Analyst: Will United's Restructuring Make it a Fearsome Adversary for Major Carriers?

Feb. 2, 2006
As United emerges from its lengthy excursion through Chapter 11 proceedings, analysts agree that the streamlined airline is a far cry from its former, bloated self.

More than three years ago, airline industry pundits predicted a tour through bankruptcy court would transform United Airlines into a lean, tough company and a formidable rival for American Airlines and other major carriers.

Now, as United emerges from its lengthy excursion through Chapter 11 proceedings, analysts agree that the streamlined airline is a far cry from its former, bloated self. But it remains to be seen whether United's restructuring has transformed it into a fearsome adversary for American and other major carriers.

"Clearly, United post-restructuring is a very different animal than what we saw in 2002," said William Warlick, an analyst with Fitch Ratings in Chicago. "They've lowered the cost bar tremendously."

But some argue that while it has slashed billions in costs, United, which is scheduled to leave bankruptcy court protection as early as today, hasn't gained much ground on American and Continental Airlines, both of which have restructured outside of bankruptcy. And although the new United may have an advantage over Delta Air Lines and Northwest Airlines, those carriers are both in the midst of their own bankruptcy cases and are making substantial cuts of their own.

US Airways, meanwhile, merged with America West Airlines and has vowed to reshape itself into a nationwide low-cost carrier that more resembles AirTran Airways or Southwest Airlines than United.

"Everyone has slimmed down," said Ron Kuhlmann, an analyst with Unisys R2A Transportation Management Consultants. "United certainly isn't unique in that respect."

What is clear is that when it officially ends its bankruptcy tour, United will be a leaner, more efficient airline that has gained significant relief of burdens like pension payments, debt and high labor costs.

And the airline, based in Elk Grove Village, Ill., near Chicago, has implemented a strategy that focuses on snaring premium business passengers with a high level of service, even while its competitors reduce perks and in-flight amenities.

The success or failure of United, the world's second-largest airline, is of particular interest to Fort Worth-based American, the world's largest carrier. The two airlines operate competing hubs at O'Hare Airport in Chicago, and they also compete on lucrative overseas routes.

"These two are always going to be competing fiercely," Warlick said.

But the airline's emergence from Chapter 11 also marks an end to some advantages over nonbankrupt rivals.

"United is re-entering the real world, where they have to pay all their bills and honor their contracts," Kuhlmann said. "They're back on a level playing field, and that will be beneficial to the carriers not in bankruptcy."

In bankruptcy, United slashed more than $7 billion in annual expenses through a series of concessions and contract renegotiations.

"We have made fundamental, sustainable changes to United's business and established a solid financial platform," United's chief executive, Glenn Tilton, said in a prepared statement.

But some analysts wonder whether the cuts have been deep enough.

"Whether the cost structure will be low enough for the company to be competitive remains a question," said analyst Ray Neidl of Calyon Securities in a recent report on United.

United executives have predicted that the company will earn a profit this year, but that's based on oil prices averaging $50 per barrel, and many analysts have questioned United's assumptions.

American, by contrast, is forecasting crude-oil prices at $65 per barrel. United executives counter that even if oil prices are higher than expected, they can offset the expense with greater revenue from higher fares and other sources.

United reported a small cost advantage over American during the fourth quarter of 2005. During that period, American paid 11.6 cents to fly one seat one mile on its network, a common industry benchmark. United's cost per seat-mile was 11.1 cents.

Meanwhile, discount carrier Southwest, based in Dallas, had an even bigger advantage, spending 8.4 cents.

Still, United has been able to slash expenses in bankruptcy that American and other carriers can't touch. The airline has shed billions of dollars in obligations by jettisoning $10 billion in liabilities in its traditional pension plans, which will save it $645 million annually.

American, meanwhile, faces significant pension payments. That airline doled out $310 million in 2005 to maintain its retirement plans, and it will pay hundreds of millions more this year.

"The pension is probably the single biggest advantage United has over American, in terms of costs," Warlick said.

United has also been able to slash $13 billion in debt and renegotiate aircraft leases, which American has been unable to do outside of bankruptcy.

Nonetheless, United still has a significant amount of debt -- about $17 billion, compared with more than $20 billion at American.

In addition to its progress in cutting costs, United has vowed to boost its revenue by luring top-paying business travelers with high levels of service. The airline has also bucked some trends by keeping magazines and pillows on board and continuing to hand out free snacks.

"We are offering United's customers the wide range of choices in products and services they demand in today's market, at prices they are willing to pay," John Tague, United's executive vice president of marketing, said in a prepared statement.

American, meanwhile, has been cutting back on many luxuries to reduce expenses.

United even ran a series of ads last year poking fun at American, after that airline reduced legroom in its coach cabins by adding more seats.

Still, American's revenue outpaced United's during the fourth quarter. American collected 12.3 cents per seat-mile from customers, while United's customers paid 11.5 cents per seat-mile.

Gerard Arpey, American's chief executive, acknowledged that customers like some of the perks that United is offering, like slightly more legroom.

"Of course customers love having more legroom," he said. "But we've found that while they like it, they don't want to pay more for it."

American, however, is clearly paying attention to United's focus on business travelers and has made some changes. On Monday, American unveiled new first-class and business-class menus featuring a host of gourmet selections on transcontinental flights, as well as on some flights to Brazil.

It was the first time American had revamped its menus since 1999.

Despite United's progress, most analysts say the airline still has to prove that it can return to profitability in and era of high fuel prices and brutal competition.

"This may be a hot stock initially out of bankruptcy," Neidl said, "but then could fall when some of the potential problems emerge."


America United
Costs* 11.6 11.1
Passenger Revenue* 12.3 11.5
Debt $20 billion $17 billion

*cents per seat-mile

All figures are for the fourth quarter of 2005.

Fort Worth Star Telegram

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