Source: New York Times
Author: Micheline Maynard

CHICAGO - With a rare ruling last week against United Airlines and its pilots union, a federal bankruptcy court judge may have opened the door to takeover offers for the struggling carrier.

The judge, Eugene Wedoff of U.S. Bankruptcy Court in Chicago, rejected a contract between United and its pilots union on Friday. In doing so, he singled out a provision that would have required United's management to keep its right to draft a reorganization plan or the contract would be nullified. He termed that requirement "inappropriate."

Potential bidders for United have been held at bay during United's 25 months under protection because the management has maintained the exclusive right to file a reorganization plan. As long as that right remains in place, bidders cannot see the airline's confidential financial data or make competing offers without the airline's consent.

But if the judge lifted that right, called "exclusivity," other companies would be allowed to look at United's books and propose their own reorganization plans.

Among those mentioned as potential bidders has been Texas Pacific Group, the investment company led by David Bonderman. In 2002, Texas Pacific made an offer for a controlling interest in US Airways before being outbid by the Retirement Systems of Alabama.

Throughout United's bankruptcy, Texas Pacific has held regular discussions with leaders of the International Association of Machinists and Aerospace Workers, which represents the airline's baggage handlers and ramp workers, people close to the talks said.

But with United's executives holding the sole right to draft a revamping plan, the talks have not been substantive, these people said. A spokesman for Texas Pacific declined to comment.

United's management would still be able to draft its own plan if it lost exclusivity. But such an action could put pressure on the executives to wrap up the reorganization, and fast, legal experts said.

Wedoff has granted more than a half-dozen requests by United to extend its exclusivity, but generally for 30 days at a time, not the longer extensions United has sought.

In August, Wedoff overruled objections from United's unions, which challenged management's exclusivity after the company stopped making its required contributions to employees' pension funds. The airline said that it might terminate the plans.

But in his ruling Friday, the judge gave the first indication that his leniency might have its limits.

Wedoff objected to a little-noticed stipulation that United's management team retain its exclusivity or the contract would not remain in effect.

The clause "is an incentive against the termination of exclusivity," he said.

United's exclusivity, he continued, "should be decided on its merits. An incentive of this sort is inappropriate," the judge told a hushed courtroom.

United said it considered the contract to be "fair and equitable.".The airline said it planned to resume talks soon on a new contract, although the pilots union warned that a deal could not be assured.

Separately, the airline reached a tentative agreement late Saturday with its flight attendants' union. The flight attendants had threatened to strike United if their labor agreement were set aside by the bankruptcy court and concessions were imposed.

The outcome of any battle over exclusivity would be heavily influenced by United's creditors' committee. The committee has not challenged the company's requests for exclusivity, and had not fought the airline in any remarkable way until the pilots contract, which it opposed along with the unions, some banks and a federal pension agency.

A change of heart by the creditors on exclusivity would undoubtedly get the attention of the judge and potential bidders, not to mention United's management. A lawyer for the creditors committee did not comment Sunday.

The issue could come up soon because of the impact on United's revenue from the decision last week by Delta Air Lines to reduce its fares by up to 50 percent and limit what it charges in coach and first class.

Merrill Lynch estimated that the Delta fare reductions could cost United $500 million. That could lead to more cuts by United, forcing it again to revise the business plan on which it is basing its restructuring efforts.

Robert Roach, vice president of transportation for the machinists union, warned of that prospect a few weeks ago, before Delta's move, and argued that investors should be allowed to look at the airline. ."We need equity investors to come in, sit down with management and labor, and provide some ideas," Roach said.