The parent company of United Airlines plans to announce it will file for bankruptcy protection early today, sources close to the airline said yesterday.
United Airlines, the nation's second-largest carrier, will become the largest U.S. airline ever to file for bankruptcy. United plans to file in U.S. Bankruptcy Court in Chicago, near where the airline is based, and hopes to have a hearing with a federal judge today.
The decision came last night as the carrier scrambled to line up $1.5 billion in loans to enable the airline to continue operating while under bankruptcy protection. United obtained financing from four lenders, JP Morgan Chase, Citibank, Bank One and CIT Group, which replaced GE Capital, after United and GE could not agree on terms.
No disruption of flights or service is anticipated, although cuts in both are likely later. United plans to honor all tickets and operate its normal flight schedule today. But over the coming months, there were will be more layoffs and flight reductions.
United's pilots union asked travelers not to abandon the airline in bankruptcy. "We remain committed to the future of United in providing world-class service to our customers," said Lewis Goldberg, a spokesman for the pilots union.
To emerge as a profitable carrier, United will have to transform itself to a slimmer and more efficient airline, experts said. United had hope to avoid these painful changes by getting a $1.8 billion federal loan guarantee, but the Bush administration turn it down last week. An official involved in the decision called United's business plan "fundamentally flawed."
As a result, United is likely to slash labor costs far more than the $5.2 billion it had negotiated with unions
As part of its effort to secure the federal loan guarantee, United negotiated $5.2 billion over 5-1/2 years in concessions from labor groups. All the unions, except the mechanics, approved the new contracts, which were contingent on the approval of the federal loan guarantee. Because the federal bailout request was rejected, the concessions were voided. But United hopes to reinstate the new contracts and use them as a starting point for negotiating further cuts, according to sources. That means the mechanics will be asked to vote again on the new contract.
Some analysts also expect United to substantially shrink its route network and to try to change work rules and other parts of its operation to improve efficiency.
Those changes could trigger a dramatic reshaping of the airline industry. Most major airlines are losing money in the face of intense competition from low-cost carriers like Southwest Airlines and JetBlue and the loss of large numbers of business travelers, who quit paying full fare after the economic slump.
The United bankruptcy filing was expected to lessen pressure on American Airlines and Continental, which are in contract talks with pilots. American Airlines said yesterday that executives met with union leaders to ask employees to forgo pay increases next year.
Arlington-based US Airways Group Inc. filed for bankruptcy protection in August.
The airline industry is expected to lose about $8 billion this year, on top of the $7.7 billion it lost last year. United, which lost $2.3 billion last year, was expected to lose about $2 billion this year.
United Airlines has a $300 million debt payment due today and a $575 million payment Thursday. The airline had about $1.6 billion in cash at the end of the September, but has been losing about $8 million a day since then.
The bankruptcy reorganization could be a slow process, said bankruptcy experts, because of the complex governance structure that gave unions a 55 percent share of the company and complicated financing that the airline has used to raise money.
Ray Neidl, an airline analyst with Blaylock & Partners, said United could be out of bankruptcy within a year, although that depends on negotiations with employees. "If they get the right cost structure and keep the employee morale up, which is going to be difficult to do both, they can emerge as a strong, franchise," he said.
Neidl said the bankruptcy filing was necessary to prevent United's equipment from being repossessed by creditors. Under Chapter 11 protection, the debtor generally retains control of its equipment and other assets while it tries to reorganize. UAL stock closed Friday at 93 cents a share on the New York Stock Exchange.Although most analysts expect United to emerge from bankruptcy, some warn that the difficulties could result in an eventual liquidation. In the past, Continental Airlines has survived two bankruptcy filings, but Braniff, Eastern and Pan Am were not as fortunate.
The government sparked the chain of events that led to bankruptcy after it rejected the loan guarantee request last Wednesday. United had said it could not raise money without the federal backing.
After the scathing critique of its business plan by the Air Transportation Stabilization Board, United's chairman and chief executive, Glenn F. Tilton, acknowledged a bankruptcy filing had become a "more likely outcome" for the airline. On Saturday, leaders of the International Association of Machinists, which represents the airline's mechanics, told their members in a letter that it was now certain a bankruptcy filing appears unavoidable and imminent."
The airline, based in Oak Grove Park, Ill., retained Chicago law firm Kirkland & Ellis as its bankruptcy adviser. Several of the airline's unions have also picked advisers.
A major challenge for Tilton will be to persuade the airlines 70,000 employees not to let the concessions hurt service, which could cause passengers to abandon the airline at this critical period.
But United employees say morale is already low. Labor groups gave up million of dollars in concessions in 1994 for 55 percent of the company and two seats on UAL's board of directors. Now a bankruptcy filing will wipe out the value of their shares, which hit a high of $100.75 in 1997.
Just getting the leaders of the five unions to agree to $5.2 billion in concessions over 51/2 years was a struggle. And in the case of the 13,000 mechanics, they have never approved the proposed $700 million in wage cuts their leaders negotiated.
Competitors such as American, Delta and Continental, as well as low cost carriers, are expected to try to go after United's business aggressively while it is preoccupied with its reorganization.
Tilton, 54, now begins the difficult task of reshaping United with no background in the airline industry. He is, however, familiar with bankruptcy proceedings because he was a top manager at Texaco Inc. when the company filed for bankruptcy protection in 1987.
Industry experts say United's problems escalated in late 1999 when the airline began working on a plan to acquire US Airways. For nearly two years after that, United's management focused on getting the acquisition done.
At the same time, other airlines such as Southwest Airlines and American Airlines began increasing their flights on United's most coveted routes.
Also, during this time, United failed to negotiate a new contract with its pilots. In the summer of 2000, angry pilots refused to work overtime. That forced United to cancel thousands of flights, which ended up inconveniencing thousands of some of their best business travelers.
To ease tensions, United negotiated pay raises for its pilots that were 25 percent to 28 percent higher than their previous pay. That pushed the airline's costs up drastically, leaving it with the second highest costs in the industry behind US Airways.
During the early part of 2000, the economy began softening and high-paying business travelers began flying discount carriers or putting off business trips all together. Also, during this time, technology companies began folding or losing money.
That hurt two major United hubs, San Francisco and Washington's Dulles International Airport.
In the spring of 2001, the government said it would block United's deal to acquire US Airways. Then in September, two of its planes were used in the terrorist attacks, which crippled United and the rest of the airline industry.
Last October, United's employees called for the ouster of its then chairman and chief executive James Goodwin after Goodwin wrote a letter to employees saying the airline was "hemorrhaging money" and would perish sometime in 2002. Goodwin was replaced with board member James Creighton until Tilton was named his chief executive in September, the airline's fourth chief executive in four years.