United, unions dig in for deal to dodge Chapter 11 By Marilyn Adams, USA TODAY United Airlines' deadline is approaching. One month ago, its parent, UAL,=20 announced the company would file for Chapter 11 protection this fall unless= =20 it had won big contract concessions from its unions by now. (Related item:= =20 United CEO's people skills get high marks) The airline, which has lost more= =20 than $3 billion since January 2001, demanded the cost cuts to help it=20 qualify for a crucial federal loan guarantee and raise $2 billion in=20 emergency cash. "We do not see bankruptcy as inevitable," United Chief=20 Financial Officer Jake Brace said Monday. United's unions have spent weeks= =20 crunching numbers to propose several billion dollars' worth of painful=20 givebacks. But as union leaders present their counter offer to UAL this=20 week, the airline and labor appear to be far apart on what United said it=20 needs and what the unions say they can give in the next several years.=20 While United says it's encouraged, many who have watched the airline's=20 stormy labor relations in recent years question whether a deal can be=20 signed or ratified by workers in time to avert a crisis. Out of caution,=20 United is preparing for Chapter 11. The prospect of the largest airline bankruptcy in history is spreading=20 alarm. Based on 2001 revenue, United is the world's second-biggest airline,= =20 with 83,000 employees, nearly 600 jets and 1,900 flights a day. Experts=20 worry that a UAL bankruptcy would put severe pressure on already-weakened=20 creditors and competitors. Coupled with low ticket revenue and the=20 possibility of higher fuel prices if the U.S. attacks Iraq, a UAL filing=20 could squeeze other cash-strapped carriers, too. Still, a United filing =97= =20 if it occurs =97 probably wouldn't come until October or November. The=20 airline would keep flying in bankruptcy, and labor-management talks could=20 continue. Nor would United be the first U.S. airline to enter bankruptcy=20 court; some have been there repeatedly and kept flying. US Airways, which=20 sought Chapter 11 protection last month, continues to operate, though with= =20 a reduced schedule. A post-bankruptcy United likely would be healthier. United's passengers, however, would feel an impact. "If United files, it's= =20 going to involve substantial cuts in the routes it serves," says Boston=20 lawyer Jon Schneider, who represented creditors in the bankruptcies of=20 Eastern Airlines and Continental Airlines. "There's a fundamental problem=20 here: They are losing money ... and they have to stop that." People=20 familiar with United's problem estimate the shrinkage would be at least 10%= =20 as it shed unprofitable routes. The airline probably would park more=20 planes, especially Boeing 747s, which are the most expensive to operate and= =20 hardest to fill in this economy. Though it's not clear which United routes= =20 would suffer, US Airways after its bankruptcy filing dropped one city, cut= =20 13% of its flying capacity and discontinued 36 routes. It also tried to=20 change the rules on its non-refundable tickets and frequent-flier program=20 but later rescinded the most drastic changes. United's immediate hurdle is= =20 an $875 million debt payment coming due in November. Saying it won't have=20 enough cash and that it has been shut out of the capital markets, United=20 has applied to the federal Air Transportation Stabilization Board for a=20 $1.8 billion loan guarantee so it can borrow $2 billion. The guarantee is=20 assurance to lenders that the loan would be repaid. The board, made up of=20 representatives from the departments of Transportation and the Treasury and= =20 the Fed, has taken a skeptical view of applicants and has insisted on sharp= =20 cost cuts in airline business plans before it will consider aid. But the upcoming debt payment isn't United's only worry. The travel climate= =20 in general remains grim a year after the attacks. And thanks to vicious=20 competition, fares are at 15-year lows, pummeling revenue. The post-Sept.=20 11 recovery of passenger traffic stalled months ago, and the first week of= =20 September of this year, traffic at big network carriers plummeted again,=20 off 15% on average from a year earlier. Although airlines suspect=20 passengers were avoiding the terror anniversary, they aren't sure bookings= =20 will firm this fall. United's big creditors are taking stock of their=20 exposure. Boeing Capital, the airplane builder's financing subsidiary,=20 recently warned of a "material adverse effect" if UAL were to default on=20 its $1.27 billion in loans and leases on airplanes. United is Boeing=20 Capital's single biggest customer and represents nearly 12% of the=20 company's total outstanding loans and leases. Airbus is also exposed. It=20 has firm orders from United for 45 planes, worth about $2.25 billion based= =20 on list prices. Three of the planes are in production. "This is all secured= =20 by aircraft," says Boeing Capital spokesman Russ Young. But since airlines= =20 already have parked many planes and there's a glut, aircraft aren't worth=20 what they were last year. "The question of exposure would be how much the=20 airplanes ... are worth now," he says. "We're watching that very carefully." The first creditors to see any disruption of payments would be unsecured=20 creditors, such as United's big hub airports dependent on airline fees and= =20 service companies such as aircraft maintenance, catering and fuel firms.