This article from NYTimes.com has been sent to you by psa188@juno.com. Costs Are Important, but Revenue Is Crucial December 6, 2002 By DAVID LEONHARDT For United Airlines, high costs are just part of the equation. As United executives continue their desperate attempts to persuade workers to accept concessions, wages have become the dominant symbol of the company's troubles. But United's descent from a highly profitable airline - and the world's largest - a few years ago to one on the cusp of bankruptcy involves far more than salaries and other costs. What separates United from its peers who are still solvent, according to industry statistics and many analysts, may be its struggle to bring in new revenue even more than its inability to contain costs. With employees owning a majority stake in United, labor costs have risen significantly since the mid-1990's, but they remain no higher than those at American Airlines, United's main rival. Instead, the employee-ownership plan appears to have left United with a dysfunctional business model that has kept it from retaining high-paying passengers as well as its rivals. In a bluntly worded letter rejecting United's request for $1.8 billion in loan guarantees this week, a federal board highlighted the company's revenue struggle. The board said United's executives overestimated the industry's prospects for a quick recovery and underestimated the effects of the continued growth of low-fare carriers like Southwest Airlines. Some of United's problems are unique to the company's long history of labor strife and weak finances, helping to explain why no other truly national carrier finds itself in such a precarious condition. Analysts expect United, a unit of UAL, to file for bankruptcy protection in the coming days or weeks. Other problems, however, exist in some form throughout the industry. In this way, the decline of United - which was born in the 1920's as a mail carrier in the Pacific Northwest and spun off Boeing shortly afterward - suggests that the near future is likely to be a rocky one for other carriers as well. "American is burning cash at almost the same rate" as United, said Randy Babbitt, chief executive of Eclat Consulting, an aviation firm, and former president of the nation's biggest pilots' union. "They just have more stuff to burn." Tim Doke, a spokesman for American, said, "We have basically the same labor cost structure and facility cost." He added, "We certainly aren't in a strong financial condition right now, but we aren't where United is." American is a unit of AMR. The severity of United's revenue problems stems partly from its heavy reliance on the bubble spending of technology companies, as well as its unusual exposure to Southwest's low-fare service. Two of its hub airports are San Francisco International and Washington-Dulles International, both in regions hit hard by the bursting of the technology bubble. Companies like America Online, with offices near Washington, and Cisco Systems, in Silicon Valley, once spent heavily on travel to drum up new business, but they have cut back severely. Other companies have reduced travel as well, leaving fewer buyers of last-minute tickets, which increased rapidly in price in the late 1990's and allowed United and other carriers to make record profits. "They were building up a fare structure based on a market that was unrealistic," said Michael S. Allen, chief operating officer of Back Aviation Solutions, a research company. "The costs went up faster than the revenues when the business passengers got off." At the same time, Southwest was growing rapidly, squeezing United's profits. Along with Los Angeles International Airport and O'hare International Airport in Chicago, also United hubs, the Dulles and San Francisco airports share metropolitan areas with Southwest strongholds. Southwest's eight largest operations are in Baltimore, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Oakland and Phoenix. Since 2000, the revenue United brings in for each seat it flies one mile has fallen 17 percent, according to Back Aviation. Continental's has dropped 13 percent and Northwest is down 10 percent. United is not alone at the bottom of the pack. The per-seat revenues at American and Delta have fallen about the same. But the big raises that United gave its pilots in 2000 left it with high costs and less of a financial cushion when hard times hit. As part of the 1994 Employees Stock Ownership Plan, or ESOP, the pilots received one quarter of United's stock and wielded unusual power. The mechanics also own shares, but their only raise since 1994 did not come until this year, and the flight attendants, who were not part of the ownership plan, also did not fare as well as the pilots. This helps explain why United's total labor costs remain similar to those at American, analysts say. Perhaps more important, the ownership plan, after some early successes, set off internal bickering between workers and management and among the different unions about how the company should be run. "The United ESOP was one of the worst-structured ESOP's of any I've ever seen," said Corey Rosen, executive director of the National Center for Employee Ownership. Employees stopped receiving stock after five years, making the plan seem like a temporary fix, and flight attendants decided not to join the plan, Mr. Rosen said. After an initial burst of activity, he added, United's management stopped involving workers in major decisions. Christopher Macken, president of Ownership Associates in Cambridge, Mass., who advised United about employee ownership, recalled a meeting with a senior executive in the mid-1990's. After Mr. Macken sat down, the executive told him he had no interest in employee ownership as a management tool. "This was strangled in the crib," Mr. Macken said. When United tried to buy US Airways in 2000, some executives became consumed with persuading the unions to back the deal and paid too little attention to the existing business, said a former United executive who insisted on anonymity. "We sort of took our eye off the ball," the executive said. "That set us back." If anything, the internal fights and the anger of workers at the stock's fall from over $100 in 1997 to almost nothing have created a workplace that is less flexible than those of its competitors, analysts say. Over the last year, United has angered corporate travel managers, many of whom influence multimillion-dollar travel budgets, by giving its employees less freedom to negotiate discounts, the managers say. They ranked United the seventh-best carrier to work with, according to a recent survey by Business Travel News. In 2001, United was second. "From a flexibility standpoint, it seems like they are just lacking," said Mark Walton, a principal at Consulting Strategies in Lincolnshire, Ill., who advises corporate travel managers. "For an airline not to empower its field staff is pretty significant." http://www.nytimes.com/2002/12/06/business/06UNIT.html?ex=1040189297&ei=1&en=0d8167565c18d3f2 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company