This week marks a full year of bankruptcy reorganization for United Airlines parent UAL Corp. Though the company has not made public its business plan, certain elements of its financial progress, operational plans and sales strategies have emerged in recent weeks. Unlike partner US Airways, which emerged from bankruptcy after just seven months
(BTN, April 28), UAL has taken a slower track and plans to complete its reorganization no earlier than mid-2004.
In its latest monthly operating report to the court overseeing its bankruptcy restructuring, UAL said net income in October was $25 million, excluding $149 million in reorganization expenses. The company for the ninth consecutive month met the requirements of its debtor-in-possession financing and expects to do so again for the month of November. Passenger unit revenues grew 9 percent, and UAL exited October with a cash balance of $2.5 billion.
"United's restructuring has established a foundation for success," said president and CEO Glenn Tilton. "It is back in the game, competing."
A major financial obstacle is the company's pension plans, which under the current timetable would risk underfunding. "The facts are that we can fund our pension obligations on the standard, non-accelerated timetable," said UAL CFO Jake Brace. "The only issue we have is the significantly accelerated pension funding schedule currently mandated."
United is among a group of companies, including other airlines, actively lobbying Congress to make adjustments to the mandated pension rules. Those efforts suffered a setback when the U.S. Senate could not adopt such adjustments before breaking for Thanksgiving recess. The U.S. House of Representatives already had approved airline-specific legislation that would, for a two-year period, ease pension funding requirements.
United also will sell a portion of its stake in Orbitz, whose initial public offering, expected in the coming weeks, is priced between $22 and $24 per share. United, which currently holds 26 percent of Orbitz and will maintain an 18 percent stake, is expected to realize between $40 million and $50 million from the IPO.
Integral to United's new business plan is development of its low-cost operation Ted
(see story), which initially will fly from Denver to Fort Lauderdale, Las Vegas, New Orleans, Ontario, Calif., Orlando, Phoenix and Tampa. The operation also will offer Los Angeles-Las Vegas flights and services between San Francisco and both Las Vegas and Phoenix. "It is a tactical decision to compete against Frontier in Denver," said vice president of Oakland-based Unisys R2A Transportation and Management Consulting Alan Sbarra. "It is a good place to start, but there are not many super-high density markets to expand into from Denver." As such, Sbarra suggested a second or third base could be San Francisco, once home to United's unsuccessful shuttle operations.
United last month also signed a memorandum of understanding with Mesa Air Group, a firm United Express partner airline, stipulating that both Mesa and Atlantic Coast Airlines would serve as United Express affiliates on routes currently served by ACA, "in the event that Mesa is successful in its bid to acquire ACA." For its part, ACA, which is seeking to end its United Express obligations and transform into an independent Washington Dulles-based airline, has accused United of backing Mesa's hostile takeover bid, and said the Mesa-United MOU "is further evidence" that the two companies "are working together to try to squash ACA's efforts." ACA said Mesa and United "conspired in violation" of federal antitrust laws. United denied the allegations and continues to work with ACA under existing contract terms.
Should ACA break its United Express contract and avert Mesa's takeover bid, United would be left without a feeder affiliate at its Dulles hub, though United has insisted it will maintain an extensive feeder network from the airport, regardless of ACA's efforts to end the relationship.
Once a new business plan is finalized and exit financing is secured for the emergence from bankruptcy—UAL has identified Citicorp and JPMorgan Chase as potential lenders—UAL likely will re-apply to the Air Transportation Stabilization Board for a loan guarantee expected in the neighborhood of $2 billion. ATSB last December rejected UAL's application for a $1.8 billion loan guarantee, forcing UAL to file the largest bankruptcy case in airline industry history
(BTN, Dec. 9, 2002).If all the elements come together—a new business plan, a resolution to the ACA issue, a reworked pension funding schedule, renegotiated aircraft leases, exit financing and an ATSB loan guarantee—UAL will work with the bankruptcy court to finalize a timetable to complete its reorganization.
On the corporate sales front, some travel managers have complained about United's hardball tactics at the negotiating table, including exclusivity clauses
(BTN, Nov. 10), while others are more optimistic and suggested new leadership is beginning to make a difference. "They are doing some things to recover and get their customers back," said Steve Shook, vice president of strategic sourcing at Carlson Wagonlit Travel. "We have seen some good moves by them recently."
Some buyers have been frustrated by United's recent promotions, including a fly-three-fly-free incentive. "After convincing us to include Saturday night stays, their latest promotion explicitly excludes Saturday night stays," said one corporate buyer. Other travel managers suggested that United has "softened" its stance on insisting corporate clients send data to Prism Group
(BTN, March 25, 2002). "Several accounts have said they won't agree to Prism, and we are one of them," one buyer said.
United vice president of sales Dan Walsh said the airline uses Prism "religiously" but conceded that other providers are used occasionally. "We far prefer that things go through Prism," he said. "One way or another, we work it out with all accounts."
In other news, the airline last month struck a three-year agreement with Worldspan to provide the global distribution system with virtually all fares, including fares previously available only through online channels, in exchange for distribution cost savings. Worldspan signed Northwest Airlines to a similar content-for-discount deal earlier this year.