Update 2002-11

December 10, 2002

It's December, and time for the November update. 

In case you are not following the news at United airlines, here is a quick update.  Last week, the International Association of Machinists  (IAM) voted "no" to wage concessions.  This in effect scuttled the United recovery plan, and caused the Airline Transportation Stabilization Board (ATSB) to deny United's loan.  Now, United has been forced to declare bankruptcy.

The papers have been filed with the Courts.  Follow this link to see the documents in Adobe pdf format. The official filing.

These three articles shed a little light on UAL's prospects.

UAL Bankruptcy Is A Smart Move
Mark Tatge and Brandon Copple, 12.09.02, 7:30 AM ET

CHICAGO - United Airlines' parent, UAL filed for Chapter 11 bankruptcy protection--a move that experts say may be United's smartest in years. Finally, the nation's No. 2 air carrier (2001 revenue: $16 billion) will be forced to bring its bloated costs under control.

But there is major risk involved--if reorganization fails, United (nyse: UAL - news - people ) could go the way of other bankrupt carriers, namely Eastern Airlines, Pan Am and Braniff, and never emerge from bankruptcy.

Even in the best case scenario, reorganization could take years to complete, particularly given the fractious relationship United has with its unionized pilots, baggage handlers and flight attendants.

The question now whether the carrier, often crippled by indecision, will get so bogged down negotiating with creditors and labor unions that the franchise erodes beyond viability.

United has $1 billion in cash on hand, but it is burning $7 million a day. At that rate the company is expected to lose $2 billion this year. United needs to slash $9 billion in order to survive. That's a Herculean task in the high-fixed-cost airline business, where majors like American Airlines (nyse: AMR - news - people ) and Delta Air Lines (nyse: DAL - news - people ) are chasing fewer customers since Sept. 11 and where air travel is increasingly becoming a commodity.

United has the highest costs in the airline industry, spending 11 cents per available seat mile, mostly due to expensive labor contracts. Labor costs are nearly 60% higher than low-frill juggernaut Southwest Airlines (nyse: LUV - news - people ), according to J.P. Morgan Chase.

But labor isn't United's only problem. UAL management can look back on its share of screwups. Two years ago, UAL then-Chief Executive James E. Goodwin cancelled 23,700 flights after pilots staged a work slowdown. Thousands of furious travelers flocked to the competition. Goodwin wound up caving in to the pilots, who along with other union members were demanding catch-up pay for $4.9 billion in past concessions. So immediately after it agreed to raise its pilot payroll by $900 million, United was forced to slash fares in an attempt to win back passengers.

United's directors, three of whom represent pilots and mechanics unions, forced out Goodwin in October 2001 after he publicly speculated that United would go bankrupt if it couldn't reign in costs. Unfortunately, Goodwin was right. United may have been just as well off filing Chap. 11 last December.

Instead, Goodwin's successor, Glenn Tilton, has been preoccupied since September with securing $1.8 billion in loan guarantees from the federal government so United could restructure and avoid bankruptcy. But UAL's Tilton didn't win any sympathy from United's unions by taking a $3 million signing bonus last fall, just before launching a cost-cutting campaign aimed at cutting flights and jobs while extracting concessions from those who kept their jobs.On Wednesday, the Air Transportation Stabilization Board rejected United's restructuring plan for lack of sufficiently aggressive cost cuts.

Chapter 11 poses perils for United, particularly since it still will need the cooperation of its unions to get costs in line. Of the eight largest airline bankruptcies going back to Braniff's filing in 1989, only two carriers have emerged intact--Continental Airlines (nyse: CAL - news - people ) in 1993 and America West (nyse: AWA - news - people ) the following year. (US Airways went into Chap. 11 in August and is expected to file a reorganization plan by Christmas.)

Could United go the way of Eastern Airlines and Pan Am? It's possible.

Bankruptcy will wipe out shareholders' equity--55% of which is held by pilots and mechanics under a 1994 employee stock option plan. All United's employees are looking at pay cuts. And if pilots and mechanics feel they're getting a raw deal, they could disrupt service, as the pilots did so effectively in 2000. That would in turn drive more passengers away--further shrinking United's vanishing revenue.

