Published December 11, 2002
CHICAGO – Tough talks on wage cuts between United Airlines and its unions were starting again Tuesday, a day after the world's second-largest airline filed the biggest bankruptcy in aviation history.
As United, a unit of UAL Corp. (UAL), commences a battle for its survival, unions can expect to see big demands for givebacks, according to sources familiar with the matter.
In the absence of such concessions, United could use special provisions of U.S. bankruptcy law to terminate its collective bargaining agreements.
The airline has some of the highest labor costs in the industry after big pay raises won by pilots in August 2000 and by machinists earlier this year.
In court papers, United said it currently pays pilots $1 million more per day than AMR Corp.'s American Airlines and Delta Air Lines.
It also said its labor costs per available seat mile in the first six months of this year were 4.75 cents, just under American's 4.83 cents.
United, based in Elk Grove Village, Illinois, has made no secret that to survive the bankruptcy process it will need big sacrifices from its union and nonunion workers alike, along with breaks from suppliers, vendors and others.
The airline's bankruptcy lawyer, James Sprayregen, disclosed in court Monday that the giant carrier was losing $20 million to $22 million a day on a cash basis in December and was projected to lose about $10 million to $15 million a day in January.
Airline industry analysts and executives were shocked by the numbers, which far exceeded the $8 million to $10 million a day cash burn rate that Wall Street was projecting.
Meetings in Boston
A United spokesman confirmed Tuesday that meetings with its labor relations executives and the unions' financial advisers were scheduled to take place in Boston. After that, meetings would be set with union leaders daily.
"The goal is to build on the cooperation we've already had," said the spokesman, Joe Hopkins.
As part of the first-day court process, a bankruptcy judge Monday approved interim financing for United. An initial $800 million of debtor-in-possession financing will be made available in 10 more days, but the rest will come only upon satisfaction of specific cash flow targets.
A source familiar with the benchmarks that United needs to meet in order to obtain the rest of the money said the urgency to quickly secure wage cuts is high.
"This company is threatened with going out of business," he said. "The company has a business plan that they presented that's way different than what they gave to the ATSB."
United filed for bankruptcy Monday, less than a week after the federal Air Transportation Stabilization Board denied its request for backing of a $1.8 billion loan.
Pilots and machinists have two seats on the UAL board of directors, but it is not immediately clear what will happen to that structure in bankruptcy. A section of the U.S. bankruptcy code allows for labor contracts to be voided under certain conditions.
"We've got meetings scheduled and we're going to work to find a sensible way to restructure the company," said Captain Paul Whiteford, head of the United pilots' union.
Pay and Work Rules on the Table
But to avoid court-imposed labor contracts, sources said the airline needs either massive wage cuts or a combination of less severe wage cuts and significant work rule changes.
A coalition of union leaders at United had offered $5.2 billion in concessions over 5-½ years to support the loan guarantee application. But that was far below the $9 billion that former Chief Executive Jack Creighton said was needed.
In an interview Monday, the new CEO Glenn Tilton said he still believed the $9 billion was a reasonable number.
Sources said United needs that number or more, given the deterioration in the airline revenues that took place late this summer and early fall.
United's broad plan for emerging from bankruptcy in 18 months appears realistic, Chester Salomon, a New York bankruptcy attorney, said Tuesday.
"Eighteen months is a long time and it may take that much time, but it wouldn't surprise me if they tried to get out sooner," Salomon said. "
The staggering daily losses United cites probably do not take into account wage cuts that can be made quickly, routes that can be eliminated and other moves, Salomon said.
"The sooner that (cutbacks) are in place, the faster the spilling of the red ink will be stemmed," Salomon said.