Source: Aviation Week & Space Technology
Author: James Ott
Thanks Christine for the great story!

GRAND EXIT

Can a trimmed-down United Airlines survive in the grueling domestic arena and in the global competition among super carriers? That question is facing the airline as it advances through final legal issues toward exiting Chapter 11 bankruptcy protection.

Burdened by $17.42 billion in debt, United is challenged to produce a profit at its primary domestic hubs against low-cost domestic operators Southwest, JetBlue, AirTran and Frontier and traditional rival American Airlines. Across the globe, in company with Star Alliance partner Lufthansa, United already has its hands full competing with Air France-KLM, the world's No. 1 airline in terms of revenue, British Airways, and growing operators in Asia such as Cathay Pacific.

The Pacific Rim carriers, leaders in the acquisition of fuel-efficient Boeing 787s and passenger Airbus A380s, will be a force to be reckoned with, especially since United has no public plans to renew its fleet at any time soon. If United does not succeed against this array of world competitors--25% of its capacity is committed to the Far East--the U.S.'s long dominance in global aviation will surely fade.

Glenn Tilton, chairman, president and CEO of UAL Inc., is using this issue to secure changes in U.S. policy that would favor United and other network carriers. He is seeking tax reductions, a moderate policy toward mergers and approval of a higher level of foreign investments. He also wants a hands-off disposition by the government under which the airline industry would be treated as any other.

"For the first time in the history of aviation, U.S. carriers are no longer the largest, strongest companies leading the way," Tilton told the Chicago Council on Foreign Relations last year.

Tilton is critical of U.S. policy, insisting that it aggressively pushes for more aircraft capacity and is biased toward new entrants and non-network carriers. He cites the government's handling of congestion problems at Chicago's O'Hare International Airport. United and American voluntarily surrendered slots and depeaked schedules to relieve the situation, but the FAA later proposed to reallocate those slots to new entrants and foreign competition. With such a slant in its policy application, he says, the government has contributed to the problem of domestic excess capacity.

The veteran executive, an emigrant from the oil industry, Tilton is now a union target in what could be the final legal entanglements barring United's Chapter 11 exit. The unions objected to a management proposal in the initial reorganization plan that would preserve 18.75 million shares for management and directors. Some 10 million shares were proposed for incentive plans and 8.75 million dedicated to future distribution. That would have been 15% of the 125 million common shares to be issued. Unions called it "a stock grab."

Under pressure from the criticism, United last week decided to reduce the percentage of new stock destined for management and directors to 11% of the total. The precise distribution has not been worked out, a company official said. Management, in reconsidering its earlier decision, thought 11% more in line with commonly accepted practices.

Judge Eugene R. Wedoff of U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Div., is reviewing the unions' petitions among more than 50 objections to United's exit plan. He is expected to rule after hearings starting next week.

United launched the Boeing 777-200 and uses the aircraft on long-range routes. It will be competing against carriers with the newest equipment, especially in the Pacific Rim.Credit: GEORGE HAMLIN

THE AIR LINE PILOTS Assn. objection says the incentive plan for executives and directors "is excessive and has the effect of insulating United's executives and management from the consequences of a reorganization that has deeply affected all other stakeholders." The proposal is "insensitive in light of the substantial wage and benefit reductions including the termination of the pilots' defined benefit plan."

Tilton has taken a $133,500 annual salary cut, reducing his salary to $712,000 a year, while the flight attendants will take $725 million in cuts through 2010, according to the objection.

The objection put forth by the Assn. of Flight Attendants says the proposal "does not reflect sound business judgment, or good faith, much less respect for the enormous sacrifices employees have made to keep United flying." Tilton has taken a $133,500 annual salary cut, reducing his salary to $712,000 a year, while the flight attendants will take $725 million in cuts through 2010, according to the objection. The union is further upset that the exit plan does not provide for the continuance of the flight attendants' defined pension benefit plan, which the Pension Benefit Guaranty Corporation deemed affordable. United has terminated all four defined benefit pension programs to save an estimated $645 million a year. The PBGC is expected to cover $6.6 billion of the airline's total $9.8 billion in unfunded liabilities.

Under the reorganization plan, the PBGC will receive $400 million in new United shares. The total equity of the reborn company is projected to be worth $2.3 billion, with $1.9 billion in common shares to other parties. The $17.4-billion debt projection is about $8 billion less than when United filed for Chapter 11 protection in December 2002.

The carrier's survival in the price competitive U.S. market is in no way assured. Washington-based consultant John Adams observes: "Even the powerhouse of their international operation will have a hard time subsidizing a domestic network that is still unprofitable, since they didn't get enough of the fat out versus lean machines like JetBlue and the new Virgin operation."

The future business plan appears to be based on United's traditional model. The carrier serves large population centers and is boosting its international exposure by adding 16 destinations in 2004, and last year, increasing service to Mexico, Hong Kong, China, Australia and Germany. Services were started to Liberia and Costa Rica. Moreover, in 2005 code-sharing was established with South African Airways, TAP Air Portugal and Jet Airways in India. It will be banking on Star Alliance partners to extend market reach.

United's case was strengthened when JPMorgan and Citigroup offered $3 billion in debt exit financing. The recent report to the bankruptcy court that United earned $9 million in operating profit in November, despite higher fuel prices that added $124 million to fuel costs, further bolstered its position. The earnings represented a $197-million improvement over the same month last year. Prior to the end of 2005, United recalled 500 pilots and added 2,100 flight attendants. All classes of creditors accept the reorganization plan.

Tilton says the airline has prepared itself for the heightened competition. It expanded its low-cost leisure Ted operation 20%, bringing the dedicated fleet to 56 Airbus A320s. Excluding fuel, United's costs have been reduced by 20% and could reach an average savings of $7 billion each year through 2010. Efficiency moves account for a 27% increase in productivity. In the important area of regional traffic feed, new contracts have been negotiated with United Express partner carriers that are among the most competitive in the industry. New agreements related to United's fleet are expected to bring down costs by about $850 million a year.

YET ITS SURVIVAL is debatable. As United continues through the Chapter 11 process, fuel prices remain at record levels and unions grumble at the heavy cutbacks and stock distribution. "Stock ownership issues will be interesting, but in the final analysis the creditors who want UAL to live are the bankers who still command double-digit interest rates on the Equipment Trust Certificates," Adams says. "Where can you get 15% on your money these days except for a loan for a multimillion-dollar airplane?"