United Airlines Mechanics Reject Pay Cuts

Published November 28, 2002

| Reuters

Mechanics at United Airlines said on Thursday they rejected $700 million in proposed pay cuts over 5-½ years, increasing the odds of a bankruptcy filing very soon unless the No. 2 U.S. airline can hammer out a new deal with the union workers quickly.

The International Association of Machinists, District 141M, said its 13,000 members rejected their portion of a total $1.5 billion wage cut deal by a 57 percent margin. Some 24,000 other IAM members, including public service workers and baggage handlers, part of a separate bargaining unit called District 141, approved their portions of the cuts — $800 million.

Elk Grove Village, Illinois-based United, a unit of UAL Corp. (UAL), said it would immediately begin new talks with the mechanics.

But whether the discussions will bear fruit was uncertain on the Thanksgiving holiday as United's fate hangs in the balance.

"We intend to achieve the full labor cost savings included in our business plan," United said on Thursday afternoon. "Reaching our $5.2 billion target is essential if we are to secure federally backed loans and avoid a Chapter 11 filing."

The airline, bleeding about $8 million in cash daily, is willing to modify some aspects of the tentative agreement but must have the same dollar amount of concessions from mechanics, according to Chief Financial Officer Jake Brace.

Brace said in an interview that talks with 141M leadership had already begun.

A Kink in the Plan

In any case, unless a new deal comes soon, the mechanics' rejection jeopardizes pay-cut agreements achieved by sister unions, including those for pilots and flight attendants, which all said the givebacks were contingent on every single union taking part in the sacrifices.

IAM spokesmen were not immediately available.

Like other U.S. airlines, United has posted billions of dollars in losses in 2001 after the Sept. 11 attacks and again this year as revenues remained weak.

The airline recently secured agreements for $5.2 billion in wage cuts from its employees, including five separate unions, as part of a financial recovery plan put before the Air Transportation Stabilization board. That is a new federal agency created after the Sept. 11 attacks and charged with doling out up to $10 billion in loan guarantees.

United has asked the agency to back $1.8 billion of a $2 billion loan. It has met with staffers in Washington every week recently after the board said more labor wage concessions were needed than what the airline originally outlined.

Industry experts say a decision from the ATSB will determine the near-term fate of United as it tries to avoid restructuring through the courts.

"The IAM rejection cleary jeopardizes what was already a highly uncertain ATSB application," said JP Morgan analyst Jamie Baker.

"Furthermore, it may seriously jeopardize UAL's ability to secure the requisite bridge financing in the unlikely event the ATSB turns in a conditional approval ... clearly UAL is closer to bankruptcy than ever before," Baker said.

Pressure on United to present a government agency with a broad package of labor concessions has intensified in recent weeks. The airline faces a big debt repayment of $375 million on Monday for which it needs new capital.

The ATSB has been a tough sell for many airlines — some have had their financial plans approved, but others, like National Airlines, have been rejected and stopped flying after they ran out of money.

The powerful IAM represents a variety of workers at United from mechanics and customer service agents to baggage handlers and reservation agents. A committee of leaders agreed to the pay cuts only after months of intensive negotiations, having won their first pay raises since 1994 earlier this year.

Bankruptcy May Come Soon

United faces an imminent bankruptcy filing unless it can persuade the government to grant the loan guarantees very soon as part of the landmark aviation bailout package passed last year. The three-member board wants a viable business plan in addition to the broad labor cuts.

Mechanics, distrustful of management they say has misguided the company in the past, apparently disagreed with the need to cut costs or at least what their participation should be.

"Each employee measured the costs and benefits of participating in United's recovery plan," said Scotty Ford, District 141-M president, in a statement. "In the end, some thought the risk was worth taking, and others felt they had sacrificed enough. We respect both decisions and this organization will aggressively represent their common interests as this extraordinary situation unfolds."

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