United cuts costs, warns of fall bankruptcy filing

Dave Carpenter

Thursday, Aug. 15, 2002 | 9:50 a.m.

CHICAGO -- United Airlines warned Wednesday that it will file for bankruptcy court protection this fall unless it succeeds in lowering costs dramatically through a restructuring.

The announcement steps up the pressure on unions that so far have balked at pay cuts United says are necessary to stem massive losses. The warning comes three days after US Airways filed for Chapter 11 bankruptcy and a day after American Airlines announced severe cutbacks.

"Unless we lower our costs dramatically, filing for bankruptcy protection will be the only way we can ensure the company's future and the continued operation of our airline," Jack Creighton, chairman and CEO of United parent UAL Corp., said in a statement.

United hopes the restructuring will help it win a $1.8 billion loan guarantee from the federal government, a prospect many industry watchers say is unlikely.

UAL, which has $2 billion in cash but is losing millions of dollars a day, must repay $875 million in loans due in the fall.

United, the nation's No. 2 carrier behind American, is setting a 30-day limit on cost-cutting talks with employees, vendors and leaseholders. Its pilots' union tentatively agreed to a 10 percent pay reduction earlier this summer, but other groups have rejected proposed pay cuts.

Talks with employees, who own 55 percent of the company, are expected to focus on layoffs as well as pay cuts. United did not immediately follow the lead of American Airlines, which cut 7,000 jobs Tuesday and said it would retire planes and overhaul its flight schedule.

"Our hope is to get our costs down on a collaborative basis," United spokesman Joe Hopkins said. "If that doesn't work, we'll have to go to Chapter 11."

Three airlines have filed for bankruptcy protection this year, citing the sluggish economy, competition from low-cost carriers and a downturn in travel after Sept. 11. United would be the biggest to seek protection from creditors.

United says the federal loan guarantee is necessary for it to compete in a difficult market. Creighton told employees earlier this week that the Air Transportation Stabilization Board appears poised to reject it without more evidence of cost-cutting.

A spokeswoman for the government board wouldn't comment on United's loan guarantee request, except to say it is still under review.

"The changes we need to make are urgent, significant and immediate," Creighton said. "Simultaneously, we are preparing for the potential of a Chapter 11 bankruptcy filing this fall, due to our fourth-quarter debt payments."

Creighton said the Elk Grove Village, Ill.-based airline would in the coming days present new cost-saving proposals to employee representatives and other stakeholders.

"Whatever course we take, we have one message for customers: Our recovery efforts are about the long-term health of United Airlines," he said. "We will do whatever it takes to continue to meet the needs of our customers for many years to come."

UAL's stock fell 29 cents Wednesday to close at a 22-year low of $2.45 a share and was selling for $2.15 in after-hours trading. It has lost 53 percent of its value this week.

United's biggest union, the International Association of Machinists, said late Wednesday it is ready to listen to new proposals.

Flight attendants, who also have declined pay-cut proposals, said they will consider a new United plan. But spokesman Jeff Zack of the Association of Flight Attendants said any new proposal must take into account that their pay is pegged to industry-average wages, unlike the industry-leading pay of other employee groups.

Denver-based airline consultant Michael Boyd said United's warning appeared to be a negotiating tactic, which he thinks is unlikely to work without United first hiring a new CEO with a clear plan to revive the airline. Creighton, who turns 70 next month, wants to step down as soon as a replacement is found.

Airline analyst Ray Neidl said United could restructure without filing for bankruptcy.

"There's enough room, enough time, enough resources for them to get the airline in shape outside a Chapter 11 filing," said Neidl of Blaylock & Partners. "But they're letting everybody know this can't go on forever. If you're not going to get (employee) concessions, you might as well take it into Chapter 11."

The company lost a record $2.1 billion last year and another $851 million in the first six months of 2002. It has said substantial losses are expected for the rest of this year as it fights a soft economy and shrunken demand.

"The world has changed," Creighton said. "Revenue isn't coming back the way the industry expected."