Bankruptcy Provides Time, No Guarantees

In a fight for survival, United boosted performance, slashed pay and set out to win back customers. But after years of turmoil and bitter labor relations, can the airline sustain these gains?

United Airlines chief James Goodwin and his top executives were huddling in his second-floor office when a secretary burst in with the news: An American Airlines jet had flown into the World Trade Center.

Andy Studdert locked eyes with Goodwin and dashed out the door. United’s stocky chief operating officer sprinted the length of a football field through the airline’s sprawling headquarters near O’Hare International Airport. He ducked into a covered walkway between buildings, then bounded up a set of stairs, two at a time to the operations center.

“Confirm American into World Trader Center,” Studdert barked, his barrel chest heaving.

But the dispatchers, keeping track of air traffic around the globe, had other concerns. “We can’t find Flight 175,” one of them shouted.

Another rushed across the room with word that a flight attendant aboard 175 had called a maintenance hot line to report a bloody hijacking.

Sensing disbelief among his employees, who had undergone a crisis-training exercise just 10 days before, Studdert told them, “This is not a drill.”

As they helplessly stood by, Flight 175 hit the trade center. United Flight 93, bound from Newark N.J. to San Francisco, was missing too.

With that, Studdert gave an order he had never delivered, not even in doomsday drills: “Ground the fleet!”

In the span of a single, bright summer morning, the nation arrived at a horrific new destination- a world of terrorism, fear and uncertainty.

Even as the airline pulled together in the crisis, the events of Sept. 11 laid bare its fragile financial state, and massive losses pushed it into bankruptcy. Only now, as the summer travel season approaches its peak, has United come close to breaking even again.

Although the carrier won huge concessions from its labor unions and boasts an industry-leading on-time records, its business strategy so far reflects little new thinking.

Early this year, United’s latest CEO, former oil executive Glenn Tilton, insisted the carrier had little choice but to mimic Southwest Airlines’ no-frills service. Then, after winning bigger-than-expected pay cuts in his mainline operation, Tilton scaled back the plan for his own discounter by two-thirds.

Instead, United is returning to its strategy of attracting elite business travelers, even though executives are flying less and paying lower fares.

Despite a long history of workplace turmoil, Tilton also is counting on harmony in labor relations. The long term contracts herald a new era of peace with workers, Tilton said. “I have the sense they believe this is a point of departure for United, a genuine new beginning.”

With a helping hand from the federal government, the airline expects to emerge from bankruptcy in coming moths. But after hacking the pay, work rules and governance rights of his unions, Tilton risks a backlash.

United remains saddled with an enduring legacy of distrust that could hold it back in a volatile marketplace.

“We’ve got to find a way to not peak in the good years and to go into these tremendously low valleys in the bad years,” said Paul Whiteford, the pilots union leader who sits on United’s board. ” Because…if that’s cycle continues, the next time we may not come out of it.”

Perish the prophet

During economic storms, United always faces a challenge in getting employees to accept sacrifices that make the airline more competitive. Even after the Sept. 11 tragedy and the deep falloff air travel, employees initially balked at signing on to long-term changes.

In daily morning meetings, at United’s Elk Grove Township headquarters in the weeks after the attacks, Goodwin, Studdert, President Rono Dutta and a dozen or so of their top lieutenants struggled to perform triage.

Sensing the trouble ahead, United would lay off 20,00 workers and lose a mammoth $1.16 billion in the quarter that included 9/11- the worse three month showing in the company’s 75 year history and almost triple American Airlines’ loss.

Goodwin and his team needed to convince employees that the airline couldn’t sustain such massive losses for long.

But after years of bad blood, made all the worse by a failed employee stock ownership plan, the group recognized that workers simply tuned out any dire warnings form the executive suites. Somehow, they had to convey that far greater sacrifices were essential to save the airline.

United’s public relations department drafted a letter that would go to employees over Goodwin’s signature.

Not strong enough, the top brass decided at a meeting.

According to two people who were there, Jake Brace, United’s chief financial officer, suggested the letter should say United would “perish” without massive concessions from its mostly unionized employees. In effect, the warning would be a form of shock treatment.

In the days to come, the letter got redrafted and tweaked, but the word survived.

Little more than a month after Sept. 11, United e-mailed the letter to 4,000 employees. But even before everyone received it, an airline industry web site posted it for public consumption. By the next day,
Oct. 17, nearly every major newspaper in a nerve-wracked country had the story about United boss predicting an internal memo that the airline could “perish.”

