And so the inevitable has happened. United Airlines has filed Chapter
11. The company that a scant three years ago was hailed as arguably the
most successful, largest and most profitable airline in history is now
incapable of scrounging together enough loose change to make a routine
debt payment.
Don't kid yourself with euphemisms like "spring cleaning", "fresh start"
and other cuddly terms that serve no purpose other than to deny the
obvious. Make no mistake folks. The company is BANKRUPT. Insolvent.
Delinquent. That is what you call folks who can't meet their
obligations.
There has been much finger pointing as to who is to blame for this
fiasco. AFA blames IAM who blames ALPA who blames the ATSB who blames
management who blames Osama Bin Laden. Personally, I think that although
Osama was the catalyst that accelerated this freefall into the stygian
depths of airline purgatory, UAL was committed to the slippery downward
slope well in advance of 11 September 2001. UAL's true day of reckoning
was 26 August 2000; the day that James Goodwin and Rick Dubinsky shook
hands across a table in Elk Grove.
Charismatic leadership is essential for a good airline to maintain its
industry leading position. Through history, UAL has been driven by
leaders such as Pat Patterson, Dick Ferris and even Steven Wolf, all of
whom left their mark upon the proud legacy of the friendly skies.
Unfortunately ESOP created an environment where organized labor wound up
with far too much of a say in how the company is run, and of course
labor has a vested interest in ensuring that each leader is more
ineffective than his predecessor. James Goodwin was a wonderful guy who
dedicated his entire life to serving the airline he loved, but he had
about as much charisma as a bowl of jello with just slightly more
intelligence to boot.
When Goodwin and Rick Dubinsky faced off during the Summer From Hell, it
was a mismatch worthy of any of the Buffalo Bills' Superbowl
appearances. Simply put, on most issues Goodwin didn't stand a chance -
and he fired wide right on the ones he might have been able to salvage.
Dubinsky and his ALPA attack dogs mauled management to the point where
capitulation to their ridiculous demands was the only humane course of
action remaining by the time the end of August 2000 rolled around.
UAL was able to be so profitable in the late 1990s mainly because their
labor costs were below those of the competition, thanks to the cost
reductions that were made available through ESOP. As revenue soared amid
the dotcom boom, UAL's profit margins also grew beyond anyone's wildest
dreams as "Rhapsody in Blue" became "Rhapsody in Green" to reflect the
sweet sound of money jingling into the corporate coffers. Unfortunately,
due to a mixture of greed and stupidity, they then made the mistake of
pegging their costs to the absolute apex of revenue. So when the economy
inevitably tanked, the only sound emnating from Elk Grove was a loud
SPLAT when the airline's high speed free fall finally arrested itself
via impact on the pavement below as the airline's financial books played
"Rhapsody in Red" in a B-flat key.
But enough dwelling on the past. After all, that was arguably what got
UAL into this mess in the first place. Where does UAL want to go from
here, and more importantly do they have a map to get there? Obviously,
the primary objective has to be to transform UAL into a viable business
entity. In its simplest form, that involves making sure that revenues
are greater than costs. To achieve this end, a number of different
strategies will probably be adopted. The key element is to redefine the
cost benchmark to attain a competitive position in the marketplace.
There will be labor savings, both through wage reductions as well as
through streamlining of work rules. There will also be a move to divest
unproductive assets. This will take the form of grounding
underperforming aircraft types, as well as discontinuing (or spinning
off to regional affiliates) routes that are not operating optimally. The
fundamental rule of restructuring is that it is better to be profitable
with under-capacity than to be greedy and seek higher returns while
running the risk of over-capacity.
Some of the other rumors doing the circuit involve the sale of assets.
Much as UAL would love to sell a big chunk of their 747 fleet, the sad
truth is that all but about 10 of them are already pawned off to
assorted lenders. And even if this wasn't the case, its hardly a
seller's market for 747s right now anyway. As for route authorities from
Heathrow and Narita, I hate to be the bearer of bad news but times have
changed since Pan Am's days. The bilaterals between the US and both the
UK and Japan have been tightened up significantly to prevent an easy
transfer of assets. In my opinion, this simply will not happen, or at
least not efficiently enough for it to be of much use to either UAL or
the purchaser.
Labor is the single largest component in UAL's cost structure, so it
stands to reason that UAL will seek the deepest cuts there. Here is
where things get interesting. ALPA knows that their contract is more
than generous and that unless they come up with ways to voluntarily
realize target savings, UAL will simply ask a bankruptcy court to
abrogate the contract, which any judge worth his salt will probably
agree to. Conversely, the IAM feels that any concessions requested
voluntarily by UAL will leave them worse off than throwing themselves at
the mercy of the court and risking an abrogation. AFA, as usual, is
pretty insignificant in this issue as they actually have a contract that
is structured around realistic market conditions. So we have very
different motivations among the various "labor coalition" members,
almost certainly ensuring that discord will be the means and
disagreement the end result of their efforts.
So what will the labor contracts at the new UAL look like? It will be
very interesting to see, primarily because these contracts will serve as
the benchmark for the other big-6 carriers to tailor their subsequent
agreements around. The biggest sticking point is likely to be how much
representation the labor groups have on the board. Surprisingly enough,
I am a big proponent on labor having at least some representation at the
highest level. A successful airline must have an open relationship
between management and employees, and the mistrust is so high right now
that it would be nearly impossible to achieve that without a board seat.
Besides, like it or not, labor is a huge factor in most business
decisions nowadays and a board seat would give a representative voice to
the employee stakeholders.
The best analogy comes from a reader who said that the outcome of UAL's
Chapter 11 is like a long haul flight. You have to make sure the fuel
(in this case the DIP financing) does not run out, that the crew are
able to do their jobs (in this case that the labor groups stay on board
with cost reductions) and that the passengers are satisfied with their
service. As long as those three core principles are adhered to, United
stands an excellent chance of emerging from Chapter 11 as a healthy and
viable entity. If not, I fear that we may have seen the end of the
Friendly Skies, both literally and figuratively.
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