=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/2003/12= /14/BUGNC3M92U1.DTL ---------------------------------------------------------------------- Sunday, December 14, 2003 (SF Chronicle) United -- one year later/How the airline has flown the turbulent skies David Armstrong, Chronicle Staff Writer When UAL Corp.'s United Airlines filed for Chapter 11 bankruptcy protection on Dec. 9, 2002, the world's second-largest carrier faced a ride so bumpy, some airline industry observers thought United might disappear altogether. After a year of painful restructuring, the airline's prospects for survival have improved, although the turmoil it created has left its mark on a much-changed company. Pressed by a need to curb its high operating costs, United has extracted $5 billion in savings from employees and vendors and slashed its workforce to 63,000 from 100,000 just before the Sept. 11, 2001, terrorist attacks. In addition, it has petitioned Congress and the Internal Revenue Service for relief from having to make accelerated payments to its pension plans, dissolved an employee stock ownership plan that had given organized labor a big say in running the airline, and announced plans to start a low-cost carrier in February to challenge upstart rival discount carriers. United also continues its slow but apparently steady journey out of Chapter 11. On Wednesday, the company reportedly landed commitments from J.P. Morgan Chase and Citigroup, its leading debtor-in-possession lenders, for $2 billion in exit financing, which UAL hopes will allow it to leave Chapter 11 by the middle of next year. "They will definitely emerge from bankruptcy. The pressing question is whether they will emerge as a handicapped company or a very healthy and strong company," said bankruptcy attorney Martin Zohn, a partner in the Los Angeles office of the Proskauer Rose law firm. "You can cut costs, but there is only so far efficiency and reduced capacity can take you, especially in a shrinking industry. Right now, the aviation industry is waiting for a turnaround in passenger levels," Zohn said. "United is presently battening down the hatches and surviving until the recovery comes." The main challenges for a full recovery, Zohn said, are meeting $4.8 billion in pension obligations and showing it can increase revenue as well as it cuts costs. All this downsizing and repositioning has left United a smaller, less lucrative airline. Its stock, for example, sold for $1.48 per share at the close of trading on Wednesday (up modestly from $1.07 a year ago). That compares with $15.70 per share for folksy low-cost carrier Southwest Airlines and $27.19 for stylish low-cost-carrier JetBlue Airways. United's market cap stands at $163 million, while JetBlue's market cap h= as soared to $2.76 billion and Southwest's is a sky-high $12.36 billion. The whirl of restructuring activity has blown hard through Northern California, where United has cut its workforce nearly in half, from 20,000 two years ago to just 11,000 today. Additionally, United closed its maintenance base at Oakland International Airport in May, consolidating its maintenance operations at San Francisco International Airport. Nevertheless, Chicago's United remains embedded in Northern California, where it serves SFO, Oakland and Mineta San Jose International Airport. It remains the dominant carrier at SFO, the region's biggest airport, where it accounts for about half of all passengers and flights, and operates extensive transpacific routes from SFO. United's maintenance base at SFO, where the airline has operated since 1926, is the carrier's largest maintenance operation anywhere, according to United spokesman Stephen Roth. It employs 5,000 workers. All told, "With 11,000 employees, we are one of the largest employers in the Bay Area, and our Bay Area workforce is the second-largest in the United system, after our headquarters in Chicago," Roth said. Hammered by post-Sept. 11 fear of flying, the slumping economy and the walk-up to the Iraq war, United has lost some $6 billion since 2000. When it filed for Chapter 11 a year ago, it was the largest Chapter 11 filing in U.S. aviation history. Combined with the lingering legacy of the terrorist attacks and the slumping economy, UAL's Chapter 11 filing was painful for employees. United's pilots, the airline's highest-paid employees, took an across-th= e- board pay cut of 30 percent, said Air Line Pilots Association spokeswoman Capt. Scottie Clark, who has flown for 16 years at United. Moreover, some pilots took additional cuts as they were shifted to small= er planes. "Some pilots took pay cuts of 50 and 60 percent," Clark said. "That's something you definitely notice right away." Before Sept. 11, 2001, United employed 10,600 pilots, Clark said. When t= he company filed for bankruptcy on Dec. 9, 2002, that number was down to 8, 583. Now, United employs just 7,257 pilots, but has assured employees that there will be no more furloughs barring a dramatic turn of events, she said. "People have gotten used to working in bankruptcy," she said. "The employees have really stepped up to make this thing work. The worst, hopefully, is over." In recent months, United executives and some analysts say, the situation has started to turn around. In October, for example, United posted an operating profit of $60 million for the month, compared with a loss of $350 million in October 2002. More broadly, the airline reported that revenue rose to $3.817 billion in the third quarter compared with $3.737 billion in the year-ago quarter. The airline also narrowed its losses to $367 million in the third quarter compared with $888 million in losses in the year-ago period. Moreover, cash flow has improved, with the airline