=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2002/05= /09/BU76383.DTL ---------------------------------------------------------------------- Thursday, May 9, 2002 (SF Chronicle) Flying into turbulence/Few options available for United Airlines as it face= s financial recovery that experts say could take 3 years David Armstrong, Chronicle Staff Writer The outlook is grim at United Airlines as the busy summer travel season approaches. Crowded planes, slow-moving lines, even less-palatable food, cranky service -- and higher fares -- await travelers on the Bay Area's dominant air carrier as it struggles to recover from a financial free-fall that experts say could last three more years. After hemorrhaging an aviation-industry record $2.1 billion in 2001, United took another big hit in the first quarter when it lost $510 million more. The options for United are scant, and none promises quick results. The airline can stay the course, sell off assets to raise capital or file for bankruptcy. Whatever United does, it's going to have a big impact in the Bay Area, where it employs 18,000 people and dominates the region's largest airport, San Francisco International, where it handles half of all the passengers and flights. The airline also maintains a prominent position at both Norman Y. Mineta San Jose International Airport and Oakland International Airport. Even with a substantial fall in traffic last year that dropped SFO from the nation's fifth-busiest airport to its 10th-busiest, SFO retains its status as United's most profitable gateway for international flights, especially in the bustling Asia-Pacific market. Thus far, United, the world's second-largest airline, is sticking with i= ts current cost-cutting strategy. It is also working hard to lure back passengers by offering double miles to frequent fliers, giving summer fare discounts to leisure travelers and rolling out an upbeat national advertising campaign with the tag line "A reason to believe in United." Perhaps most important, United's parent company, UAL Corp. of Chicago, is asking its unions for wage concessions in an attempt to staunch the bleeding. But industry observers say substantial wage cuts, while crucial, are no sure cure. "Labor is unlikely to agree to permanent wage rollbacks," said analyst S= am Buttrick of UBS Warburg in New York. "They have worked hard to get the wage structure where it is." Buttrick, one of Wall Street's star aviation industry analysts, is beari= sh on United's short-term prospects. "With its current cost structure, it is unlikely that UAL will be profitable until 2004 or even 2005," he said. "It is further unlikely that UAL will ever be able to earn attractive returns on capital on any consistent basis with its current cost structure." Buttrick said the reverberations from Sept. 11 and the recent recession have hurt the industry, which he predicts will lose $4 billion this year after bleeding a record $7 billion last year. EXECUTIVE TURNOVER Of all the major airlines, United has been hit hardest. The air carrier began slipping into the red in late 2000, a year in which it lost $265 million. Contributing to that loss were a rich, 33 percent wage increase for United's pilots and a $74 million charge in connection with a failed merger with US Airlines. The airline's money-losing ways eventually led to the forced resignation last year of Chairman and Chief Executive Officer James Goodwin. Goodwin was replaced in October by turnaround specialist John W. Creight= on Jr., who recently has decided to leave. On April 30, UAL's board of directors announced plans to find a successor to the 69-year-old Creighton, who came out of retirement to take the job and said all along that his stay would be brief. Analysts expressed surprise that he announced his departure while tough labor negotiations were still going on, and said finding a top executive to tackle United's manifold problems could be a real challenge. "I don't know why any of them would want to walk into this really difficult decision," said John Ash, managing director of Global Aviation Associates, a Washington, D.C., airline consulting firm. After Sept. 11, United slashed operations by 23 percent, eliminating some flights and cutting back on amenities such as food service. Fewer flights ensured that the planes that were flying would be crowded, and tightened security meant that fliers would spend more time in airport checkpoints than ever before. Additionally, United furloughed 22,000 employees, about 20 percent of its global workforce, which stretched service thin. The furloughs covered flight attendants, pilots, mechanics, reservation agents, baggage handlers and others. More than 3,000 of United's 18,000 Bay Area