One Year After Emerging From Bankruptcy, United Has Turned a Profit

On the one-year anniversary of United Airlines' emergence from bankruptcy, Glenn Tilton stood at a lectern in the nation's capital, championing industry consolidation to a group of aviation lawyers.

"We cannot prevent the acceleration of change in the world of international aviation," Tilton, United's chief executive officer, said Thursday. "It is up to us in the U.S. to acknowledge that fact and then decide if we wish to be participants or spectators."

Tilton's comments reflect the new United Airlines, a company looking to grow now that it has regained some of its status and swagger - not to mention its financial health - a year after emerging from the longest, most expensive Chapter 11 case in U.S. aviation history.

United has come a long way, although the fight is not over by any means.

The company posted a small profit during its first 11 months out of bankruptcy and has been adding service in key competitive markets such as Denver. It's expanding internationally and introducing new amenities and services for customers.

And it wants to become an even bigger force in the industry, having indicated it is on the hunt for potential mergers or acquisitions.

"I think United has been pretty shrewd," said Tom Parsons, who runs travel site Bestfares.com in Texas. "I think management has been aggressive where it needs to be. I'm surprised at how well United has done since they came out."

Its relative stability is good news for Denver, where United employs more than 5,000 workers and ranks as the city's largest carrier.

For all its progress, though, United could be headed toward new storm clouds.

Worker groups will be looking for wage and benefit increases in coming years after taking massive cuts, which could boost labor costs significantly. Two of United's large competitors expect to exit bankruptcy soon as stronger, leaner companies.

And, perhaps most worrisome, United only managed a small profit last year despite a strong economy, declining fuel prices and rising fares.

"This is a volatile industry, and you've got to make a lot of money in the good years to cover the bad years," said Roger King, a Connecticut-based airline analyst with research firm CreditSights Inc. "They haven't done that yet, and these are the good years."

INFOBOX

Coach to first class

United's post-bankruptcy focus is centered on providing different levels of service for different consumers.

The Chicago-based carrier, for instance, offers "economy plus" seating that allows customers to upgrade to seats with more leg room and overhead storage for a fee. It operates a Denver-based discount arm of its business called Ted, a no-frills carrier created to compete with low-cost rivals such as Frontier Airlines and Southwest Airlines.

It also contracts with regional carriers to provide United Express service, which uses smaller planes and typically flies less-popular routes.

On the higher end, United sells upscale coast-to-coast service with amenities such as power outlets, phone and e-mail access from every seat. It also is upgrading some of its first- and business-class cabins with lie-flat seats and new entertainment systems.

The goal is not only to boost revenues but also to offer consumers more choice.

"We are trying to provide premium services for customers that will pay for them yet provide a good experience at the same time," said Pete McDonald, United's executive vice president and chief operating officer.

It's a significant departure from the rest of the industry. Most other airlines are looking to standardize and simplify their services, not broaden them.

"United has added or expanded products on both sides of the price spectrum, which is a bit unusual," said Steve Stapleton, a Dallas-based lawyer who represents airline creditors for Cowles & Thompson. "Their thinking is you have to price things differently to attract different kinds of people."

The carrier also is leveraging one of its greatest strengths: a coveted, far-reaching network that spans the United States and much of the globe through alliances with other airlines.

International routes, which are more profitable than domestic ones, have played an increasing role in United's game plan. The carrier even recently won a major coup when the U.S. government awarded it a Washington, D.C.-to-Beijing route, choosing United over several competitors.

United said it has increased its focus on customers, upgrading lobbies and gate areas in its major hubs to make them more consumer-friendly. In Denver, United installed several new high-tech jet bridges that reduce the time it takes for passengers to board and exit its Ted flights.

But other changes, including some involving its frequent-flier program, aren't necessarily good for all its passengers. And for some consumers, the positive changes haven't been enough to truly set United apart from its rivals.

"Their people were very nice, and everything was pretty smooth," Al Barret, a Highlands Ranch resident who flew United last week on one leg of a return trip from Chile, said while waiting for his bags. "But overall I'd say they were pretty much equal to other airlines I've flown. Not much better, not much worse."

Cost cuts enough?

From a financial perspective, United has proved some of its critics wrong, at least so far.

Several observers said early last year that the carrier could be back on the verge of bankruptcy by now. Others said it didn't cut costs enough to turn a profit.

Despite racking up a loss in the fourth quarter, United managed to earn $25 million in the 11 months since emerging from bankruptcy. That's no small feat for a company that also bled billions of dollars over a five-year period.

United lost $61 million in the fourth quarter of 2006 - most of it due to snowstorms in Denver and Chicago - but still managed a $23 million operating profit.

The carrier also continues to cut costs, paring $435 million in expenses since its emergence. Employee productivity is up several percentage points, and United is flying its planes 16 minutes longer each day on average, helping boost the bottom line.

