WHINE AND CHEEZ
by Sean Mendis
Come Fly The Bankrupt Skies
12 December 2002
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 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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