“We had to get this message out to the rank-and-file. The employees didn’t think there was a crisis,” Goodwin said in a recent interview. “They didn’t take it seriously.”

Although dead-on in its prophecy, the letter was self defeating. United’s workers were furious at what they perceived as another strong-arm tactic. Wall street dumped the beleaguered stock, and lenders backed away. Goodwin’s prediction started to look like it might be self fulfilling, as a crisis of confidence engulfed the company.

Less than two weeks after the letter leaked, Goodwin was out of a job.

The United lifer got the word from his friend, James O’Connor, former head of Commonwealth Edison and the airline’s senior director: The board had called a special weekend meeting without Goodwin at the O’Hare Hilton barely six weeks after the terror attacks. On Saturday night, O’Connor told him his tenure was over.

The board wanted fresh leadership, despite lingering support for Goodwin among some directors. John Peterpaul, for one, was convinced no mere mortal could have found a path through the feeble economy and terror attacks. “The only guy who wouldn’t have failed in Jim’s job would have been Christ,” said Peterpaul, a retired machinists union leader who had sat on United’s board.

An interim CEO was chosen at the meeting: United board member John Creighton, a retired chief executive of Weyerhaeuser Paper Co. and someone who had a reputation for working especially well with the machinists.

Even as Creighton was relieving him that day, Goodwin’s closest aides thought they could see the relief on the ousted executive’s face. Sending up clouds of sweet smoke from his favorite brown pipe as he took a last break in the employee parking lot under the headquarters building, Goodwin looked like the amiable Jim they remembered from his pre-CEO days.

Creighton had some damage control to do. One of his first moves on the job would be fateful.

In telephone interviews with newspapers and Wall Street firms, Creighton obediently followed a script prepared by an outside publicist the company had flown in from New York to manage the news. Among his sound bites: “I did not take this job to preside over any kind of bankruptcy.”

But by foreswearing bankruptcy, he gave un an important bargaining chip with United’s increasingly angry unions.

The carrier would teeter along for more than a year before it finally turned to Chapter 11, losing more than $3 billion that would have given it more staying power had it chosen to restructure its debt sooner.

In the end, Creighton made good on his vow to avoid bankruptcy on his watch. That job would go to the man he interviewed as his successor, Glenn Tilton, who headed Texaco before the merger that created Chevron Texaco.

Meeting Tilton in a restaurant at the Westin San Francisco Airport Hotel, Creighton was candid about United’s dire financial condition. They talked about how Tilton’s experience with Texaco’s bankruptcy might come in handy, both recalled in interviews.

United’s situation was tremendously difficult, Creighton told him. Any new CEO would have no choice but to demand massive pay cuts from the airline’s embittered unions.

Then Tilton asked Creighton a question. Would he take the job today if he were offered it? “No,” Creighton replied.

But Tilton, was now second in command at ChevronTexaco, wasn’t dissuaded. In an interview, he said he was seeking a demanding, important post. He also received a $3 million signing bonus.

On September 2, 2002, he was introduced as United’s new CEO.

Though it had hired a top bankruptcy attorney months earlier, the carrier was holding out hope for reprieve from Washington. United had turned to House Speaker Dennis Hastert, the Republican whose northern Illinois district makes him a natural United ally, to support the carrier as the Air Transportation Stabilization Board considered it for $1.8 billion in federal loan guarantees.

Congress set up the board shortly after the Sept. 11 attacks to back as much as $10 billion in private loans for the struggling airline industry. The guarantees came on top of the $5 billion lawmakers handed the airlines free and clear to keep them flying, including $782 million for United.

To qualify for the loan guarantees, United had to not only demonstrate need but also prove it could pay back the money. The carrier’s only option was to turn again to its workers for concessions.

Cheesecake rage

At the operations center in Elk Grove Township, an e-mail arrived from a United 777 captain. Not for the first time, he wanted the bosses to know, the support crew at the Dulles International Airport hub had messed up.

“They are boarding plain cheesecake, with no topping of any kind, with the crew meals, ” the pilot wrote. The flight crew was supposed to get the same dessert as business-class passengers, he noted, and “business-class… this day got cheesecake with a caramel-nut topping.

The e-mail only underscored the central argument against giving United a federal loan guarantee: The airline was still focused on petty sniping rather than fixing its problems.