=20 Competitors are bracing themselves. "We are taking this seriously," says=20 Elise Eberwein, a vice president for Frontier Airlines, a Denver-based=20 discount carrier that competes with United there. Frontier could benefit if= =20 United cuts routes or flights but would be hurt "if United decided to=20 compete against us with irrational pricing," Eberwein says. "You don't know= =20 which scenario to plan for. They are so big, and we have 35 planes." At a=20 time when raising cash has become extremely tough, some United competitors= =20 are worried about a United bankruptcy for other reasons. Airline executives= =20 "are very concerned about two things this fall: a war with Iraq and a=20 United bankruptcy," says Gerry Pasciucco, a senior Morgan Stanley=20 investment banker who specializes in airline financing and is advising=20 United. "A bankruptcy would send a negative signal to the markets about=20 airlines' ability to get labor concessions short of bankruptcy." The fear,= =20 he says, is a United Chapter 11 filing in this environment could dry up=20 already-tight credit during the slow fall and winter travel period and put= =20 cash-strapped, highly leveraged carriers at risk. A UAL filing "would=20 probably do further damage" to airlines' cash access, adds Standard &=20 Poor's bond analyst Phil Baggaley. If United returned planes to creditors,= =20 it would worsen the industry glut of unwanted planes and make lenders wary= =20 of them as collateral. Bankruptcy talk and the industry's other ills have taken a toll on airline= =20 shares. Last week, FMR Corp., parent of Fidelity, the nation's largest=20 mutual-fund company, disclosed to the SEC that it had dumped virtually all= =20 its stock in United parent UAL, whose shares are trading under $3. FMR=20 dropped its stake to a few hundred UAL shares from 3.1 million, a 5.6%=20 stake, a month earlier. It also disclosed it had slashed its stake in=20 Continental Airlines, to 3% from 12.8% four months ago. Last month, FMR=20 disclosed it cut its stake in Delta Air Lines to 7.5% from 12.5% last Dec.= =20 31. Fidelity declined comment on the moves. While it works to stay out of=20 bankruptcy, United is methodically preparing for a bankruptcy filing.=20 Experts say advance work for such a filing, including lining up=20 debtor-in-possession financing, can take weeks or months for a big company.= =20 United hired law firm Kirkland & Ellis last fall. It recently signed on=20 financial adviser Rothschild North America. New York-based Rothschild is=20 known on Wall Street for advising companies on restructuring and=20 bankruptcy. Union leaders acknowledge that they, too, have hired bankruptcy= =20 specialists to protect their interests in court. United is 55% owned by=20 employees, and representatives of the mechanics and the pilots unions have= =20 seats on the board. In a bankruptcy, that equity likely would be wiped out.= =20 Employees fear losing their huge personal investment and their board votes. Employee ownership at United adds a peculiar complexity to talks. United's= =20 former president and COO, unpopular with the unions, recently resigned. New= =20 CEO Glenn Tilton, an oil executive hired by the board two weeks ago with=20 the support of the mechanics' and pilots' unions, now must negotiate with=20 them for cuts in pay, benefits and work rules. Those unions have been down= =20 a similar road before: In 1994, the International Association of Machinists= =20 (IAM) and the Air Line Pilots Association agreed to major contract=20 concessions over six years in exchange for stakes in the company and seats= =20 on the board. Monday their UAL shares closed at $2.68 each. Tom=20 Buffenbarger, international president of the IAM, United's largest union,=20 says he believes bankruptcy can still be avoided. "If it isn't avoided, all= =20 parties have failed to do their jobs," he said. Asked if he thinks his=20 union's members will vote to ratify pay cuts after receiving hard-won=20 contracts and raises a few months ago, Buffenbarger didn't commit. "I'm not= =20 going to predict that. There's too much that's unpredictable in this= industry." 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