United Airlines Emerges from Bankruptcy

CHICAGO – UAL Corp, parent of United Airlines, (UAUA) ended three years in Chapter 11 protection Wednesday, wrapping up the most expensive airline bankruptcy in history.

The No. 2 U.S. airline, which used its time in protection from creditors to slash costs by $7 billion a year, now must sink or swim in a fiercely competitive industry that is plagued by soaring fuel costs and overcapacity.

"We have achieved a great deal in our restructuring to reposition this company and build upon our assets, an unrivaled global network and our dedicated employees," UAL's Chief Executive Glenn Tilton said in a statement. "We can be better. We are in a very competitive industry, and we take nothing for granted."

Experts, however, were more cautious in accessing UAL's prospects for success and long-term survival. If UAL succeeded, its story would resemble that of Continental Airlines Inc. (CAL), which went bankrupt twice before regaining traction.

If it failed, UAL would join a long list of U.S. airlines that died in or after bankruptcy — including TWA and Pan American.

"I think they have substantial challenges — energy costs, pricing power," said airline consultant Robert Mann. "And I think there are some questions as to whether they can be the instigator or the target of consolidation."

UAL filed for bankruptcy in December 2002, weakened by low-fare competition and a drop-off in air travel following the Sept. 11, 2001, terror attacks on the United States.

The airline's woes intensified as energy prices crept higher. Oil prices notched a record high above $70 a barrel in August and were trading above $68 a barrel on Wednesday .

Analysts also have questions about the appeal for investors of shares in the reorganized UAL, which are to begin trading Thursday on the Nasdaq stock market under the ticker symbol "UAUA".

"I am not sure who's going to buy their stock," said Morningstar analyst Chris Lozier. "There are obviously folks who get excited by IPOs. There are people who like to gamble in the airline game. We are not those people at Morningstar."

Lozier said that for UAL to survive and to be a worthwhile equity investment, it needs the most competitive cost structure in the industry. He said Delta Air Lines Inc. and Northwest Airlines, which currently are restructuring in bankruptcy, could emerge with even stronger cost structures than UAL's.

"In a year or so, is United going to have the most competitive cost structure among the legacy carriers?" Lozier said.

Low costs are the key to success in an industry that simply has too many seats for all carriers to thrive. Many experts, including UAL's Tilton, say the industry is in dire need of consolidation to help pull excess capacity from the market.

Some have speculated that UAL may be interested in merging with another airline, but Tilton denies that he is shopping the airline around.

"I do think the market would benefit from consolidation," he said on Tuesday. "I want this company to be able to make a decision — yes or no — good idea, bad idea."

Meanwhile, the company continues to face employee morale problems stemming from wage and benefit cuts its workers endured during bankruptcy.

Unions representing the workers most recently were riled by a provision in UAL's reorganization plan that grants an estimated $115 million in equity to the top 400 management personnel. Tilton's share of that amount has been estimated at $15 million.

Management compensation of that amount flies in the face of a notion that UAL employees should share the burden of cost cuts, said Mark Bathurst, Chairman of the United Master Executive Council of the Air Line Pilots Association.

"It's hard to imagine a situation where one would look at this as a shared sacrifice," he said.

UAL officials have said that linking management compensation to the airline's stock performance ensures competent leadership by a management team that will not be tempted to look for higher-paying work elsewhere.

The airline further noted that non-management employees also share in a stock incentive plan in which employees will receive shares valued at more than $2 billion.