United’s discount airline strategy faces skepticism

Dave Carpenter

Monday, Feb. 17, 2003 | 9:59 a.m.

CHICAGO -- United Airlines CEO Glenn Tilton faces a tough audience as he races to drum up employee support for a proposed in-house discount carrier he says is critical to ensuring the bankrupt company's survival.

Union officials and industry experts are strongly skeptical of the plan for an airline within an airline -- a strategy that has failed in the past and is now being pitched by an industry outsider who's been at the helm less than six months.

With labor groups restive, fuel costs at two-year highs and war in Iraq looming, the analysts say the world's second-largest airline -- even more than other troubled major carriers -- has scant margin for error.

"This is something that's never worked before, and United's running out of time," said Douglas Baird, former dean of the University of Chicago Law School and an authority on bankruptcy and corporate reorganization. "The problem is United's burning cash every day, and when it uses up its cash it's going to stop running."

United insists it needs its own U.S. discount carrier because it faces low-cost competition from such carriers as Southwest Airlines and American Trans Air in 70 percent of its domestic markets. It dismisses as premature the criticism of its 18-month restructuring plan, which also entails heavy cost-cutting and greater use of regional jets.

"We've created a strong business plan that will take this company to profitability on a sustainable basis," Tilton told employees on a company hot line Wednesday. The low-cost carrier, he said, "is a critically important part of our plan to rebuild our company and take on the low-cost competitors who are attacking our business and our customers every day."

But United and Delta Air Lines, which is starting a low-cost carrier on the East Coast this spring, are bucking a history of failures for the concept that includes Shuttle by United, which folded in 2001.

Despite United's pledge to avoid past industry mistakes, aviation analyst Bill Oliver of the Denver-based Boyd Group consulting firm doesn't see how United's entry -- given the internal code name Starfish -- can be much different from previous attempts.

"From what evidence they have presented, they're going right down a path that has failed with every other airline," he said.

Paul Biederman, a longtime TWA executive who teaches about the airline industry at New York University, expects union opposition will kill the plan and maybe the airline itself.

"United would love to become a Southwest. But you can't transform yourself overnight," he said.

Still, he gives United a small chance of success, if only because the biggest U.S. carriers desperately need a new way of doing business. "The majors in their present form really don't have a future, so something's got to give."

United has been scrambling to devise a new strategy since Dec. 4, when the government cited its "fundamentally flawed" business plan in rejecting a request for a loan guarantee, forcing it to seek bankruptcy court protection.

The airline made important early progress in bankruptcy when most of its unions agreed to interim wage cuts, and reductions were imposed on the only holdouts, the machinists. With the court's backing, United also has negotiated more favorable terms for many of its 463 leased planes and let others go unpaid.

Late Friday union groups said United is now asking them to take deeper pay cuts. The carrier is seeking $2.56 billion over five years, up from $2.4 billion. The Air Line Pilots Association and the Association of Flight Attendants balked at the proposal, saying United had not sufficiently justified the need for the cuts.

United officials had no immediate comment.

United, 10 weeks into its reorganization effort, has released few details about the low-cost carrier plan. Officials have said pilots and other workers at the lower-fare operation would be paid less, and that the carrier would operate on all the United routes now dominated by low-cost rivals.

United's pilots and flight attendants unions, concerned about a loss of jobs and seniority, have pledged to fight the plan and accuse the company of failing to provide necessary details.

"We feel that the process has not been conducive to the future financial health of United Airlines," pilots spokesman Dave Kelly said.

The uneven early results from United's restructuring contrast with the comparatively swift overhaul of US Airways, which at a comparable stage of Chapter 11 proceedings had already negotiated long-term labor cuts and is now on pace to emerge from bankruptcy in March after less than eight months.

Some experts say Tilton's newness to the industry has led to a questionable strategy. A career oil executive, he arrived at United only last September and ultimately tapped management consultant McKinsey & Co. to draft a turnaround plan.

"I have grave doubts that an experienced airline executive would have proposed a low-cost carrier," said Aaron Gellman, a professor at Northwestern University's Transportation Center.