"They have to walk a very fine tightrope between alienating employees and driving away customers," says Ray Neidl, an airline analyst at Blaylock & Partners. And in bankruptcy, Tilton will be working without a net.

United Airlines sees spending rate nearly tripling
Monday December 9, 12:54 pm ET


CHICAGO, Dec 9 (Reuters) - United Airlines expects to spend between $20 million and $22 million a day in December and $10 million to $15 million a day in January, a much faster rate than previously reported, the attorney representing the bankrupt airline said in a court hearing on Monday.

United, the world's second-largest airline and a unit of UAL Corp. (NYSE:UAL - News), had previously reported a cash burn rate of around $7 million to $8 million per day. But attorney James Sprayregen of Kirkland & Ellis said that rate will nearly triple during the winter months, which he said were one of the slowest periods of the year for United.

The airline now has about $800 million in unrestricted cash on hand and $600 million in restricted cash, Sprayregen said.

He also said that for United to emerge from bankruptcy, it will need to be a smaller company.

United's bankruptcy filing on Monday marked the largest airline bankruptcy ever. United is projecting passenger revenue of $11.8 billion for 2002, down from $16.9 billion in 2000, according to court documents

United CEO Says Some Assets May Be Sold
Monday December 9, 11:23 am ET


CHICAGO (Reuters) - Glenn Tilton, chief executive of bankrupt United Airlines, said on Monday he will consider selling some assets as the world's second-largest airline begins to reorganize under court protection.
In an interview with Reuters after United's Chapter 11 bankruptcy filing earlier Monday, Tilton said he plans to "stress test" the airline's assets and see which ones still fit.

"I'm going to ask whether they're core to the proposition of the new United," Tilton said. "I'm going to ask whether or not they're assets upon which we build to make certain that I have an equity that you're going to be interested in buying ... If they're more value to somebody else than they will be to the new United, then they're likely for sale."

Tilton also said he still believes the $9 billion in wage concessions his predecessor, Jack Creighton, saw as necessary to turn around the airline was a reasonable target.

United may reapply to the federal government for loan guarantees as an exit strategy from bankruptcy, he said.

United, a unit of UAL Corp. (NYSE:UAL - News), continues to have discussions with its Star Alliance marketing partners, Tilton added, saying it was "possible" the German carrier Lufthansa (Frankfurt:LHAG.F - News) could take an equity stake.

In case you have not noticed, wasn't the UAL AFA calling UAL management the enemy not eight months ago?   Reread AFA UAL press releases.  Wasn't the AFA threatening strikes, wasn't their MEC President saying that there would be no givebacks?   Read the latest  little gem from the AFA.

United Airlines' Employee/Management Cooperation Remains Strong

Working Together Key to Successful Bankruptcy Restructuring & Strong Future

CHICAGO — Association of Flight Attendants, AFL-CIO, United Airlines Master Executive Council President Greg Davidowitch made this statement after the airline announced it would file for bankruptcy to continue operating as a result of the federal Air Transportation Stabilization Board denying its application for a loan guarantee:

"It wasn't long ago that United Airlines was the biggest, best airline in the world. But a number of very poor decisions by recent CEO's, the loss of $20 billion in revenue among the major network carriers in our industry and the unethical collaboration between the Air Transportation Stabilization Board and some other airlines who stand to gain if United fails, combined to result in our carrier's bankruptcy filing.

"These outside forces will not succeed in grounding United. The coming months will be difficult and painful for flight attendants as we work through the bankruptcy process. But we are committed to continuing the unprecedented cooperation between employees and management that will be necessary to turn United around and successfully shepherd it through reorganization.

"This process will mean further cuts to our contract and a bigger strain on our families. But we will face these challenges head on. We know and management knows what happens when a carrier fights with its workers in bankruptcy. There are enough former Eastern Airlines employees in our ranks to remind us of that.

