fix your company," he said. "A judge, quite frankly, doesn't know the front end of an airplane from the back."

Bethune declined to comment on United's efforts but said that too many companies ignore fundamental problems.

"It's not about just low cost," he said, citing the bankruptcy filing last year by ATA Airlines, a low-cost carrier that is the second-largest airline at Midway.

"Look, you can make a pizza so cheap that no one is going to want to eat it. And you can make an airline so cheap no one is going to want to fly it," Bethune said.

Tilton believes the post-bankruptcy United can be an airline that offers low-cost service, business-class travel and international service. That's why United has resisted a push to emulate low-cost carriers on all domestic flights. Customers should have a choice, he said.

"The issue is really a seat and an experience," Tilton said. "If Marriott can afford a suite of products that goes from luxury to economy, so, certainly, can we.

"It's really all about customer expectations."

Hurdles along way in Chapter 11 path

Bankruptcy takes away some of a company's ability to control its destiny. United's efforts have been influenced by various sources:

Labor unions: They agreed to deep pay cuts and work-rule changes, and they have tentatively signed off on another round of givebacks. But they are strongly resisting efforts to kill their pensions, a benefit United says it no longer can afford.

Air Line Pilots Association: Pilots have more clout than other workers at United. If their pension is terminated, the pilots receive a $550 million note when United exits bankruptcy. That could be sold on the open market to replace some of the lost pension benefits.

Judge Eugene Wedoff: The bankruptcy judge vetoed a deal that would have let the pilots walk away from a renegotiated contract and receive a $28 million monthly payoff if other unions were allowed to keep their pensions.

Attorneys and consultants: They have already cost United $130 million, making it the most expensive airline bankruptcy ever. They have cautiously--some argue too cautiously--steered the airline through legal and strategic challenges.

Unforeseen events: A domestic recession, the collapse of the Asian economy, SARS and record oil prices have hurt the entire industry and stalled recovery efforts.