United Airlines Touts its New Plan

United Airlines is about to fly out of the protective nest of Chapter 11 bankruptcy reorganization a far leaner company than when it went in. But whether the USA's No. 2 airline has done enough to thrive in a brutal environment remains to be seen.

United's executives say the company is poised to soar after the approval Friday by U.S. Bankruptcy Judge Eugene Wedoff of the company's plan to operate a reorganized airline outside bankruptcy protection. The decision means that within days, United, after more than three years, will end the longest, largest and most expensive bankruptcy case in aviation history.

United "is ready to compete successfully with the strongest carriers," CEO Glenn Tilton said after Friday's court ruling.

"This company has changed at its very root," says United marketing chief John Tague.

In its new life, the Chicago-based carrier wants to offer something for everyone: It will cater more than ever to elite business fliers paying the highest fares. It's also reaching out as never before to thrifty fliers who just want cheap seats. And in its quest to be more international, it will fly regularly to more foreign cities and to fewer U.S. cities.

In the bankruptcy process, United has shed $8 billion in debt, 20,000 employees and 100 jetliners. Since filing in December 2002, United has cut its operating costs despite the highest jet fuel prices in history; its revenues have risen.

But others outside United aren't so sure it has sufficiently reinvented itself to become consistently profitable and avert another financial crisis if fuel prices remain high, travel demand slackens or the economy sours. They worry United's operation is still too complex and too vulnerable to the vagaries of oil prices and the price-cutting of low-cost rivals, which already have diminished the big carrier's market share in the five U.S. cities where it operates hub airports.

"I doubt they will make a profit in the near term," says airline analyst Philip Baggaley of Standard & Poor's, the credit-rating firm. In the next economic downturn, "United is likely at risk."

The past five years of United's corporate life could make a sweeping Hollywood epic. In early 2001, American Airlines surprised the industry by buying TWA and vaulting over United to become the world's No. 1 carrier. Months later came the Sept. 11 terrorist attacks. United lost two jets and everyone aboard.

Air travel plummeted. Overwhelmed by high costs and heavy losses, United sought Chapter 11 protection 15 months later. It twice applied unsuccessfully for a multibillion-dollar federal loan guarantee. Then came the wars in Afghanistan and Iraq and the Asian SARS epidemic, all of which hammered United's international business. Recently, airlines have been pummeled by record-high oil prices that approached $70 a barrel after Hurricane Katrina and topped $68 last week. Delta and Northwest airlines recently followed United into Chapter 11.

'Very concerned early on'

Even United's supporters wondered during bankruptcy whether the company might collapse under the weight of its problems.

"We were very concerned early on," says Fruman Jacobson, a lawyer for unsecured creditors. "They were losing a ton of money and had pinned their hopes on a government loan."

United and its army of lawyers, investment bankers and consultants set about leveraging every possible provision of the bankruptcy laws to cut costs. The work of bankruptcy hasn't come cheap: United has racked up legal and consulting fees of about $10 million a month for the past 37 months.

United employees agreed to two rounds of deep pay cuts. Thousands of employees lost jobs -- their work eliminated or contracted out. Thousands more retired early. United terminated all of its employee pension plans to eliminate $10 billion in pension liabilities. The federal Pension Benefit Guaranty Corp., which insures pension plans, assumed responsibility, but workers lost billions in benefits that weren't covered.

United farmed out millions of miles of flying to contract airlines using smaller regional jets. It closed two giant aircraft maintenance centers and contracted out the work of thousands of mechanics. It shut six reservation call centers and today routes many callers to voice-recognition software or the company website. United now flies five aircraft types, down from 10.

Recently, three major banks pledged United up to $3 billion to finance the airline after it exits Chapter 11.

Altogether, United has slashed about $7 billion from its annual expenses. United's unit cost of operating, excluding fuel, is down 20%. But unlike its peers, United has resisted the temptation to throw out every free onboard frill.

Going against the common wisdom in restructuring, United has done the opposite, creating new services during bankruptcy to attract more passengers. Today, United offers more travel choices than it did before the bankruptcy filing. For passengers willing to pay for it, it's also offering more luxury.