"Many cowardly airline CEO's, in their lobbying to get our ATSB application denied, questioned our resolve and the sacrifices we've made. The average United flight attendant has provided 12 years of dedication and earns an average of $32,000 a year. These dedicated workers voluntarily decided to take painful pay and benefit cuts to keep their carrier afloat. What flight attendants have been willing to offer United thus far has been awe-inspiring. And we will not let those who doubt us from the comfortable confines of their executive suites and six and seven figure salaries in the White House and Wall Street, diminish our sacrifices or resolve to see this carrier succeed.

"We will not be deterred from our goal of restoring United to the premiere airline in the world. We will continue to work with our United Airlines Union Coalition partners and airline management to position the carrier so that we can emerge as the preeminent airline in the industry once again. Those who doubt us will lose. They will not be able to compete with the new United."

More than 50,000 Flight Attendants, including the 24,000 Flight Attendants at United, join together to form AFA, the world’s largest Flight Attendant union. Visit us at www.unitedafa.org.

Between union busters behind every bush, "cowardly" CEO's of other airlines,  and AFA  policy reversals,  the paranoid world of the AFA must be a scary place to live.  

Truly awe-inspiring.

It is a harsh time in the industry.  Many of our peers at other airlines are losing jobs and are being forced out of our industry.   While we wish everyone the best, and do not hope for harm on any individual or any company, we are reminded of last year.

Remember last year when we were being stopped by AFA activists from other airlines in our terminals?  Remember the smug, condescending tone when we told them that we did not support the AFA?   We still hear the smug, condescending tone every time management takes an action to try to keep our company out of bankruptcy. "See what you get for not voting 'yes' and getting a contract?"

As the bankruptcy judge has his way with UAL flight attendant compensation and work rules without their say, as their "legally binding contract" is eroded, as they discover  "dignity and respect of the furlough,"  as they find out that the AFA is powerless to help them when they need it most, we wonder if these same activists are wondering what years of $39.00 per month would look like in their bank accounts.

Wonder how many of them would trade their contract for the job security that the non-union flight attendants at Delta enjoy?

We wonder if they are still so smug.

Delta must be doing something right.  Even the AJC had something nice to say.

From AJC/Access Atlanta

Delta's status better than United, observers say
Russell Grantham - Staff
Wednesday, December 4, 2002

The bottom line is cash, or the lack of it.

Like most other big carriers, both Delta Air Lines and United Airlines have been losing billions of dollars and shedding thousands of employees.

But Delta has about twice as much cash as United and is losing money at a slower rate.

That's why, at the most fundamental level, many industry watchers say Chicago-based United will likely end up in bankruptcy court while its Atlanta-based competitor won't.

Industry analysts list lots of reasons why Delta, the nation's third-largest airline, is in better financial shape than No. 2 United.

Some point to the most obvious difference between the airlines. More than 80 percent of United's employees belong to unions, and they've often been at loggerheads with management. Partly as a result, these analysts say, United has among the highest operating costs in the industry.

In contrast, Delta's pilots are the only employees with a union, giving the airline more flexibility to improve productivity and cut costs, say some analysts.

But other analysts say it's not so much labor differences as differences in the airlines' competitors and pricing and operating strategies that have distinguished their fates.

"It's not unionization," said New York airline consultant Bob Mann. Delta "is a far more efficient factory." Delta's Atlanta hub is more efficient than most other airlines' hubs, he said.

Delta also generally operates much larger jets than competitors on its domestic routes, lowering costs on a per-seat basis.

United, on the other hand, has been hurt more than Delta by its heavier dependence on business travelers who have rebelled against high fares, analysts say.

"Delta never lived off that high-octane mix," said Mann.

Meanwhile, Delta has benefited from "quite a liberal" labor contract clause with its pilots union, he added, that allows Delta to operate more regional jets than its competitors.

The smaller jets, which have much lower operating costs per hour, have given Delta more flexibility to match capacity with demand on routes since last year's terrorist hijackings, he said.

