An Unscheduled Landing for United: Bankruptcy?

With cash dwindling fast, the carrier could face a crisis by fall

Last fall, James E. Goodwin, then-chairman and CEO of UAL (UAL ), lost his job. His big mistake: He bluntly warned that the airline would perish in 2002 unless it quickly stopped bleeding money. Eight months later, the company's planes are still flying, and UAL is sitting on a mountain of cash, thanks to a flurry of high-priced loans and frenzied cost-cutting. But as the peak summer travel season winds down, and as losses once again deepen, Goodwin looks more prophetic every day. Barring a government rescue, the world's No. 2 air carrier increasingly looks headed for bankruptcy by yearend.

Clearly, investors see the handwriting on the wall. Shares of UAL Corp., the parent company of United Airlines Inc., fetched $34 each a year ago. Since then, they've fallen 83%--farther than shares of any major carrier except US Airways Group Inc. In July alone, UAL shares dropped 48%, to $5.95, following a weak earnings report and a deteriorating outlook. UAL's market capitalization totals just $332 million, vs. $1.74 billion for archrival AMR Corp. Worse, its unsecured debt--which Standard & Poor's downgraded to a single-B rating in June--is trading at 25 cents on the dollar.

UAL execs, who confirm that the airline retained bankruptcy lawyers earlier this year, won't discuss the possibility of a Chapter 11 filing. At first glance, bankruptcy hardly seems inevitable. UAL has amassed $2.7 billion in reserves. It burns through less than $1 million a day from its cash reserves to cover operating expenses, down from $10 million a day in 2001's fourth quarter. The company has also applied for $1.8 billion in new loans backed by the federal government. Moreover, it has just launched a marketing alliance with US Airways that promises to boost revenues.

But UAL's piggy bank may not hold out. The company must repay $900 million in debt in the fourth quarter, plus $150 million in early 2003. It needs $500 million for essentials such as aircraft parts and at least $250 million to cover its second-half operating losses. Add it all up, and UAL's reserves are on a course to fall below $1 billion, the minimum amount that management says it needs to avoid a liquidity crunch by November.

As if that weren't bad enough, UAL has had little success with its biggest headache: rising labor costs. Although outlays fell with the post-September 11 dismissal of 20,000 employees, or 20% of its payroll, they're on the upswing again. Earlier this year, a federal panel awarded United mechanics a 29% pay hike to make up for wage cuts they took in 1994 as part of the employee takeover of the carrier. Then, an arbitrator gave flight attendants a 5.9% raise. And, in May, UAL pilots got a 4.7% bump in pay. The raises hit just as the rebound in business travel stalled in June.

Without federal loan guarantees, UAL execs concede a cash squeeze is certain. Because of its shaky situation the company is now all but shut out of the capital markets, says Frederic F. Brace, UAL's chief financial officer. The International Association of Machinists even put a lien on UAL's headquarters to secure $500 million in back pay the airline owes its members.

Problem is, management and labor are locked into a dangerous game of chicken that threatens UAL's chances of getting the government to go along. To qualify, UAL needs a one-year 10% pay cut from its unions. So far, only the Air Line Pilots Assn. has acquiesced, and it can rescind the giveback if the other big unions don't chip in. That's not looking likely as union leaders argue that management has exaggerated the airline's woes. Says Greg Davidowitch, president of the UAL flight attendants council: "It's not our wages that are causing the problem."

Even if the airline gets government backing for its loans, UAL won't be out of the woods until it can meet its costs without more borrowing. With the travel recovery stalling and the airline's labor woes unresolved, most industry observers don't see that happening until 2004 at the earliest.

If UAL goes bankrupt, the airline would probably be able to maintain operations and reorganize. But that's no sure bet. Brian M. Campbell, of Campbell Aviation Group in Alexandria, Va., predicts that UAL could go the way of Pan Am, which liquidated in 1991. If only UAL's board had taken James Goodwin more seriously.

By Michael Arndt in Chicago

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