P.S., for example, is United's new premium service for luxury-craving, transcontinental travelers. Between New York and either San Francisco or Los Angeles, P.S. flights offer three-class service on Boeing 757s. For $4,550 round trip in first class, P.S. offers the domestic industry's most pampering, with fully reclining seats and DVD players.

Now, United is rolling out first-class service, called Explus, on 70-seat United Express regional jets in hopes of providing seamless first-class service systemwide. By spring, 100 regional jets will have first-class cabins offering larger seats and first-class meals.

As United has shrunk its domestic system, it has methodically expanded its international routes, where it has little low-fare competition. It has roughly doubled its service to mainland China, the USA's largest Asian trading partner. Today, United offers frequent flights to 44 foreign airports, up from 34 before the filing.

United also is reaching out to the opposite end of the market: customers who just want cheap seats. In bankruptcy, United launched Ted, its low-fare answer to Southwest, Frontier and other discounters. The airline-within-an-airline has an all-coach cabin, bright orange planes and its own perky website.

'More complicated'

Not everyone is a fan of the changes. Airline consultant Mo Garfinkle, who advised the creditors committee during the restructuring, remains concerned about the complexity of the retooled operation and questions whether the new services are profitable.

"United hasn't restructured its basic business," he says. "They have made the business more complicated, not simpler. They still think they should be all things to all people."

United officials say both Ted and P.S. generate more revenue and less cost than the regular United flights they replaced. Tague says the new products are success stories, that the additional complexity makes sense.

"That complexity has to deliver a customer benefit" that falls to the bottom line, he says. All of United's new products passed "rigorous analysis."

Recent financial results show clear improvement. Had United been allowed to exclude bankruptcy expenses in the July-September quarter, it would have posted its first profit in five years.

Its on-time performance and baggage-handling numbers measured by the U.S. Department of Transportation have been beating most of its peers. "Their operating performance relative to the rest of the industry is impressive," says airline consultant Bill Swelbar, who advised the flight attendants' union during the bankruptcy.

Now United is embarking on a new efficiency project to reduce airplanes' time on the ground -- time when they don't make money. Starting this month in San Francisco and moving to the other hub airports, United plans to cut ground time between flights by four to 12 minutes. United operations chief Pete McDonald says by year's end the changes will free up 10 planes that United can use to generate revenue on new flights.

While United has been slogging through restructuring, competitors have not been sitting still.

Discount king Southwest Airlines this month launched service to Denver, a United hub. United has been losing market share in all five of its hub cities, with the deepest loss in Denver -- a 55% market share vs. 73% in 2000.

The growth of Denver-based discounter Frontier Airlines is the main reason for the United decline. But Southwest won't make life easier for United.

Meanwhile, Virgin America, a start-up bankrolled in part by British billionaire Richard Branson of Virgin Atlantic Airways, plans to launch low-fare, transcontinental service to New York from San Francisco International, another of United's hub airports. It could start this year.

"The low-cost carrier 'cancer' continues to spread," says Joe Schwieterman, a transportation professor at Chicago's DePaul University, who once worked for United.

Baggaley of Standard & Poor's worries about the United balance sheet. United is leaving bankruptcy with more than $17 billion in debt, even after chopping away $8 billion in Chapter 11. That leaves the carrier highly leveraged compared with most companies.

United projects it will break even or turn a profit in 2006, but Baggaley forecasts a modest loss. United's business plan assumes $50-a-barrel oil prices, on average, ahead. S&P, by contrast, predicts $60 a barrel this year and $55 a barrel next year.

United faces intangible risks, too. Despite angry union opposition, the carrier leaves Chapter 11 with a new management incentive plan that rewards 400 executives with a total of 10 million stock shares, 8% of the reorganized company.

"If the stock price goes up and 400 people get really wealthy, I hope the employees don't revolt," says Swelbar.

Airline spokeswoman Jean Medina contends the executives' equity stake is needed to retain top performers and tie the company's success to executive rewards.

United says it's finished cutting costs of labor and aircraft leases, but it's not finished fixing the company. The push to reduce ground time to get more out of its airplanes is just the beginning, for example.

"There are areas we will continue to improve on," says Tague.



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