Delta has continued adding regional jets at subsidiaries Comair and Atlantic Southeast Airlines, even as it has postponed deliveries through 2004 of new mainline jets and continued furloughing pilots on its mainline operations.

Paradoxically, Delta may also be in better shape because it has had to learn to compete with low-fare carriers such as AirTran Airways, its main rival at its Atlanta hub, said Jamie Baker, with J.P. Morgan.

"AirTran's presence in Atlanta has a more profound competitive impact on Delta than American's presence in Chicago has on United. American and United don't compete on the basis of price; AirTran and Delta do," he said.

Delta "has done a better job at managing its costs," he said, although its costs are still too high to compete with low-cost carriers.

In the third quarter, Delta said it cost 10.33 cents to fly one seat one mile --- lower than United's 10.90 cents but well above the 7- to 8-cent range of competitors AirTran and Southwest. Delta is launching a new subsidiary next spring that it says will match those costs.

But it's Delta's "union-lite" status relative to United that has allowed it to pursue such new strategies while the latter has continued to burn through its dwindling pile of cash, said other analysts.

That difference gave Delta the ability to change its pension plan for nonunion employees, for instance, said Philip Baggaley, with Standard & Poor's.

Delta said last month that it expects to save $500 million over the next five years by switching to a so-called cash-balance pension plan.

United would have to negotiate such changes with its unions, said Baggaley. United "has a higher cost structure, including higher labor costs," he added, partly because work rules under its labor agreements allow less flexibility to change how it operates.

Delta's $10 billion in revenue this year is less than 8 percent behind United's $10.8 billion, but its mainline operations have almost 18 percent fewer employees: 68,000 vs. 83,000 at United.

At Delta, "you don't have all these wasteful work rules," said Ray Neidl, an analyst with Blaylock & Associates.

United has also been hampered by more management turnover because its employees have an effective veto over who becomes chief executive, he said.

As a result of earlier labor concessions, United's employees own a majority of the airline and hold three voting seats on its board of directors.

United's history of labor strife threatens to scuttle its efforts to get a $1.8 billion federal loan guarantee it says it needs to avoid bankruptcy.

United will almost certainly seek Chapter 11 protection from creditors, said Neidl, if Machinists union members don't approve an amended $700 million concession package this week.

Leaders of the International Association of Machinists urged members to vote in favor of the package Thursday. They rejected another package last week.

All the airline's other employee groups have approved their portions of $5.2 billion in labor cost cuts over 5 1/2 years that United promised the government in seeking the loan guarantee.

HOW THEY COMPARE
...................................Delta..........United
Year-to-date revenues:............ $10.0 billion..$10.8 billion
Market share (rank)*:..............14.9% (3)......17.1% (2)
Employees, mainline operations:....68,000........ 83,000
Percentage of unionized employees: 12% 81%
Directors representing employees:..1 nonvoting....3 voting
Directors representing
common shareholders:.............. 13............ 5
Total directors on board:..........13............ 11
Fleet size**:......................827............557
Cost to fly one seat one mile:.... 10.33 cents....10.90 cents
Losses since 2000:................ -$2.1 billion..-$3.9 billion
Available capital:................ $2.6 billion.. $1.3 billion
Year-to-date stock performance:....-58%.......... -77%
*In terms of miles flown by paying passengers, through October
**Including regional subsidiaries
Source: Staff research

Some of our mechanics are at it again.  They want a union.

Do you think that they remember what national mechanic's union politics did to Eastern?  Probably not.

Do you think that they see what  national mechanic's union politics did to UAL? Again. probably not.

Can you imagine what national mechanic's union politics would do to Delta?

Apparently, a  few disgruntled Delta AMT's do not have this vision.  They are trying to  organize Delta.  We can only wonder what AMFA national has promised these organizers as a reward for their loyal service.  Anyway, follow this link if you want to see their  website.

Hopefully, the majority of our Delta mechanics will be smart enough to see through AMFA disinformation and withhold support.   Militant mechanic's unions belong at other airlines, not ours.

