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August 3, 2004
United Appears Boxed In as Trouble Percolates
By MICHELINE MAYNARD
Never meet trouble halfway," wrote the 17th-century botanist John Ray. But by failing to address its monstrous pension issue the first time it sought worker concessions a year ago, United Airlines did just that.
And now, United, a unit of UAL, is facing trouble everywhere it looks.
Labor unions, a federal pension board, members of Congress and its regional partners all are unhappy with United over decisions it is making while it is in bankruptcy proceedings.
Drawing the most wrath is the company's decision to stop funding its pension plans until it emerges from bankruptcy, raising the possibility that it might terminate them altogether.
Because pilots may fear that their pensions might be threatened, analysts said the airline might see a wave of retirements like those at Delta Air Lines.
If tensions grow deep enough, experts said, disgruntled employees may even re-enact their slowdown in the summer of 2000, which caused numerous delays and canceled flights.
That could wreak havoc on United's tightly run operations, which have been a lone bright spot in its 20 months in bankruptcy.
"There are tough choices to be made, but this could have been more artfully done," said Robert W. Mann, an industry consultant in Port Washington, N.Y.
United executives insist that the airline's day-to-day business will not be affected by the uproar. Employees, whose jobs are at stake, are just as intent as the company's management on making sure United restructures, said John Tague, United's executive vice president for sales, marketing and revenue.
"We're going to keep our eye on the ball and not be distracted by all this noise," Mr. Tague said.
As proof the company is looking forward, United yesterday announced new premium transcontinental service, between New York and Los Angeles and New York to San Francisco, called "p.s." It will fly Boeing 757 jets with 110 seats in three classes - first, business and economy-plus - replacing Boeing 767 jets on the routes that had been outfitted with 168 seats in three classes.
Taking out the seats will allow the airline to offer an atmosphere more akin to that of a private jet, Mr. Tague said. First-class seats will convert to lie-flat beds, and there will be more legroom in each cabin.
Such an approach is opposite that of Ted, the low-fare carrier that the airline started last year, and comes at a time when other low-fare airlines like JetBlue and Southwest are attracting a growing share of the business in transcontinental markets.
Mr. Tague says the two ends of the service spectrum represent United's aggressive approach, bankruptcy issues aside. "We're not going to act like a wounded company," he said. "We're going to do what it takes to rebuild this company."
But such frills run the danger of further fraying the nerves of some employees. None are more upset than members of the machinists' union, which represents ramp workers and customer-service agents.
"They are about to find out what reaction is like in the real world," said S. R. Canale, who represents the machinists on United's board. "We are at war with United Airlines."
Mr. Canale boycotted a two-day meeting last week in protest, a move applauded by United's flight attendants, who do not have a board seat. On Thursday, the machinists sued United's chief executive, Glenn F. Tilton, accusing him of a breach of fiduciary duty, the first time that Mr. Tilton himself had been drawn into the fray. The machinists filed a similar suit in New Jersey yesterday. The first suit was filed in Chicago.
United fired back at the union for personalizing the fight, saying it had made a corporate decision to preserve the company's liquidity and flexibility as it tried to find its way out of bankruptcy proceedings.
The roots of United's current chaos lie in the company's decision a year ago to leave its pensions basically intact, even as it wrung $2.5 billion in wage and benefit reductions from its unions.
At the time, United had an opportunity to suggest entirely new plans. It filed a motion with the bankruptcy court to cancel its existing labor agreements. But United did not ask unions for deep cuts in future pension benefits nor did it try to replace the pension plans with less generous ones even though it could have used the same bankruptcy motion to do so.
The airline's choice to leave pensions alone mirrored Mr. Tilton's approach to employee relations. Mr. Tilton, a former oil executive who came on board two months before United filed for Chapter 11, strived to ingratiate himself in the tumultuous weeks that followed, acting like a strapped father unhappy at having to cut a child's allowance.
Yet the kid-glove treatment given pensions caused murmurs among airline analysts and government officials, who knew they could yield the airline billions in savings. Publicly and privately, United insisted that was not necessary, saying the company's business plan allowed it to eventually become profitable and meet its pension obligations. All it needed, the airline said, was legislation that would stretch out its overdue obligations.
