United Airlines plans to file for bankruptcy protection Monday, sources close to the company said, ending a 14-month struggle by the world’s second-largest carrier to stabilize its finances and restructure without protection from creditors.
The Elk Grove Township-based airline, which employs 83,000 worldwide, including 18,000 in Illinois, will file for Chapter 11 reorganization Monday in U.S. Bankruptcy Court in Chicago, sources said Sunday. It would be the largest bankruptcy filing by a domestic airline and one of the largest in U.S. history.
Passengers, however, are not likely to notice a difference in the short term. A top United official reiterated Sunday that service would continue uninterrupted. The carrier also has pledged that travelers can continue using and accruing frequent-flier miles.
Though many of the nation’s air carriers have landed in bankruptcy court, this would be the first filing in United’s 76-year history. It is a stunning turnabout for a company that once was the industry leader in air traffic and prestige.
Four years ago, United’s stock sold for more than $100 a share. On Friday, with investors spooked by the threat of bankruptcy, shares closed at 93 cents on the New York Stock Exchange. A bankruptcy filing would take that value to zero, most experts said.
United’s employees own 55 percent of the company through their employee stock ownership plan. A bankruptcy filing also would be a bitter end to the carrier’s experiment, the most aggressive in the industry, in employee ownership of an airline.
The board of directors of UAL Corp., United’s parent company, adjourned Sunday without issuing a statement after spending the weekend meeting to consider the company’s fate. But after a government bailout board last week rejected United’s request for $1.8 billion in loan guarantees, UAL directors determined that the carrier had no choice but to file for bankruptcy, sources said.
“It will go quickly,” one source said of the filing. “Very soon.”
Sunday evening, the company wrapped up details of new loans that it would receive once it files for bankruptcy. Chicago-based Bank One Corp., which issues a credit card allowing users to earn United frequent-flier miles, will be the lead lender in a coalition of banks that also includes J.P. Morgan Chase & Co. and Citigroup Inc.
For days, obtaining the so-called debtor-in-possession financing had been a problem for United because of a decision by lending giant GE Capital Services Corp. to pull out of the lending team. GE Capital holds more than $4 billion in debt from United and US Airways, which filed for bankruptcy in August.
Without the debtor-in-possession loans, United would have been left to draw down its cash reserves, estimated at less than $1 billion. With the carrier losing $7 million a day, it could burn through its cash in about four months. United is on track to lose a record $2.5 billion this year.
A United bankruptcy filing would end 14 months of financial scrambling that began when terrorists hijacked two of the carrier’s jets on Sept. 11, 2001. One crashed into the south tower of the World Trade Center in New York, the other into a Pennsylvania field.
Woes predate 9/11 attacks
But the attacks alone did not bring United to bankruptcy’s door. The carrier had been financially weakened long before. In the three financial quarters leading up to the attacks, United lost a combined $950 million. And for nearly two decades, the company and its employees have been dodging financial and labor crises–some of them homegrown and some the result of dramatic turbulence in the airline industry that has claimed such legendary carriers as Trans World Airlines and Eastern Airlines.
For United’s employees, the trip through bankruptcy court promises to be particularly harsh. Workers would lose the value of their stock holdings, which they had accepted over the years in exchange for raises. And no longer would the airline’s powerful pilots and machinists unions have a say in every major business decision through their seats on UAL’s board.
In bankruptcy, “the creditors and bondholders become the directors” of the company, said Paul Biederman, a professor at New York University who was involved in TWA’s two bankruptcy filings. “They become the controlling people.”
Employees appeared to be accepting the inevitable. The leaders of the two unions that represent the airline’s 37,500 mechanics, ramp workers, customer service agents and gate workers warned members over the weekend in a written statement that bankruptcy “appears unavoidable and imminent.”
But Biederman, noting that TWA and Continental each made two successful trips through bankruptcy, said a Chapter 11 reorganization isn’t necessarily the end of United.
“They can get through this, and many passengers won’t know the difference,” he said.
Workers face more wage cuts
A key factor will be how already dispirited employees respond after losing their stock value and power in the company. The workers also face new wage concessions that experts say are necessary if United is to reduce its labor costs, the industry’s highest.
For months, United had warned that bankruptcy was likely if it didn’t get $2 billion in new loans, with $1.8 billion of that guaranteed by the federal Air Transportation Stabilization Board. Congress and President Bush created the board to help the airline industry after last year’s terrorist attacks.
On Wednesday, the board rejected United’s request, saying the company’s financial plan was “fundamentally flawed.”
United offered $5.2 billion in labor savings, but forecast that it would turn an operating profit by 2004–long before its competitors were predicting that for their own operations. Over the weekend, the unions offered to accept $3.2 billion more in savings.
But United officials who reviewed the last-minute offer determined that it wasn’t enough. The federal board said the savings that United and the unions already had offered were far less than they appeared, leaving United far short of the mark.
A Chapter 11 filing would be complex because of the 55-percent ownership stake by the airline’s employees. On Sunday, Kevin Mitchell, president of the Business Travel Coalition, an advocacy group for the business travel industry, suggested the appointment of an advocate to represent the airline’s passengers in court proceedings.
Through the weekend, United has been sending e-mail to reassure customers who might be nervous about the airline’s future.
“I want to be emphatically clear that United will continue to fly and deliver exceptional service to customers worldwide,” said Chris Bowers, senior vice president of marketing and sales.
“Challenging times make a company stronger, leaner and more focused,” he added. “The employees of this airline stand ready and committed to serve you today and in the future.”
