Loan rejection and failure to agree costs cuts with labour groups leads to largest-ever airline bankruptcy case

United Airlines faces a long and difficult restructuring process after seeking bankruptcy protection earlier this month. Aircraft and other assets will have to be sold, and wages slashed, if the airline is not to follow Eastern Airlines and TWA into collapse. The airline made history on 2 December when it became the largest airline bankruptcy case ever, filing for Chapter 11 protection with debts of $23 billion and free cash of just $800 million.

A rejected government loan guarantee application and an inability to hammer out sufficient cost concessions with all its labour groups ended United's year-long struggle to avoid bankruptcy.

United, the world's second largest carrier and a key partner in the Star Alliance, is expected to spend at least 18 months in Chapter 11 as it reorganises so that it can emerge as a viable company. The alternative would be Chapter 7 liquidation.

But United's game plan for reorganisation is unclear. US Airways, which filed for Chapter 11 earlier this year, had much of its plan in place, with the focus on a smaller, East Coast operation with greater emphasis on regional jets. United is also expected to emerge as a smaller carrier, but cannot reduce its size and still maintain its massive global network and key hubs such as Chicago, Los Angeles and San Francisco. The carrier has appointed former chief financial officer Doug Hacker as vice-president, strategy, to oversee the new business plan.

Chapter 11 is fairly common in the US airline industry (see chart) and many airlines thrive after a brief period of reorganisation - but none has ever been as indebted as United.

Also troubling is the extent of United's financial crisis. Its $23 billion debt is three times as big as any other airline bankruptcy case, and United admitted to the Chicago bankruptcy court last week that it was losing $22 million a day and expects to burn $18 million daily throughout January. Even with its $800 million cash, and a further $800 million in debtor-in-possession funding that was approved by the court last week, the airline is in danger of running out of money in less than three months.

The carrier is therefore likely to start selling assets to survive and to give up aircraft. It is widely expected to park a mix of Boeing 747-400s, its entire Boeing 767-200/200ER fleet of 18 aircraft and some Boeing 737-300s. There are already 10 747s stored in the desert and Douglas Kelly, vice-president of consultancy Avitas Aviation, thinks a further 13 could be destined for storage.

Kelly says there is "no market to begin with" for the 747, so additional retirements will not cause any more harm. Fred Bearden, president of Aircraft Information Services, agrees: "You can't kill a dead horse."

United will also have to secure deeper cost cuts from its workforce than those it had been putting in place before the bankruptcy. United chief executive Glenn Tilton was seeking $5 billion in labour cost concessions, but admits that within Chapter 11, the figure will probably be nearer $9 billion. "We're going to have to be leaner, we're going to have to be more focused," he says, adding that the airline faces "profound and agonising change".

Another casualty is United's employee stock ownership plan, under which staff own 55% of the company. Standard & Poor's Philip Baggaley says the plan "is dead".

A creditors' committee was due to have been appointed at the end of last week. The airline's largest unsecured creditors are banks, with the Bank of New York owed $1.27 billion and Bank One Trust almost $1 billion. Airbus has unsecured debts of $47.6 million for maintenance parts and services.

Boeing and General Electric both made public their liabilities to United this year, with almost all debt being secured against assets.

Additional reporting by Scott Hamilton in Seattle

Source: Flight International