There was a sense then that United might be banking on a directive from the Air Transportation Stabilization Board, which was considering United's application for a loan guarantee package. In 2003, the board had told US Airways that it had to address its pilots' pension plan before it could win final approval of a $900 million loan package.
A similar order to United could give it cover with its unions, bound to be angered by any efforts by United to touch the "third rail" of labor contracts, Mr. Mann said.
But the board and its staff were mum on the subject, a person close to the discussions said, feeling that it was up to the airline to outline steps it planned to take in its revamping plan.
With its loan application rejected for a third time on June 28, United swiftly moved on its retirement plans. Within hours, the company's financial advisers sent signals that pension plans had to be addressed; otherwise, lenders to whom it must turn to for billions in financing to exit bankruptcy proceedings would not come forward.
On July 14, United said that it had put off a decision on a $72.4 million payment due the next day, the first time since it had entered bankruptcy proceedings that it had not made required payments.
The next week, it said that it would not make any more payments due before it exited bankruptcy, and was leaving its options open, including the possibility of terminating the plans.
That left Mr. Canale outraged. "Every last little bit of credibility that this company had is gone," he said in an interview last week.
In Washington, the Pension Benefit Guaranty Corporation, which oversees the nation's retirement plans, expressed "deep concern," while one of United's most vocal Congressional critics took another swipe at the company.
"It is a horrible bait and switch perpetrated on the workers," said Senator Peter G. Fitzgerald, a Republican of Illinois, who cast the lone no vote against airline bailout legislation in 2001 and opposed United's loan guarantee bid.
United's chief financial officer, Frederic F. Brace III, said the airline faced different circumstances, given the spike in oil prices in the last year. United, which based its original loan guarantee application on the assumption that a barrel of oil would cost about $25, instead was facing prices of $42 a barrel.
"The world changed," Mr. Brace said on Friday. "We have a different economic situation than we did six or nine months ago."
Liabilities over the next 18 months, Mr. Brace said, including pensions, represent "a huge financial burden on the company."
But some of those liabilities may be easing slightly. United disclosed in a regulatory filing yesterday that the actual cost of its pensions dropped by nearly half during the first six months of the year. United said its pension costs were $250 million from January to June, compared with $455 million in the period a year earlier.
In addition, the airline said that its retiree medical benefit costs also dropped almost in half, to $114 million from $226 million. This spring, United negotiated cuts in retiree health care benefits with its unions that it said would save it $300 million a year.
United also said that it had begun hedging against further increases in the price of fuel. The airline had estimated its fuel costs in 2004 would be $750 million higher than anticipated because it did not have hedging contracts. But the regulatory filing showed United has hedged 30 percent of its remaining 2004 fuel contracts, at prices of 92 cents to $1.16 for a gallon of jet fuel, and expects to hedge in 2005 and 2006 as its financial conditions allow.
The search for new financing means, however, that United will need to renegotiate some of its aircraft leases, even though it had reached agreement in principle on new payment levels with many lease holders. It warned in the regulatory filing that this could mean that some of its aircraft could be repossessed.
The pension issue is not the only one drawing legal scrutiny. Last week, Atlantic Coast Airlines said that United had failed to pay the $1.1 million it owed Atlantic for flights it operated in June as United Express.
And it was not paid $1.9 million for flights in July either, said Kerry B. Skeen, chief executive at Atlantic Coast, which began operating Independence Air, a low-fare airline, in June. Mr. Skeen said he would raise the issue in bankruptcy court.
Yet United does have one cheerleader who knows the trouble it has seen: Frank Lorenzo, the former chief executive of Texas Air, who fought heated battles in the 1980's and 1990's with unions at Continental and Eastern over his quest to sharply reduce costs.
Mr. Lorenzo, in an interview, said that United could successfully restructure if it attacked its pensions and health-care plans and adopted the low costs at JetBlue and Southwest as its model.
"I think there's a pretty good chance that United could make the changes," he said.
But Mr. Mann said such "incendiary" actions could come back to haunt United. "Take a look at the impact that upset employees can have," Mr. Mann said. "They call in sick, things get broken, customers get held hostage. It's not a conducive atmosphere for operational excellence."