generating $803 milli= on in cash from its operations for the first three quarters of this year compared with a $1.14 billion loss for all of 2002. United has also improved its once-dismal on-time performance record. Aft= er leading the major network carriers in on-time ratings in 2002, it remained the leader through the first nine months of this year. "What these results point to is that United's restructuring has established a foundation for success. It is back in the game, competing," said Glenn Tilton, UAL's chairman, chief executive officer and president. Tilton, a former president of ChevronTexaco in San Francisco, was hired in September 2002 expressly to turn UAL around. Tilton and his management team "are doing just what they said they would do, cutting labor expenses, renegotiating aircraft and ground leases, containing their costs," said Ray Neidl, an airline analyst with Blaylock & Partners in New York. These money-saving measures should ensure United's survival, Neidl said. However, he added, the company's future prosperity is far from assured, and its employment levels of the past may not be seen again for a long time. UAL hopes that a $2 billion commitment from Morgan and Citigroup will be enough to persuade the federal Air Transportation Stabilization Board to grant another $2 billion in loan guarantees. Such guarantees, which the ATSB denied late last year, propelling UAL into bankruptcy, should help the carrier stabilize when it finally emerges from Chapter 11. United's efforts to pump up revenue have been less impressive so far than its steps to contain costs, said Neidl, who does not own UAL stock. For one thing, he said, United's planned low-cost carrier, christened Te= d, will not be all that cheap to fly because it will be staffed with mainline United employees at standard salaries. "I don't know if it's really a low-cost carrier," Neidl said. Michael Boyd, the principal in Colorado aviation consulting firm the Boyd Group, is not convinced that starting Ted consists of any more than repainting Airbus 320 aircraft already in the United fleet and cramming in more seats. "In fact, by increasing seat capacity from 138 to 156 seats, Ted will actually require one additional flight attendant," thus increasing labor costs, Boyd said. United executives insist Ted will save the parent company money and redu= ce fares for fliers by making more extensive use of each aircraft and using A320 pilots already on the United payroll who are paid less than United pilots who fly larger aircraft. Whether Ted ultimately flies with investors and the public, United could rely on other strengths to help it get off the ground. Chief among them, analysts say, is United's extensive global route structure, which it has extended through code-sharing agreements with other airlines. United's membership in the Star Alliance allows passengers who book flights on United to continue long-haul journeys on other Star Alliance carriers such as Lufthansa, All Nippon Airways and US Airways. In the short-term, United's recovery will get a boost if it can persuade Congress to allow it to avoid accelerated payments to its pension plans.The House agreed to grant a delay, but the Senate left for its holiday break last week before settling the matter, putting it off until Congress is back in session on Jan. 20. As matters stand, United's pension problems will intensify next year because of a federal rule requiring companies with large, lasting pension deficits to make a series of catch-up contributions. Earlier this year, United and other large U.S. corporations began to lobby for legislation to suspend the rule. United's chief financial officer, Jake Brace, emphasized in a Nov. 20 statement that the company is not trying to avoid funding its pension plans but simply wants to avoid a cash-flow crisis brought on by an accelerated payment schedule. "The facts are that we can fund our pension obligations on the standard, non-accelerated timetable," he said. Simultaneously, United is pursuing a waiver from the IRS that would also help slow down, but not suspend, its pension payments. A waiver would allow UAL to spread $2.4 billion of its pension obligations in payments over five years instead of the present 20 months, according to UAL's lead bankruptcy lawyer, James Sprayregen. The turnaround in the past 12 months -- When UAL filed for bankruptcy on Dec. 9, 2002, it had 83,000 employees nationally, including 16,000 in Northern California. Today, it has 63,000 workers nationally, including 11,000 in Northern California. -- One year ago, United had 575 aircraft; it now has 475. -- United has reduced operating expenses by $5 billion from a year ago -= - $2.5 billion comes from employee wage and benefits concessions; $1.5 billion from productivity improvements, outsourcing and revised airport leases; and $900 million from renegotiated aircraft leasing contracts.. Source: Chronicle research Key events in United's bankruptcy -- Dec. 9, 2002: UAL Corp.'s United Airlines files for Chapter 11 bankruptcyprotection, the largest airline Chapter 11 filing in history. -- Spring 2003: UAL dissolves its 9-year-old employee stock ownership plan, which gave its unions three seats on the corporate board of directors. -- May 31: United closes its Oakland maintenance base, consolidating maintenanceat San Francisco International Airport -- Nov. 18: United announces it will start its own low-cost carrier, to = be calledTed, from Denver in February. -- Dec. 9: J.P. Morgan Chase and Citigroup pledge $2 billion in funding for UAL, which hopes to use it to exit Chapter 11 by mid-2004.. Source: Chronicle research=20 ---------------------------------------------------------------------- Copyright 2003 SF Chronicle