Though pilots, flight attendants and ground workers eventually all agreed to steep pay cuts to help stave off bankruptcy, some colleagues balked.

The carrier’s 13,00 mechanics, on Nov. 27, rejected what the company considered a last-ditch proposal involving a 7 percent pay cut and the loss of four vacation days. Embarrassed union leaders scheduled another vote, and United’s financial whizzes struggled to find the formula that would win over skeptical bureaucrats weighing their loan application.

Trying to minimize the risk it posed as a borrower, United offered to take the guaranteed loan in phases, rather than in one big gulp. The executives begged for more time.

But questions persisted about United’s revenue projections, which some saw as overly optimistic. If the company couldn’t pare costs through labor concessions or find new sources of revenue, how could it guarantee that it would repay the loans?

Behind the scenes, a furious lobbying campaign raged. The speak of the house thought he had an understanding.

Not once, but twice, Hastert spoke on the phone with then Treasury-Secretary, Paul O’Neill about United’s application for the loan guarantee. “He said, ‘ Everything’s fine, everything’s fine. Things look okay,” Hastert recalled. “It was very positive.”

Hastert knew that if the application failed to pass muster with the Aviation Board, United would go broke. And he knew one key vote on the board belonged to O’Neill’s deputy Peter Fisher.

The speaker had watched as the fight grew nasty. He was getting reports that Continental Airlines and American, based in President Bushes’ home state of Texas, were hoping to carve up United. And although Delta Airlines has said it stayed neutral, ” Delta was out there…bone-picking.” Hastert recalled.

In the weeks before the vote, Hastert had called White House Chief of Staff Andrew Card to say, “We don’t want this airline to shut down.”

Hastert recalls Card saying, “We are concerned.”

The crucial moment came on the afternoon Dec. 4, as the board met inside the imposing white marble Federal Reserve Building along Constitution Avenue in Washington.

When a board member suggested postponing a decision for a few days so United could provide more information, Fisher shot back tat a delay would serve no one’s interest, according to minutes of the meeting.

The airline’s management needed to take responsibility for “United’s destiny, ” he said. Then Fisher voted against the airline.

Its business plan was unrealistic, the board concluded. Its top administrator, Dan Montgomery, told reporters that even if United got the loan, it would have gone under un a few years anyway. Then taxpayers would be on the hook for repayment.

Competitors were pleased. Continental’s CEO Gordon Bethune praised the board for “letting the marketplace determine the winners and losers.”

Five days later, at 5:30 a.m. on Monday, Dec. 9, a grimy van packed with financial documents and lists of creditors rolled down a concrete ramp leading under the Dirksen Federal Building in Chicago. Untied was filing for bankruptcy.

While Tilton and his lieutenants were cobbling together a strategic plan, union leaders were in the unenviable position of trying to sell members on the deepest wage cuts in the airline’s history.

Squat and sturdy like an aging baggage handler, the stone-clad machinists union hall for Local Lodge 1487 sits across form a Sam’s Club along a light-industrial stretch in Des Plaines. The militant memorabilia of past strikes covers its walls- defiant angry sentiments spelled out on a framed placards. “UAL: Underpaid Airline Laborers.” “United Suffers from Foot in Mouth disease.”

But it was the sound of accommodation, not militancy, that echoed in the hall late on a February night as union leader Rich Delaney addressed members of the International Association of Machinists and Aerospace Workers.

After tossing down some Miller Lites and Genuine drafts, the more boisterous IAM members were getting, louder and louder, and fuses were getting shorter and shorter- so short that shop stewards had to shuttle between tables, persuading members not to take a swing at someone.

The union should never give up contract concessions to the band of losers running United, one IAM member said, declaring, “I’d rather go down fighting for the ship.”

Delaney did his best to commiserate with the couple hundred baggage handlers, reservation agents and others gathered in the hall. “We would love to go in there and tell them to go to hell,” he said. “That’show we were raised.”

But this time was different, Delaney said. Wall Street was all but rooting for United’s dissolution, arguing that the only way to cure the problem of over capacity was for a major carrier to fold. Competitors would love to pick over the best pieces of United, he warned.

The IAM had little choice but to reach a painful agreement with United management, like it or not. “The alternative,” Delaney said, “is liquidation.” In that case, United and their jobs would be gone for good.

Later, as dozens of union officials fanned out across the country to talk to machinists, invariably someone would ask, “If the company starts doing well again, will I get this back?”

Delaney had to tell them, “This is not temporary.”