United Appears Boxed In as Trouble Percolates
By MICHELINE MAYNARD
Never meet trouble halfway," wrote the 17th-century botanist John Ray. But by failing to address its monstrous pension issue the first time it sought worker concessions a year ago, United Airlines did just that.
And now, United, a unit of UAL, is facing trouble everywhere it looks.
Labor unions, a federal pension board, members of Congress and its regional partners all are unhappy with United over decisions it is making while it is in bankruptcy proceedings.
Drawing the most wrath is the company's decision to stop funding its pension plans until it emerges from bankruptcy, raising the possibility that it might terminate them altogether.
Because pilots may fear that their pensions might be threatened, analysts said the airline might see a wave of retirements like those at Delta Air Lines.
If tensions grow deep enough, experts said, disgruntled employees may even re-enact their slowdown in the summer of 2000, which caused numerous delays and canceled flights.
That could wreak havoc on United's tightly run operations, which have been a lone bright spot in its 20 months in bankruptcy.
"There are tough choices to be made, but this could have been more artfully done," said Robert W. Mann, an industry consultant in Port Washington, N.Y.
United executives insist that the airline's day-to-day business will not be affected by the uproar. Employees, whose jobs are at stake, are just as intent as the company's management on making sure United restructures, said John Tague, United's executive vice president for sales, marketing and revenue.
"We're going to keep our eye on the ball and not be distracted by all this noise," Mr. Tague said.
As proof the company is looking forward, United yesterday announced new premium transcontinental service, between New York and Los Angeles and New York to San Francisco, called "p.s." It will fly Boeing 757 jets with 110 seats in three classes - first, business and economy-plus - replacing Boeing 767 jets on the routes that had been outfitted with 168 seats in three classes.
Taking out the seats will allow the airline to offer an atmosphere more akin to that of a private jet, Mr. Tague said. First-class seats will convert to lie-flat beds, and there will be more legroom in each cabin.
Such an approach is opposite that of Ted, the low-fare carrier that the airline started last year, and comes at a time when other low-fare airlines like JetBlue and Southwest are attracting a growing share of the business in transcontinental markets.
Mr. Tague says the two ends of the service spectrum represent United's aggressive approach, bankruptcy issues aside. "We're not going to act like a wounded company," he said. "We're going to do what it takes to rebuild this company."
But such frills run the danger of further fraying the nerves of some employees. None are more upset than members of the machinists' union, which represents ramp workers and customer-service agents.
"They are about to find out what reaction is like in the real world," said S. R. Canale, who represents the machinists on United's board. "We are at war with United Airlines."
Mr. Canale boycotted a two-day meeting last week in protest, a move applauded by United's flight attendants, who do not have a board seat. On Thursday, the machinists sued United's chief executive, Glenn F. Tilton, accusing him of a breach of fiduciary duty, the first time that Mr. Tilton himself had been drawn into the fray. The machinists filed a similar suit in New Jersey yesterday. The first suit was filed in Chicago.
United fired back at the union for personalizing the fight, saying it had made a corporate decision to preserve the company's liquidity and flexibility as it tried to find its way out of bankruptcy proceedings.
The roots of United's current chaos lie in the company's decision a year ago to leave its pensions basically intact, even as it wrung $2.5 billion in wage and benefit reductions from its unions.
At the time, United had an opportunity to suggest entirely new plans. It filed a motion with the bankruptcy court to cancel its existing labor agreements. But United did not ask unions for deep cuts in future pension benefits nor did it try to replace the pension plans with less generous ones even though it could have used the same bankruptcy motion to do so.
The airline's choice to leave pensions alone mirrored Mr. Tilton's approach to employee relations. Mr. Tilton, a former oil executive who came on board two months before United filed for Chapter 11, strived to ingratiate himself in the tumultuous weeks that followed, acting like a strapped father unhappy at having to cut a child's allowance.
Yet the kid-glove treatment given pensions caused murmurs among airline analysts and government officials, who knew they could yield the airline billions in savings. Publicly and privately, United insisted that was not necessary, saying the company's business plan allowed it to eventually become profitable and meet its pension obligations. All it needed, the airline said, was legislation that would stretch out its overdue obligations.