"I think the odds are against airlines surviving when they go into bankruptcy," said Bruce G. Allen, head of Bruce G. Allen Investments LLC in Denver. "It was able to emerge from bankruptcy by taking some pretty Draconian steps, but in some ways United emerging from bankruptcy at all is a feat."

United has plenty of cash - $5 billion - and plans to pay down $1 billion in debt.

The company's financial position is healthy enough that it's actively pursuing mergers.

United last year hired an adviser to help it explore such options, and it reportedly has broached the subject with executives at both Continental Airlines and Delta Air Lines.

CEO Tilton also has been vocal about his belief that the U.S. should allow foreign ownership of domestic airlines, a mantra he repeated this week during his presentation in Washington.

Middle of the pack

But even United admits that the work is far from over, and there still are plenty of critics skeptical of its business plan.

United's 2006 profit wasn't nearly as strong as some of its top competitors, excluding those operating in bankruptcy.

When compared with its larger peers, United ranks in the middle of the pack in numerous financial and operational measures, analysts say.

United's workers also are eyeing raises and benefit increases. The company's pilots are looking to win some concessions before their contract negotiations in 2009.

Another union says it will look during the next round of contract negotiations to at least get back what it lost.

"We expect nothing less," said Bill Moons, a spokesman for the Aircraft Mechanics Fraternal Association.

United acknowledges that it still has much to do from a financial perspective. This year it plans to cut another couple of hundred million dollars in expenses, and it continues to look for ways to boost revenue.

"We believe we've got further potential to improve our revenues and cost performance," United's McDonald said.

While some observers say United didn't slash costs enough, others think it went too far in areas such as staffing. Some also say United has diluted its brand - and confused customers - by offering various services under different names.

And although a merger or acquisition could make United the world's largest carrier, it also could create new headaches. Such moves, after all, have rarely been successful in the airline industry.

The real test likely will come in the next couple of years.

Another spike in oil prices, a sharp decrease in demand or an economic slowdown will reveal exactly how far United has come, observers say.

"They seem to have regained some equilibrium and stability," said Anthony Sabino, a law professor in the Tobin College of Business at St. John's University in New York. "But you'll only really start to see if United has in fact rehabilitated itself during the next economic downturn."

Carrier hits the numbers

* In the first 11 months since United emerged from bankruptcy:

Profit: $25 million

Cost cuts: $435 million

* 2006 compared with 2005:*

Operating revenue per available seat mile, excluding certain items: $12.28 vs. $11.24

Costs per available seat mile, excluding fuel and certain items: $7.92 vs. $8.08

On-time arrival 2006 (through November): 74.26 percent vs. 78.53.

Available seat miles: 158.8 billion vs. 154.7 billion

Load factor, which measures how full its planes are: 81.7 percent vs. 80.9 percent

* Fourth quarter 2006 compared with same period in 2005:

Revenue: $4.6 billion, up 2 percent

Employee productivity: Up 4 percent

Aircraft productivity: 11 hours a day, up from 10 hours and 44 minutes

Salaries and related expense: $1 billion, from $934 million

*United Was Still In Bankruptcy For One Month In 2006

How they've fared since United emerged from bankruptcy

* Workers

United's bankruptcy took a huge toll on employees, who were forced to take pay, benefit and pension cuts on top of mass layoffs and outsourcing. Workers, though, have benefited from the relative stability of their employer over the past year, and many received small pay increases built into their contracts. But most employees still make far less than they did a few years ago.

* Executives

United's executives have been rewarded handsomely - in the form of stock awards. The carrier's top eight executives received 1.6 million shares of restricted stock and 2.5 million stock options, only a fraction of which have vested to date.

$11.6 million: How much United's top seven executives have made by selling stock and options awarded after the carrier emerged from bankruptcy.

* Customers

Free and clear from the restraints of bankruptcy, United has devoted more time to bolstering customer service. After cutting back on service for years, United has been adding flights in Denver and elsewhere, upgrading its elite cabins on international flights and introducing advanced jet bridges that allow for faster boarding and deplaning.

69.2 million passengers flew on United Airlines in 2006, up 3.8 percent from a year earlier.

* Stockholders

United shareholders who bought or received stock after the carrier emerged from bankruptcy have been on a bumpy ride. After debuting last February at $41, United shares tumbled to about $22 by August. United's stock then marched upward, hitting a high in the low $50s on acquisition speculation. On Friday, the stock traded at $44.31, 8 percent higher than a year ago.

$44.31 Closing price of United shares on Friday, up $3.31 from the stock's debut a year ago.

69.2 million passengers flew on United Airlines in 2006, up 3.8 percent from a year earlier.

$11.6 million: How much United's top seven executives have made by selling stock and options awarded after the carrier emerged from bankruptcy.

51,700 United workers in the fourth quarter of 2006, down from 53,200 in 2005.



News stories provided by third parties are not edited by "Site Publication" staff. For suggestions and comments, please click the Contact link at the bottom of this page.

Loading