Date: July 23, 2007
Source: Chicago Tribune
Author: Julie Johnsson

How long can United Airlines sit out the booming market for jetliners?

A decade ago, Chicago-based United was the first airline in the world to fly Boeing Co.'s 777, a large aircraft that revolutionized long-range travel by soaring over lengthy ocean routes on just two engines.

Now, United is watching Asian carriers with global ambitions, Japan's ANA and Singapore Airlines, launch the latest game-changing airplanes: Boeing's fuel-efficient 787 Dreamliner, and Airbus's A380 superjumbo jet, respectively.

That's because United hasn't ordered any new aircraft for its 460-plane fleet since it filed for bankruptcy nearly five years ago, even though almost all of the world's leading carriers are rebuilding their fleets.

United executives insist they are in no hurry to buy planes, although they have the financial means to do so.

After emerging from Chapter 11 reorganization last year, the carrier has remained in cost-cutting mode, spending sparingly on infrastructure and building cash reserves that now top $4 billion, reserves that could alternately fund deals or make United attractive to buyers.

United Chief Executive Glenn Tilton long has advocated for airline consolidation. Large-scale aircraft purchases remain on the back burner at United until the airline sorts out its strategic options, say people close to the airline.

But acquisition-minded airlines and private-equity funds aren't likely to pull off a large-scale deal in the present environment, as fuel costs soar and the U.S. airline industry lurches toward another downturn, analysts say.

If United defers its aircraft purchases for much longer, it risks damaging its franchise or getting shut out of aircraft production lines as Chicago-based Boeing and Airbus SAS tally record orders.

"[United] better get moving pretty quickly here, or they'll have to wait until the end of the next decade to get airplanes," said Paul Nisbet, aerospace analyst with JSA Research.

First up for Tilton: deciding whether to follow through on an order with Airbus for 42 narrow-body jets worth $2.5 billion. The deal, struck before United filed for Chapter 11 in 2002, is one of the few trade obligations that the carrier didn't shed in bankruptcy court.

United must pay Airbus $200 million this year to preserve its place on the assembly line for those A319 and A320 jets, according to recent Securities and Exchange Commission filings. Canceling the order would cost United its
$91 million down payment.

"We like the flexibility we have, and no decision has yet been made," said Jean Medina, a United spokeswoman.

The new Airbus planes, which seat between 120 and 150 passengers, likely would be used on shorter flights around North America, sources say, replacing United's oldest Boeing 737s. The 737s had an average age of 18 years, as of Dec. 31.

United also faces increasing pressure to update the long-range planes that it flies across the Atlantic and Pacific Oceans, routes that are the jewels in the carrier's international franchise.

United, which has the largest market share of any airline flying across the Pacific, soon will be competing head to head against carriers flying the next generation of aircraft on both southern and northern routes in that region.

Qantas leading the way

Qantas Airways Ltd. plans to fly its first A380 between Melbourne, Australia, and Los Angeles by late 2008. ANA plans to start flying the Dreamliner from Japan to North America the following year.

United, meanwhile, is spending $300 million to upgrade the first- and business-class cabins on its wide-body fleet and is due to unveil these new amenities at a trade show this week.

"United's new cabins will lead all U.S. carriers and be fully competitive with leading international carriers," Medina said.

Even so, analyst say United's 1990s-era aircraft will be at a disadvantage to the newer aircraft, which will have lower fuel and maintenance costs if they perform as the planemakers have promised.

The new Airbus jumbo jet, designed to seat 550 passengers or more, should give Qantas a cost and capacity edge on lucrative flights to Australia, analysts say. United primarily flies older Boeing 747 jumbo jets that seat about 350 people across the south Pacific.

"We're operating against airlines that don't have products in the same generation [of aircraft] as we do," said Gareth Evans, a group general manager for finance, network operations and pricing at Qantas.

Qantas will be one of the largest A380 operators in the world, with 20 of the behemoths on order, and it plans to fly much of that fleet from its base in Australia to the Western U.S., routes where United currently is its only competitor, Evans said.

The Australian airline is also the largest 787 customer, with 65 planes on order, and it eventually could deploy some of those aircraft to the U.S., he added.

United's planes had an average age of 12 years as of the end of 2006, making its fleet newer than those of most U.S. carriers. But United's toughest overseas competitors are upgrading aircraft holdings that are younger than
United's: Singapore Airlines' planes are 6 years old, on average; ANA's average age is 9 years.

Analysts say that aircraft age is especially important to well-heeled travelers, and United doesn't match up favorably with its overseas competitors.

"At some point [United has] to address the fleet, because it's aging," said Howard Rubel, aerospace analyst with New York investment bank Jefferies Inc.

United's planes don't offer travelers the hundreds of movies and television shows widely available on aircraft made in recent years, for example. In fact, on one of the first United flights from Washington Dulles International Airport to Beijing, a route that United fought hard to win, the plane's entertainment system failed altogether in the economy cabin for most of the 13-hour journey.

That disadvantage is shared by all of the U.S. carriers that fly overseas, a crucial market segment given the worsening outlook for the domestic U.S.
market.

However, US Airways, Continental Airlines and Northwest Airlines have moved to stock up on new, long-range aircraft. Analysts say it is inevitable that United, American Airlines and Delta Air Lines will place similar orders, although none have announced plans for major wide-body purchases.

Of this group, only United has yet to announce any aircraft deals whatsoever. But the airline is in regular contact with Boeing and Airbus and is confident "we would be able to acquire aircraft when needed for replacement or growth plans," Medina said.

Shifting planes a possibility

For now, United executives are content to try to wring more flying out of its current fleet while the company explores its strategic options. For example, if United shifted its newly upgraded Boeing 767s to routes within Asia, that would potentially free up the larger Boeing 777s and 747s currently used for such flights to focus exclusively on trans-Pacific routes, said a person close to United.

"We are going to continue to build a stronger company with the right network, fleet and products, supported by sound and disciplined financial decisions," Tilton told United employees this month in a recorded call.

Tilton and other United executives weren't available for comment last week because the company was in an SEC-mandated quiet period in advance of announcing its second-quarter earnings on Tuesday, Medina said.

But United's stringent fiscal policy has strained relations with one crucial constituency, its pilots. Only one out of every seven furloughed pilots accepted job offers from United this year, an outcome that would have been unthinkable during the carrier's 1990s heyday, said Herb Hunter, a 747 captain and spokesman for United's pilots union.

"People don't know where we're going," Hunter said. "We're the only airline out of bankruptcy that doesn't have any plane orders. We're the only major carrier in the world that doesn't have any new planes on order."