It's Chapter 11 for United Airlines

December 9, 2002
By Kathy Fieweger

CHICAGO (Reuters) - United Airlines filed for bankruptcy on Monday, the largest such case ever in the global airline industry, after high costs and low airfares left the world's No. 2 carrier with too much debt and not enough cash.

UAL Corp.'s United , with one of the broadest networks in the world, will continue to fly worldwide as it attempts to reorganize under protection from the U.S. Bankruptcy Court in the Northern District of Illinois.

The entire U.S. airline industry has been reeling from a weak U.S. economy and the Sept. 11 attacks, posting losses last year of about $10 billion and on track for at least $7 billion in losses this year.

United stressed in a statement it will be "business as usual" for customers.

But for employees, suppliers and others, changes are in store, said Chief Executive Glenn Tilton.

"During the Chapter 11 process, we will go further and deeper in our efforts to reduce our costs," he said. "We are developing a very compelling plan of reorganization that will enable us to successfully emerge as a stronger company with a competitive cost structure."

United, with about 83,000 employees, had two of its Boeing jets commandeered in the devastating attacks on New York and Washington on Sept. 11, 2001.

Since then it has posted nearly $4 billion in losses, with no end in sight to the red ink.

Judge Eugene Wedoff, chief of the bankruptcy court in Chicago, will preside over the huge bankruptcy case, which the airline said it hopes to complete within 18 months. A court hearing is scheduled at 11 a.m. CST on Monday.

SECOND MAJOR U.S. CARRIER IN COURT

Another big U.S. airline, Arlington, Virginia-based US Airways Group , filed for bankruptcy in August, and several smaller carriers have shut down altogether.

For United, which has a history of labor troubles and some of the highest wage costs in the industry, the downturn has also proved too difficult to navigate. The U.S. government last week rejected the airline's bid for federal loan guarantees, which had been its last hope for securing fresh capital.

The court filing has been widely expected and analysts generally predict a successful although lengthy court process.

"The odds clearly favor a reorganization, but that is by no means a foregone conclusion," said Gary Chase, airline analyst at Lehman Brothers. "United and its employees and suppliers have to quickly address the company's heavy cash burn in order to ensure a successful reorganization."

UNIONS REACT

In a statement, the International Association of Machinists, representing about 37,500 workers, said it foresees sacrifices for workers but the union is fired up about its role in the bankruptcy.

"Though bankruptcy may be new for our United Airlines members, the IAM has resources and experience in this area. We do not intend to be passive participants in United's bankruptcy. Actually, we are primed to play an active role."

The Air Line Pilots Association also said any successful restructuring must involve the pilots' union.

"United Airlines' Chapter 11 bankruptcy filing is one of the most difficult and disappointing developments in our proud history and one that we have worked extremely hard over the past 12 months to avoid," said Captain Paul Whiteford, the head of the airline's pilots branch.

Leaders of United's unions had agreed to a total of $5.2 billion in wage cuts over 5-1/2 years, but rank-and-file mechanics rejected their $700 million portion the night before Thanksgiving, dealing the bailout plan a blow.

United is 55 percent employee-owned, and the pilots and machinists each have a seat on the company's board after a 1994 employee stock ownership plan was put in place. A simple majority vote from the board was required to approve a bankruptcy filing. Bankruptcy usually leaves a company's common stock worthless.

"The natural tendency in situations like this is to waste energy placing the blame," Chase said. "Unfortunately, that's the most unproductive thing that United and its employees and creditors can do at this time, given that time is of the essence."

Included in the bankruptcy filing are UAL Corp., United Airlines Inc. and 26 other direct and indirect subsidiaries, the airline said.

UAL shares were trading at 55 cents in preopen dealings on Monday, down from a Friday close at 93 cents on the New York Stock Exchange.

FINANCING IN PLACE

United confirmed it arranged with a group of banks for $1.5 billion in financing to see it through bankruptcy. At the final hour, GE Capital pulled out of the group of lenders and was replaced by CIT Group .

The other three lenders are JP Morgan Chase , Citibank and Bank One . Bank One, based in Chicago, will take the heaviest exposure at $600 million. Of its share, half or $300 million is a separate credit line. The remaining $1.2 billion of the financing is divided equally among the four institutions.

Banks and others are willing to lend United the money in bankruptcy because these credit lines get paid back first.

United, based in the Chicago suburb of Elk Grove Village, Illinois, has hired two high-profile public relations firms to help it present the bankruptcy in the best possible light and encourage travelers to continue to use the airline.

for full article see
http://www.washingtonpost.com/wp-dyn/articles/A29963-2002Dec9.html