Thanks to Christine Schenk for sending this in to us...

Source: Los Angeles Times:
Author: James F. Peltz

Forty years after United Airlines first urged travelers to "fly the friendly skies," the airline is at the center of industry upheaval that could decide which major carriers stay airborne.

Loss-ridden and fighting for its life, United last week won approval from the judge overseeing its bankruptcy case to hand off its underfunded pension plans to a federal agency.

The airline also asked Bankruptcy Court Judge Eugene Wedoff in Chicago for permission to impose more wage cuts on its 26,000 mechanics, ramp workers and other unionized ground employees.

With the employees threatening to strike if Wedoff sided with United, the airline and its mechanics' union reached a tentative out-of-court agreement on a new five-year contract for the mechanics, who still must ratify the pact.

United continues to negotiate with the International Association of Machinists, which represents the other ground workers, in hopes of reaching a deal before the judge's ruling and any potential work stoppage.

The outcome of United's turmoil will affect the survival prospects of the other old-line carriers — Delta Air Lines Inc., Northwest Airlines Corp., Continental Airlines Inc., US Airways Group Inc. (which last week announced its merger with America West Airlines) and the industry leader, American — all of which are struggling. US Airways, like United, is operating under Chapter 11 bankruptcy protection, and third-ranked Delta earlier this month warned that it too could be a candidate for Chapter 11 in the coming months.

"United is the 900-pound gorilla in this situation," said Alan Sbarra, a principal of Roach & Sbarra Airline Consulting in San Francisco. "They are the airline everyone's looking at."

The implications for travelers are considerable. Although it is unlikely a major carrier will go under this year — as Eastern Air Lines did in 1991 — financially troubled airlines are hacking away at their route systems, reducing options for fliers. And service, already a complaint with many travelers, might remain a problem as carriers push their employees for more wage-and-benefit concessions.

United, which carried 71 million passengers last year, sent shock waves through the industry when it succeeded in transferring $6.6 billion in pension obligations to the Pension Benefit Guaranty Corp. The move gives United a potential competitive advantage that rivals might be forced to emulate.

Northwest Chief Executive Doug Steenland said as much recently, when he told Bloomberg News that unless Congress changes the pension laws or Northwest finds some other way to keep funding its pensions, "The only alternative you have is to file for Chapter 11." Northwest's pension plans are underfunded by nearly $4 billion.

With United able to shed its pension obligations, "That could be the last straw that drives Delta and maybe others to go through bankruptcy to accomplish the same thing," said Edmund Greenslet, a former airline analyst and now publisher of the Airline Monitor, a trade publication.

Officials at Delta, which faces pension bills of more than $3 billion in the next three years, say they're hoping proposed federal legislation, which would spread out airlines' pension payments, would help solve the carrier's problem. But that could change if Delta's cash crunch gets worse later this year. The airline lost more than $7 million a day in the first quarter.

Rivals also are facing the possibility that United will succeed in its quest to wring more wage-and-benefit savings from its workforce, either through a court order or a negotiated settlement with its unions.

If United settles with its unions and gets the lower costs it is seeking, it would become a more efficient, slimmed-down airline that would put its rivals at an even greater disadvantage, and heighten the pressure on them to slash costs even more or risk perishing, analysts said.

"All the other (old-line) carriers would have to go back and restructure again, starting with their pensions," Sbarra said.

Restructuring has been a familiar refrain for the big carriers, which have been struggling to reduce their operating costs so that they can withstand the downward pressure on ticket prices and still turn a profit.

Led by massive deficits at the older carriers such as United, American and Delta, the industry has lost an astonishing $32 billion since the Sept. 11, 2001, terrorist attacks.

They have been hammered by the post-Sept. 11 dive in travel, bloated cost structures, enormous debts, a backlash among business fliers fed up with paying high fares, and growing competition and price cutting from younger, lower-cost discount carriers such as Southwest Airlines Co., JetBlue Airways Corp. and AirTran Airways.

The older airlines have used massive cost cutting in an effort to stem the red ink. United entered bankruptcy protection in December 2002, and US Airways filed for Chapter 11 for a second time in September, to help push through deeper cuts.

United has won $2.5 billion a year in labor savings and is seeking an additional $725 million in cuts from its employees. Four years ago, United spent more than 11 cents to fly one passenger one mile, but in the first quarter it cut that expense to 10.1 cents, which was lower than Delta, Northwest, US Airways and Alaska Airlines Inc.

American, which also has undergone massive cost cutting since nearly filing for bankruptcy protection in 2003, is doing even better. Its cost per mile in the first quarter was 9.8 cents.

The discount airlines such as Southwest and JetBlue spend fewer than 8 cents a mile, partly because they skimp on amenities, pay many of their workers less, have less lucrative retirement plans, are more productive than the majors and don't have the big carriers' expensive hubs and international operations to manage.

United and the others "don't have to be that low (to make money)," Greenslet said. But the airlines need to keep cutting costs and find ways to raise fares if they hope to recover, he said.

Fueling the problems Raising fares has been tough, both because of competitive pressure from discount carriers and because of an excess of capacity that has plagued the industry for years.

Another headache has been surging jet-fuel prices, which are up 35 percent from year-ago levels. So the industry is expected to lose an additional $5 billion this year even though, thanks to low fares, passenger traffic has rebounded to its pre-Sept. 11 levels.

"The price of oil is overshadowing much of the progress we are making," American Chief Executive Gerard Arpey told analysts last month.

The turmoil doesn't end there:

— In February, US Airways dumped its underfunded pension plans to the nation's pension insurer, the Pension Benefit Guaranty Corp.

— Northwest, flying with some of the highest operating costs in the business, also is pressing for more labor concessions but faces union opposition.

— Smaller airlines are also hurting. Aloha Airlines and ATA Airlines Inc. are in Chapter 11 bankruptcy protection. Alaska Airlines' first-quarter operating costs were the second-highest in the industry, behind Delta's. Independence Air, a unit of Flyi Inc., is dangerously low on cash, some analysts say.

The industry's turbulence could mean more changes for the 650 million people who board domestic flights each year, even though no airline is expected to disappear within the next year at least.

Having already pared service in many markets to hoard cash, the major carriers could cut more flights, and perhaps reduce service in smaller markets, as they continue to retrench.

United, whose fleet topped 600 jetliners five years ago, is reducing that number to 455 this year. Delta had 830 planes five years ago; today it flies about 535.

Observed Robert Mann, head of airline consulting company R.W. Mann & Co.: "The future might be more of getting in your car and driving."