Fear of United’s possible demise not only was changing the tone of labor negotiations, it was accomplishing what the airline’s historic employee stock ownership plan could not: It brought workers and management together to create and airline that was a model of efficiency.

When the government’s numbers came in for 2002, United place No. 1 in on-time performance for the first time since the rankings began in 1988.

High price for survival

To flourish in a changing industry, Untied had to do more than get customers to their destinations on time. It had to figure out how to compete with fast-growing rivals such as Southwest and more recent discount upstarts such as JetBlue Airways.

In the airline business, one of the most critical indicators of financial health is cost per available seat mile- how many pennies an airline has to spend to fly one seat on a jet for one mile.

From its inception in 1971, Southwest has set the bar on efficiency in the aviation business. Its costs hover around 7 cents per seat mile- 7.49 cents in the forth quarter of 2002, to be precise.

During the same period, US airways spent almost 14 cents per seat mile and Untied almost 12 cents. Southwest was the only major airline that reported a profit last year, largely because its basic costs are low enough that it can make money flying jets with less than 60 percent of its seats full.

For United and other carriers that operate from more expensive hub airports, that profit making point is much higher. Last year, on average, Untied could make money only if 93 percent of the seats were filled by paying passengers.

In February, to compete with discount carriers, Tilton declared that the only possible answer to this challenge was for United to create its own low-cost alternative, code named “Starfish.” United would provide its normal serve to most destinations, but on routes heavily traveled by budget-minded passengers, the airline would fly with all economy seating and no meals.

Many were skeptical about Tilton’s solution, which sounded like a previous United operation called Shuttle by United. That lasted seven years before folding in 2001.

By the time United brought in Tilton to fix the airline, the carrier’s pilots had changed their own leadership as well. Gone was Rick “Mad Dog” Dubinsky, the iconoclastic union leader who had helped push United into employee ownership and, later, what turned out to be its budget-busting contract with pilots in 2000.

Some of the men and women who fly United’s fleet came to realize that they’d overplayed their hand and needed to work more closely with management.

Into Dubinsky’s place stepped Paul Whiteford, a 51-year-old captain who quickly developed a rapport with Tilton. By March, both men knew they had to do something, anything, to get negotiations “unstuck,” as Whiteford put it.

He knew the price would be high.

Under the proposed concessions, pay cuts would be at least 30 percent. For example, a United 757 captain with 12 years experience would make $170 an hour compared with $245 at Delta, $208 at Northwest and $170 at Continental. American pilots, who recently approved major concessions as well, trailed at $150 an hour.

Anxious to preserve their jobs, United pilots ratified the deal with an overwhelming 82 percent of the vote- the first union to accept the new reality of bankruptcy court.

With the pilots having reached an agreement, and the bankruptcy judge wielding tremendous power to impose wage cuts, United’s other unions had little choice but to go along.

By the time machinists and flight attendants voted on the concessions April 29, the bitter choices had divided households.

Take my wife’s job

Together, Jay and Pamela Sherman of Palatine had put in more than 50 years at United. Pamela had notched 29, most recently as a cargo sales and reservations agent, while her husband was a gate agent with 25 years at the company.

The contract up for ratification would allow United to hire an outside company to handle most of its cargo operations, including Pamela Sherman’s job.

Still, as a shop steward, her husband was obliged to rally support for the concessions. “A ‘yes’ vote, for me, is telling the company, “Go ahead and take my wife’s job,’ ” Jay Sherman said on the day of the balloting. “She’s upset with the union. I’ve got a bulls-eye on my face every time I walk in the door.”

When the ballots were counted, his “yes” vote and others meant Pamela Sherman might soon be out of a job.

United’ gate agents, baggage handlers and other ground workers approved the cuts with 83 percent of the vote. United’s mechanics, who are represented by a different branch of the IAM, ratified the contract with 70 percent. Three-quarters of flight attendants approved the pact.

The workers had saved most of their jobs and perhaps, saved the company, but they could not save the historic employee stock ownership plan. Once considered United’s best hope for a secure financial future, it died quietly in bankruptcy court.

As part of United’s court proceedings this year; U.S. Bankruptcy Judge Eugene Wedoff, in effect, pronounced the death of the airline’s landmark experiment in employee empowerment.

Wedoff ruled that the trustee of United’s employee stock ownership plan could sell another 3.9 million shares. The sale, considered prudent to salvage a few remaining dollars for workers’ retirements, dropped employee ownership from its peak of 55 percent at the start of the ESOP to less than 20 percent.