There was a sense then that United might be banking on a directive from the Air Transportation Stabilization Board, which was considering United's application for a loan guarantee package. In 2003, the board had told US Airways that it had to address its pilots' pension plan before it could win final approval of a $900 million loan package.
A similar order to United could give it cover with its unions, bound to be angered by any efforts by United to touch the "third rail" of labor contracts, Mr. Mann said.
But the board and its staff were mum on the subject, a person close to the discussions said, feeling that it was up to the airline to outline steps it planned to take in its revamping plan.
With its loan application rejected for a third time on June 28, United swiftly moved on its retirement plans. Within hours, the company's financial advisers sent signals that pension plans had to be addressed; otherwise, lenders to whom it must turn to for billions in financing to exit bankruptcy proceedings would not come forward.
On July 14, United said that it had put off a decision on a $72.4 million payment due the next day, the first time since it had entered bankruptcy proceedings that it had not made required payments.
The next week, it said that it would not make any more payments due before it exited bankruptcy, and was leaving its options open, including the possibility of terminating the plans.
That left Mr. Canale outraged. "Every last little bit of credibility that this company had is gone," he said in an interview last week.
In Washington, the Pension Benefit Guaranty Corporation, which oversees the nation's retirement plans, expressed "deep concern," while one of United's most vocal Congressional critics took another swipe at the company.
"It is a horrible bait and switch perpetrated on the workers," said Senator Peter G. Fitzgerald, a Republican of Illinois, who cast the lone no vote against airline bailout legislation in 2001 and opposed United's loan guarantee bid.
United's chief financial officer, Frederic F. Brace III, said the airline faced different circumstances, given the spike in oil prices in the last year. United, which based its original loan guarantee application on the assumption that a barrel of oil would cost about $25, instead was facing prices of $42 a barrel.
"The world changed," Mr. Brace said on Friday. "We have a different economic situation than we did six or nine months ago."
Liabilities over the next 18 months, Mr. Brace said, including pensions, represent "a huge financial burden on the company."
But some of those liabilities may be easing slightly. United disclosed in a regulatory filing yesterday that the actual cost of its pensions dropped by nearly half during the first six months of the year. United said its pension costs were $250 million from January to June, compared with $455 million in the period a year earlier.
In addition, the airline said that its retiree medical benefit costs also dropped almost in half, to $114 million from $226 million. This spring, United negotiated cuts in retiree health care benefits with its unions that it said would save it $300 million a year.
United also said that it had begun hedging against further increases in the price of fuel. The airline had estimated its fuel costs in 2004 would be $750 million higher than anticipated because it did not have hedging contracts. But the regulatory filing showed United has hedged 30 percent of its remaining 2004 fuel contracts, at prices of 92 cents to $1.16 for a gallon of jet fuel, and expects to hedge in 2005 and 2006 as its financial conditions allow.
The search for new financing means, however, that United will need to renegotiate some of its aircraft leases, even though it had reached agreement in principle on new payment levels with many lease holders. It warned in the regulatory filing that this could mean that some of its aircraft could be repossessed.
The pension issue is not the only one drawing legal scrutiny. Last week, Atlantic Coast Airlines said that United had failed to pay the $1.1 million it owed Atlantic for flights it operated in June as United Express.
And it was not paid $1.9 million for flights in July either, said Kerry B. Skeen, chief executive at Atlantic Coast, which began operating Independence Air, a low-fare airline, in June. Mr. Skeen said he would raise the issue in bankruptcy court.
Yet United does have one cheerleader who knows the trouble it has seen: Frank Lorenzo, the former chief executive of Texas Air, who fought heated battles in the 1980's and 1990's with unions at Continental and Eastern over his quest to sharply reduce costs.
Mr. Lorenzo, in an interview, said that United could successfully restructure if it attacked its pensions and health-care plans and adopted the low costs at JetBlue and Southwest as its model.
"I think there's a pretty good chance that United could make the changes," he said.
But Mr. Mann said such "incendiary" actions could come back to haunt United. "Take a look at the impact that upset employees can have," Mr. Mann said. "They call in sick, things get broken, customers get held hostage. It's not a conducive atmosphere for operational excellence."
