United’s unions fear more cuts after federal aid failure

Dave Carpenter

Tuesday, June 29, 2004 | 9:06 a.m.

CHICAGO -- Employees at United Airlines are bracing for the prospect of new concessions after the failure of the carrier's nearly two-year quest for federal assistance.

Further cuts in United's bankruptcy restructuring would be especially painful for a work force already hit by heavy wage and benefit reductions that have enabled the company to reduce annual labor costs by $2.5 billion annually.

Fair or not, experts say they may be inevitable as United scrambles to redo its finances after being rejected for a third and final time Monday in its attempt to secure a government loan guarantee.

Among the areas likeliest to be targeted by management to make the company more attractive to outside investors is employee pensions, particularly since United must make at least $4 billion in pension payments through 2008.

Speculation on cuts also extends to United's Asia routes and the size of its work force, which already is down to 62,500 from 100,000 before the 2001 terror attacks.

"They're going to have do some things that are very unpleasant, including getting rid of a few people," said industry consultant Darryl Jenkins, professor of airline management at Embry Riddle Aeronautical University in Daytona Beach, Fla.

"This won't be a happy year for employees," he said. "Not so much pay (cuts), but additional work rules, pilots' stock that they were going to get in exchange for concessions, and pensions -- they'll all be on the table now."

United isn't discussing specifics of its options publicly. But even before the Air Transportation Stabilization Board dismissed its loan-guarantee efforts for a final time Monday, CEO Glenn Tilton cautioned employees last week that more cuts would be needed to cope with increased competitive pressures and high fuel costs.

"In order to attract a new equity investor and providers of credit, the airline will very likely have to undertake further cost cuts and demand further reductions in its debt and lease obligations," Standard and Poor's analyst Philip Baggaley wrote in a research note Monday. United's ability to attract new investment, he said, will depend partly on its success in further restructuring.

United's solid progress in overhauling its costs and operations since 2002 has won plaudits from the ATSB and others, and there is thought to be an abundance of investment groups who would like to have a piece of the airline's unparalleled route structure under certain conditions.

Some of the names mentioned by industry experts as potential investors include Texas Pacific Group, a Fort Worth-based private equity firm which invested in Continental Airlines and America West Airlines during their bankruptcies; Cerberus Capital Management, which is sinking money into bankrupt Air Canada; and the so-called Chapman group of United bankruptcy creditors, which owns 175 of the carrier's aircraft.

Discussions have been under way in earnest since the ATSB rejected United's loan guarantee application on June 17 -- a decision it affirmed unanimously on Monday -- but it's not known how long a new financing package will take to put together.

"Somebody has to belly up to the bar and say they believe in United's business plan and come forward with the cash," said Douglas Baird, a bankruptcy professor at the University of Chicago Law School. "Talk is a lot easier than writing a check for $500 million or more."

Even if a new investor demands more cuts, uneasy unions signaled they won't accept them readily.

Randy Canale, a union district president representing United machinists, said the airline must refuse to use its workers as "human fertilizer" to satisfy lenders and politicians.

United pilots' union chief Mark Bathurst said pilots will work with management in searching for solutions, but he emphasized, "We fully expect that such solutions will be found without the company again turning to employees who already have provided significant financial relief for this airline."

Negotiations with unions over what cuts would be acceptable could take months. Because of that, industry consultant Robert Mann called it unlikely that United can emerge from bankruptcy any earlier than spring 2005.