employees were furloughed. Only a few have returned to work. IMPORTANCE OF BUSINESS TRAVEL Analysts say the carrier must lure high-yield business travelers back to the skies and raise the discounted leisure fares that it and other airlines introduced after Sept. 11. In mid-April, United joined most major U.S. carriers in announcing $20 domestic fare increases but rescinded them when Northwest Airlines refused to go along, denying Northwest a competitive advantage. United and other major carriers will surely try to raise fares again, sa= id Michael Friedman, an equities analyst with American Express Financial Corp., Boston, probably by summer. In addition, United and other major carriers may double the $10 fee on every round-trip ticket to help defray the costs of added aviation security, further raising fares. In the long haul, though, United's recovery depends on business traveler= s, who traditionally pay high walk-up fares, Friedman said. "They can come back fairly quickly if business travelers come back and resume paying the very high fares they used to," said travel-industry observer Ed Perkins. "But business travel behavior is permanently changing." Indeed, an April survey of 184 corporate air-travel buyers conducted by the Business Travel Coalition shows that business travel budgets were slashed by an average of 28 percent for 2001 and 2002. Of those cost cuts, 74 percent are intended to be permanent, the survey showed. CUTBACKS, INCENTIVES Despite formidable odds, United is moving aggressively to return to the black, said United's vice president for North America sales, Frank Kent. In addition to furloughing staff and asking workers for givebacks, United is deferring the purchase of new aircraft, dropping Saturday night stay- over requirements for discounted fares and implementing double-mile offers for frequent fliers. It is also preparing to roll out in-flight goodies such as e- mail and Internet service, which were delayed by the recession and the events of Sept. 11. Kent, who was director of Northern California operations before assuming his current job, said at an aviation industry meeting in San Francisco at the end of April that United, which slashed daily flights from 2,400 a day to 1, 600 after Sept. 11, has inched back up to 1,800 flights a day. STRENGTH IN BIG JETS United is also trying to leverage its traditional strengths, Kent said, which include "offering the most nonstop destinations and the most wide-body aircraft of any airline on domestic routes." As such, San Francisco International, where United maintains a hub, will be unlikely to see jumbo jets replaced by smaller, cramped, aircraft, given its importance to the long-haul market. Kent said SFO is United's most profitable international gateway, even though SFO's international travel fell 6.4 percent last year. SFO is especially crucial to the Asia-Pacific market, which accounted for 16.6 percent of United's traffic in 2001, more than either Europe or Latin America. In a sign that United is expecting a summer travel-season lift, the company said it plans to add a third daily nonstop flight between SFO and Tokyo Narita airport from June 29 to Sept. 7. United's systemwide traffic in April was down 16.7 percent from April 2001, according to the airline. However, business has slowly picked up in recent months; traffic had dropped 45 percent from October 2000 to October 2001, shortly after the attacks. Load factors -- the percentage of seats filled -- have edged up recently, as well. United's April load factor of 72 percent was up slightly from 71.2 percent a year ago. BANKRUPTCY NOT LIKELY Analysts do not expect United, which has a large, young fleet of aircraf= t, $2.8 billion in cash reserves and equivalents and other assets to disappear. And unlike Continental Airlines, which declared bankruptcy in the mid-1990s and emerged from Chapter 11 protection leaner and stronger, analysts don't expect United to go into Chapter 11. "United has $3 (billion) to $3.5 billion worth of aircraft, which could = be sold to raise cash," observed Reno Bianchi, director of corporate bond research at Solomon Smith Barney in New York. "Chapter 11 is an unlikely scenario." Industry observers expect a long, slow recovery for United, but it will happen, they say. "They have cleared the deck and are getting rid of a lot of excess baggage, stupid ideas like starting a business jet unit," said aviation consultant Michael Boyd, principal of the Boyd Group. "I'm high on United Airlines. Now, they have a management that wants to manage the core airline." E-mail David Armstrong at davidarmstrong@sfchronicle.com.=20 ---------------------------------------------------------------------- Copyright 2002 SF Chronicle