We would all hate to see national mechanic's union politics bring Delta to a premature end.

Friday December 6, 7:51 pm ET


FORT WORTH, Texas, Dec. 6 /PRNewswire-FirstCall/ -- American Airlines today asked all employees to forgo pay increases next year as part of the company's aggressive efforts to stem short-term financial losses. Company executives met today with union leaders representing pilots, flight attendants and ground personnel at AA headquarters to make the request. They also met with other employee groups to explain the need to forgo these pay increases.

In a letter to labor representatives and other employee groups, AA Chairman and CEO Don Carty and President and COO Gerard Arpey said management and support staff would forgo pay increases for the second consecutive year. They explained the need for other employee groups to forgo scheduled wage increases in 2003 to "buy enough time to find the additional $2 billion in permanent, annual structural changes needed to survive."

By forgoing all of the scheduled pay increases, the company will avoid an immediate annual cost increase of $130 million, which will keep American's financial situation from worsening.

In recent weeks, Carty and Arpey have been meeting with employees in large and small groups around the country.

"American's employees have an enormous stake in the financial stability of our company, and I have been heartened by their support and willingness to work with us to position American to survive and prosper," Carty said. "American Airlines employees understand the seriousness of our situation and the need to protect our future by working together."

Flight attendants, represented by the Association of Professional Flight Attendants, are currently scheduled to receive a three-percent wage increase on Jan. 1, 2003, plus applicable premium increases in July. Aircraft mechanics, fleet service clerks and other employees represented by the Transport Workers Union are scheduled for a three-percent pay increase, plus applicable premium increase for some classifications, on March 1. Airport and reservations agents, who are not union represented, are slated for an average 90-cent hourly wage increase in 2003.

The letters to the employee groups explained that the company's long-term survival will require it to be leaner, more efficient and more productive -- a business model contingent upon labor agreements that allow American to compete more effectively in the new aviation marketplace.

"While forgoing scheduled increases is a necessary and important short- term step in our march toward survival, it cannot be the only one," the letter stated. "The restructuring of our labor agreements is inevitable and fundamental to our long-term goal of remaining competitive and restoring profitability."

Immediately following the events of Sept. 11, 2001, American launched a top-to-bottom review of the company's operations, and implemented a plan that will cut capital expenditures by several billion dollars by deferring aircraft purchases, facility improvements and information technology investments.

In addition, it has identified more than $2 billion a year in annual, structural cost savings all across the company. American's goal is to achieve total annual cost-savings of $3 to $4 billion.

Throughout this process, American has taken a different approach to addressing its financial challenges from some of its competitors, which sought immediate concessions from employees, rather than working first to restructure their business, increase revenue and aggressively control costs.

"We felt it was essential to do things differently -- to trim every cost we could find before turning to our employees for financial help, and we've made a concerted effort to do so," Carty said.

The U.S. airline industry is projected to lose a total $9 billion this year.

Current AMR Corp. (NYSE: AMR - News) news releases can be accessed via the Internet. The address is http://www.amrcorp.com .

As we mentioned in Update 2002-09 (Item 2),  the AFA proudly announced in a press release that the flight attendants at Shuttle America Airlines were petitioning to elect the AFA.  Hunter Kidd had the following to say.

“Union representation will provide us with a voice in our workplace,” said Hunter Kidd, a three year Shuttle America flight attendant. “We work hard for our airline everyday and deserve the job security and better benefits that a legally binding contract provides.” 

Apparently, Hunter is in the minority.

The NMB announced in 30 NMB No. 14 that the Shuttle America flight attendants rejected the AFA.  Of the  45 flight attendants who were eligible to vote, 18 flight attendants bothered to vote for the AFA.   Our guess is they rejected the AFA because of "Massive interference on the part of management."  The fact that the AFA is bankrupt and ineffective had nothing to do with it.

Delta, Frontier, and now Shuttle America.   The AFA is a three time loser.

That's all of the news that we care to write about.  Enjoy the Winter OPS, and may you never hear from Reroute.