That threshold had big implications for the role of workers in governing the company. After nearly a decade of triumph and tumult, the pilots and machinists unions had lost their last remnants of real influence- the ability to veto key board decisions.

More than ever, United’s employees were dependent on the airline neophyte running their carrier.

Back to Business

As Glenn Tilton rode the escalator to the upper level of United’s Red Carpet Club for its premium customers, Jacqueline Roy was waiting for him with a pressing question.

Ray, the club manager at O’Hare, wanted to know if Tilton could do anything to fix a dishwasher. She could hardly find enough clean cups to provide coffee to million-mile-club passengers.

Tilton assured her that he would do his best to expedite a replacement part. Ray was impressed. “He won’t do it himself, ” she said. “But he’‘l get it done.”

These days, Tilton’s checklist is lengthy, from scrounging up spare parts to nailing down a revised federal loan guarantee for United’s planned exit from bankruptcy.

What’s missing from the list is an answer to his airline’s broader strategic dilemma. Although he secured $2.56 billion in wage cuts from his workforce last spring with a minimum of acrimony, Tilton has no illusions about the task ahead.

“It took us a long time to het here,” he said. “It’s going to take a while to become the new United. This isno overnight fix. It’s simple, hard work.”

He is seeing some progress. United might have a smaller fleet but the planes are fuller than ever. In June, 82 percent of the seats on United flights were filled, the highest monthly level in the airline’s history.

Key to making those seats profitable is luring business travelers back to the airline in tough economic times. These coveted passengers are being wooed by discount carriers and told to travel less by their bosses. When they do fly, they turn to the Web and find cheaper fares.

Tilton has already begun to back away from a strategy that he once held up as a solution to the company’s financial woes-Starfish, United’s version of a discount carrier. Starfish remains in his plans but in a much diminished role.

One sure thing: United will be a much smaller carrier than ti was in its heyday, and its heavy debt load will hinder it from buying new planes and generously rewarding workers for the sacrifices they have made.

But employees will have some financial incentives. They have the chance to earn performance based bonuses beginning next year and to take part in a profit-sharing plan.

Although its latest labor deals allow United to contract our all its heavy maintenance work, the airline may have to go even further with its outsourcing.

Any such moves, of course, could set off the same sort of labor fury that has dogged United for much of the last quarter century.

In the latest sign of employee restlessness, United mechanics this week voted to embrace the combative Aircraft Mechanics Fraternal Association, replacing the International Association of Machinists.

‘They’ll remember’

Last month, inside the Lodge 1487 union hall in Des Plaines, the band opened its set. It looked like any other amateur group of heavy metal rockers, except all four members were United ramp servicemen.

They came not to serenade customers but to boost the flagging spirits of their brother and sister union members, the hundreds at O’Hare alone this year who have been laid off or otherwise pushed out the door.

The men and women of the ramp- baggage handlers, customer service reps, cargo sales clerks- sipped beer and ate hot dogs as music filled the same red-tiled hall where three months earlier union leaders had warned them of United’s possible liquidation.

“Lot of upset people,” observed Joe Szymusiak, 36 a lead ramp servicemen and bass player in the band. “They feel like they’re not appreciated.”

After all the concessions and the evaporation of the United stock, “they still want to do their job. They still want United to flourish,” Szymusiak said.

Up walked Pete Brown, Local 1487’s grievance committee chairman. “It’s a dirty, rotten shame,” he said.

He meant the latest round of job and pay cuts approved by his members in April. The cuts were bad enough. But with Tilton’s team backpedaling on the need for an in-house discount carrier, Brown and his members were starting to wonder if the talk of Starfish was merely another ploy to spook the unions into more givebacks.

:They feel like they gave up too much- it was smoke and mirrors,” Brown said, motioning to the ramp workers mingling behind him in the hall. “You heard the low-cost carrier, now it’s out the window. What’s changed? Our concessions.”

In fact, much has changed in the airline industry over the past two decades. Competition has grown more fierce, fares have fallen and labor has come under intense pressure.

Thousands of United workers remain optimistic despite smaller paychecks and the ongoing fear of layoffs. But others have yet to move beyond the anger and distrust that have bedeviled relations with management and customers. And their rhetoric is as sharp as ever.

“There’ll come a time, when it’s time to pay up,” Brown said outside the union hall. “And they’ll remember this.