How to Keep United Flying

Glenn F. Tilton

Chairman, President, and CEO

UAL Corp.

1200 E. Algonquin Rd.

Elk Grove Township, Ill. 60007

Dear Glenn:

Well, you've certainly had an eventful few months. Since taking over United Airlines Inc. (UAL ) on Labor Day, you have assembled a cost-cutting plan to lower labor expenses by almost $1 billion a year, in the hopes of obtaining the $1.8 billion in federal loan guarantees that would permit UAL to avoid bankruptcy. Of course, that's not how things turned out. Even before United's unions had finished voting on the givebacks, the Air Transportation Stabilization Board dismissed your application, calling it "unreasonable." It can't have been easy when, faced with $920 million in overdue bills, you were forced on Dec. 9 to seek Chapter 11 bankruptcy protection. As you know, United's the biggest business failure in U.S. aviation history and the sixth-largest ever, measured in terms of assets.

Things don't look good. You've said United is losing $20 million a day. Moreover, your new lenders are demanding that you come up with "substantial labor savings" within the next few months, or they'll chop off your funds. They haven't specified publicly just how deep the staff cuts must be, but as you note in the company's bankruptcy filing, you would have to pare your payroll expenses by $2 billion a year, or 28%, to match Continental Airlines Inc.'s (CAL ) labor costs. And equaling low-cost rival Southwest Airlines Co. (LUV ) would mean $200 million beyond that. That's big money. No wonder many of your rivals are betting against you. In fact, several airline insiders tell me there's a more than 50% chance UAL will wind up in a Chapter 7 liquidation.

But Glenn, let me assure you that you could still end up as the man who saved United Airlines. How? Obviously, you must start by quickly wringing huge cost reductions from labor. The good news is that bankruptcy should be a big help. Labor leaders know a judge can toss out existing contracts. But for now, there's no reason to go down that road. You would be better off negotiating. You can't risk turning your workers into adversaries--who would scare off passengers. Instead, go around labor leaders and appeal directly to the rank and file, whose votes you'll need for any givebacks. And be frank: What would they prefer--a pay cut or no job? That will help convince veteran pilots, who know they would never get such big bucks at another airline. Ordering pay cuts of up to 10.7% for all managers and executives, as you did on Dec. 9, was a good first step showing that no one is exempt from sacrifice.

Sure, the lion's share of savings will have to come from wage concessions. But you could also save tons of money by getting rid of the silly work rules that United still abides by. To take just one example, why must there be a fully licensed mechanic, making up to $102,000 a year, at the gate every time a plane is pushed off? One analyst says eliminating that one rule could save $200 million a year. In UAL's bankruptcy papers, you also point out how, by carefully picking days, a $300,000-a-year jumbo-jet pilot can take a full month of paid time off by using two weeks of vacation. That's nuts.

Of course, simply lowering labor costs won't save United. You're also still flying too many planes on too many unprofitable routes. Even with the 6% reduction you have planned for next month, your operations need further trimming. You'll want to keep United's hubs and international routes--they're your crown jewels. But you should move quickly to retire more of those costly-to-fly big planes and turn over some routes to partners flying regional jets. And while I'm sure it's hard to admit rivals may be doing a better job, you should also copy the "rolling hub" experiment American Airlines Inc. (AMR ) is trying. By spreading flights out over a day instead of bunching them together at hours consumers prefer, you would get more hours out of your planes and flight crews. While you're at it, you should also try American's current test of reducing last-minute business fares to drive traffic.

What about those pesky low-fare encroachers like Southwest? To blunt their challenge, you'll need to resurrect UAL's low-cost shuttle subsidiary. Flying point-to-point with one aircraft type, à la Southwest and JetBlue Airways Corp. (JBLU ), is the way to go there. The strategy worked against Southwest in California in the 1990s--till the unions saddled the shuttle with their burdensome work rules.

And let's get real about one thing: You need to dump UAL's employee stock-ownership plan, which gave workers equity control of the carrier and special powers on its board of directors. Creditors or potential outside investors, who could include alliance partner Singapore Airlines or investment firms such as David Bonderman's Texas Pacific Group, will probably be the ones in control if UAL comes out of bankruptcy.

Obviously, none of this will be easy. Since the airline industry was deregulated in 1978, nearly 200 carriers have disappeared, including big guys like Eastern, Pan Am, and Trans World Airlines. Only one airline from the era of regulation, Continental, has survived bankruptcy. Why not take a lesson from its experience? The Houston carrier slashed labor expenses, but it didn't really succeed until management turned workers into allies by giving bonuses for such things as on-time performance. Continental kept its hub-and-spoke network, but it stopped trying to serve every market.

The next few months will determine your legacy. If you can get labor on board--without completely destroying morale--you'll have time to put together a new UAL that could beat your hub-and-spoke rivals and stymie the advance of low-fare airlines. But if you fail, UAL will fail. Creditors figure you've got till next spring to show big progress. If you go beyond that, they're likely to push for liquidation. So the pressure is on. Time to put down this magazine and get back to work.

Yours sincerely,

Michael Arndt,

with Wendy Zellner

    Before it's here, it's on the Bloomberg Terminal.