=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/news/archive/2002/12/08/n= ational1232EST0002.DTL ---------------------------------------------------------------------- Sunday, December 8, 2002 (AP) Airline's path to bankruptcy linked to costs, errors, downturn DAVE CARPENTER, AP Business Writer (12-08) 09:32 PST CHICAGO (AP) -- Bankruptcy first appeared on the radar screen as a possibility for United Airlines following the Sept. 11 terrorist attacks. But the carrier's descent toward financial emergency began much earlier. Burdened by the industry's highest costs, management missteps and an employee-ownership plan gone awry, United buckled worse than any other carrier when aviation's biggest-ever slump hit. Those problems -- capped by the rejection of a government loan guarantee last week -- pushed the nation's No. 2 airline toward an expected Chapter 11 filing in U.S. Bankruptcy Court as soon as today. United has said it would keep flying during what would be the largest bankruptcy in the industry's history. How could such a premier global airline -- until not long ago both highly profitable and the world's biggest -- go bankrupt? The answer involves bloated costs, bad moves and bad timing, compounded by the economic downturn. "For about the last three years, the airline's been out of control," said Darryl Jenkins, head of George Washington University's Aviation Institute. "The spiraling down of United since then was internally caused." United's first huge problems erupted in the summer of 2000, when thousan= ds of flight cancellations and delays entrapped passengers in its emerging trouble. The operational chaos followed a fateful decision that May, when management agreed to the costliest merger in airline history at a time when its pilots were in stalled negotiations for their first raise in six years. Then-chairman and CEO James Goodwin was willing to pay $4.3 billion cash and take on $7.3 billion in debt to acquire US Airways, now in bankruptcy court itself. The deal collapsed 14 months later amid antitrust concerns, but the ultimate cost may have been far steeper: United's stability and perhaps its survival. A pilots' slowdown snarled daily schedules all that summer. By the time United gave in and granted pay hikes of 22 percent to 29 percent to end the turmoil, passengers had fled in droves. While other airlines were adjusting their strategies to deal with a weakened economy and stiff competition from discount carriers and Internet sites, United's energies were diverted to its ill-advised merger bid until mid-2001. In the meantime, United suffered more than other carriers from the slide in business travel it depends on so heavily. Since the second quarter of 2000, when it last turned a profit, the airline has lost a staggering $4 billion. "They just basically never recovered" from the summer of 2000, Jenkins said. "In order to get traffic back, they had to lower their fares. And while pursuing the merger, they forgot how to operate the airline." Labor relations soured as workers watched the free fall in shares they acquired in 1994, under a reluctantly adopted employee stock ownership plan, in exchange for wage and benefit cuts. Employees became more alienated during protracted contract negotiations, and a legal battle with mechanics stopped just short of a strike. Then came one more costly flop: Its plan to launch a charter jet service called Avolar. "United guessed wrong in many critical areas," said Joseph Schwieterman, an aviation industry expert and economics professor at DePaul University in Chicago. "It bought large planes, it tried to go head to head against discount airlines. At the same time, its labor relations were only growing worse." The setbacks took a huge toll. The company already was on a pace to lose $1 billion in 2001 when four airplanes, two of them United's, were hijacked by terrorists and crashed on Sept. 11. An unprecedented falloff in air travel followed. After cutting 20,000 jobs and hundreds of daily flights, Goodwin was ousted for telling employees the carrier would "perish" in 2002 unless it stopped hemorrhaging money -- a warning that devastated United's stock. But it took 10 months to find a permanent replacement in oil executive Glenn Tilton. During that time, United underestimated how slow the recovery would be and moved sluggishly to craft a restructuring plan that the Air Transportation Stabilization Board said Wednesday was not financially sound. "You can't expect a company that size to operate in its worst year ever without a permanent leader," said Denver-based airline consultant Michael Boyd. "They were rudderless for a year, and then they went out and hired a guy with no airline experience." Goodwin's "perish" warning haunts United to this day. With the airline facing a mountain of overdue debt, arguments about who's to blame have turned to talk about the drastic cuts likely in bankruptcy -- and whether other airlines will follow if the skies don't fill again. "Without Sept. 11 and the recession, United wouldn't be where they are," said Samuel Peltzman, a University of Chicago economist who specializes in airlines and regulatory issues. "They might be part of the way there, but clearly the demand for air travel played a big role." On the Net: www.united.com =20 ---------------------------------------------------------------------- Copyright 2002 AP