United Airlines Struggles with Costs After Deal

United Airlines, dodging a midweek strike by agreeing to a costly labor contract with mechanics, faces an uphill battle to control expenses if it hopes to make money and in the long haul avoid bankruptcy.

Shares of United's parent, UAL Corp. , soared by as much as 19 percent on Tuesday on investor relief over the pact. The stock closed up $1.59 at $12.95, a rise of 14 percent, on Tuesday afternoon on the New York Stock Exchange.

The jump recouped losses set in recent weeks as investors worried that the No. 2 U.S. airline could be forced into bankruptcy if the mechanics struck.

UAL plans to seek several billion dollars in concessions from all employee groups in months ahead. Its labor costs are now 38 percent of total expenses, levels unsustainable given the sharp drops in revenue after the Sept. 11 attacks.

Merrill Lynch analyst Michael Linenberg estimated United lost as much as $100 million to $150 million in "booked" revenue for the two to three weeks following the now-averted strike date of Feb. 20.

"The carrier should see a return in traffic as it is now apparent that there will be no strike," he said. "Nonetheless, UAL is far from being freed of labor issues."

The labor contract included 37 percent wage hikes upon signing for the most senior of United's 13,000 mechanics and plane cleaners represented by the International Association of Machinists and Aerospace Workers. That will bring them to the top of the heap compared with peers at other airlines.

Members will vote on the deal on March 5. A strike deadline, should they reject it, was postponed to March 7 from the original date of Feb. 20. The negotiating committee recommended ratification.

Once rank-and-file mechanics approve the deal, United will continue its plan to seek concessions companywide, said spokeswoman Susana Leyva. "The unions will dictate what that concession will look like," she said. United has six labor unions including the IAM, Air Line Pilots Association, Association of Flight Attendants and others.

Also critical to United's rebound are an upturn in the U.S. economy and a resurgence in business travel, analysts said.


As part of its financial recovery plan, United might also apply to the federal government for loan guarantees as part of the landmark $15 billion bailout package enacted after the Sept. 11 attacks on four commercial jets.

For now, UAL's chief financial officer said the airline still has cash, access to the capital markets for money and plenty of collateral -- $4 billion of hard assets like jets -- to put up for loans.

The airline burned through an estimated $10 million a day in cash during the fourth quarter and amassed a $2.1 billion net loss for all of 2001 -- a record in aviation history.

"The overall economy is clearly going to impact our cash burn situation," CFO Jake Brace said in a recent interview.

But he also said concessions are needed from each of its six labor groups and non-union salaried/management staff, even as it agreed on Monday to a five-year deal with mechanics.

Neil Bernstein, labor law expert at Washington University, said UAL faces complex problems. "United's going to need a lot of concessions, and will they be able to convince the mechanics on that when the time comes?" Bernstein said. "Based on where everyone's at now, I would say no."

Government involvement in any restructuring, beyond what United might get in additional cash outlays from the bailout, is questionable, experts said.

"At this point, the airlines are on their own and they should be," said consultant Michael Boyd.

United has received $644 million of nearly $4 billion in cash doled out so far by the government and could get more this year when the final tranche is distributed.

"Airline markets, in this case, can allocate resources effectively. The discipline of the market may be needed for United to put together a restructuring that makes sense," said Steven Morrison, Northeastern University economics professor.


United is also still negotiating with another 24,000 IAM members including reservation staff and airport workers, represented by a separate bargaining unit.

Although the industry-leading wages were the same as ones rejected last week by mechanics, other proposals in the offer were changed from recommendations by a special Presidential Emergency Board. Those included a quicker distribution of retroactive pay and modifications to a so-called linkage letter to let mechanics vote on future concessions.

Several airline experts said United, by agreeing to the pay rate increases, may be hoping the economy turns around fast enough for it to turn a profit. Once an economic upturn begins, airlines typically recover faster than other industries.

Herb Hunter, spokesman for United's Air Line Pilots Association, has said pilots have no interest in concessions per se. Nor do they want any more stock, since they already own 25 percent of the airline thanks to the 1994 employee stock ownership plan. Machinists own 20 percent.

Ray Neidl, analyst at ABN Amro, noted that UAL's labor cost per available seat mile is on par with that of rival AMR Corp. , parent of American Airlines, TWA and American Eagle.

United's break-even load factor, or percentage of seats it needs to fill on planes just to cover costs, was running 92.2 percent in the fourth quarter, Brace said. That is far above rival low-cost carriers like Southwest Airlines .