On the subject of what happens in Chapter 11, you might find this from today's Wall Street Journal interesting:
February 25, 2003
PAGE ONE
SALVAGING UNITED
United's Attempt to Cut Costs Could Force Rivals to Follow
If Workers Don't Approve Concessions,
Carrier Will Turn to Bankruptcy Judge
By SUSAN CAREY and SCOTT MCCARTNEY
Staff Reporters of THE WALL STREET JOURNAL
It's crunch time for United Airlines, and much of the rest of the airline industry. United faces a crucial deadline in three weeks: Unless its workers agree to huge cost cuts, the carrier intends to ask a federal bankruptcy judge to void the unions' labor contracts so United can impose new terms.
Either way, United must slim down to survive in a devastated market. And if it succeeds, the industry's other cost-crippled dinosaurs will be forced to take knives to their own bloat.
To see the scope of the radical restructuring the nation's airlines could face, look at United and an airline that has what United wants, thanks to two trips through Chapter 11.
The most-senior United flight attendants get 51 days of vacation annually. At Continental Airlines, flight attendants top out at 37 days. At hub airports, United aircraft are waved in and pushed away from gates by its highly paid mechanics. Continental uses ramp workers and baggage handlers to do those jobs. In 2001, United pilots flew an average of only 36 hours a month -- the lowest in the industry -- while Continental pilots logged 49 that year.
Such inefficiency at UAL Corp.'s United, the industry leader in staff costs, stands at the heart of the showdown between the airline and its workers. Last year, United, the world's No. 2 carrier, spent almost 50% of its revenue on wages and benefits, and ended up with a net loss of $3.2 billion. AMR Corp., parent of American Airlines, spent nearly 49% of its revenue on labor and tallied an even larger net loss of $3.5 billion. Continental spent only 35% of its revenue on salaries and benefits last year and incurred a 2002 net loss of $451 million.
No. 1 American has raised the possibility of bankruptcy proceedings and on Feb. 4 asked its workers for $1.8 billion in annual labor savings -- 21% of total labor costs last year. Delta Air Lines, Northwest Airlines and US Airways Group Inc., which filed for bankruptcy-court protection last summer, all spent more than 40% of their revenue on labor. Delta and Northwest also have given notice to their employees in recent days that changes must be made. Without fast and deep surgery, any one of these carriers could be extinct in a few years.
The industry has suffered an unprecedented decline in revenue driven by the poor economy, terrorism jitters, the Internet -- which makes it much easier to find cheap tickets -- and the specter of war. Making matters worse, the big airlines are being swamped by expanding competition from low-cost carriers such as Southwest Airlines, JetBlue Airways and AirTran Airways.
Facing these travails, United is pushing for lower costs. "I am here to introduce United to the harsh, brutal realities of competition in the new marketplace," UAL Chief Executive Glenn Tilton said in response to a pilot angered by the prospect of making major givebacks. "Our labor costs are the highest in the industry. Unsustainable. Our productivity is not competitive with competitors. Unsustainable."
Cuts Both Ways
Yet United's workers have already felt some pain. The pilots voluntarily agreed to a 29% pay cut on Jan. 1, and the flight attendants gave up 9% of their pay. The bankruptcy judge granted United's request last month and ordered members of the machinists union to give back 13% of their pay. A senior United flight attendant earned about $45,000 last year, a senior mechanic more than $70,000 and a 10-year captain on a narrow-body jet about $186,000. Pilots have pointed out that while they make up 28% of payroll expenses, they are being asked to shoulder 44% of the total savings sought.
Organized labor has had two seats on UAL's 12-member board since 1994, when the pilots, machinists and some other workers bought 55% of UAL in return for six years' worth of wage concessions. The experiment with employee ownership has been criticized as a disappointment by both labor and management since it never succeeded in changing the culture of the company or repairing decades of mistrust between the two sides. And although the two labor directors have special powers, they also face potential conflicts between their roles as elected union leaders and their roles as board members with fiduciary responsibilities to look after the good of the entire company.
United, which filed for bankruptcy protection in December, wants its unions to agree to longer-term cost cuts voluntarily. But if they don't, the carrier can emulate Continental in using Chapter 11 and the power of a federal bankruptcy judge to rewrite its labor contracts. United aims to pare its employee costs by nearly $2.6 billion a year -- or 36% from 2002 levels of $7.1 billion -- with a combination of lower pay, reduced benefits, higher productivity and more leeway on outsourcing. It also wants to form a separate subsidiary with even-lower costs to compete with low-fare carriers.
The other big carriers don't yet have the cudgel of Chapter 11 to wield over their unions. But they may not need it. American's pilot union, the Allied Pilots Association, says it believes it is "absolutely necessary" that workers agree to contract changes. Capt. John Darrah, APA president, wrote to members last week: "We must become competitive in this new environment, or die." American has said Chapter 11 remains a possibility if it doesn't win the savings quickly.
The temporary wage cuts United already has won, pending further negotiations, are valued at $840 million annually. The savings were needed to help UAL meet strict cash-flow targets required by the lenders providing interim financing to keep the company aloft in Chapter 11. United wants to lock in the temporary pay cuts and other belt-tightening steps by early May, when its interim financing targets get tougher.
If the company gets there through a court process, the unions might be angry enough to strike -- although that's a remote possibility since a strike would push the company into liquidation. Even a slowdown or a sick-out would cause irreparable harm at a time when each passenger counts more than ever.
It wasn't just overly generous labor contracts that got the big carriers into this mess. Other mistakes range from too many types of planes, which boosts maintenance and training costs, to reckless expansion and inefficient schedules. Struggling carriers have since corrected many problems, but their plight has still worsened with the current squeeze of higher fuel prices and lower bookings as war jitters increase.
Labor costs are their single largest expense, however, and represent the best opportunity for change. Simply cutting pay won't be enough. The key is stamping out archaic work rules. These limit the big airlines' flexibility to use cheaper subcontractors to do some jobs, build more-efficient flight schedules and make employees perform multiple tasks. And the key for the industry's big carriers may be United.
"It's a domino game" among the major network airlines, says Dan Kasper, an airline consultant for LECG in Cambridge, Mass. "The first little domino was US Airways," which has cut its labor costs by 27% while in Chapter 11. United, he adds, "is the big kahuna."
Pilot contracts represent the biggest variance and the most opportunity for savings from improved productivity. Gary Chase, a Lehman Brothers analyst, estimates that if United got all that it wanted from its pilots alone, the new labor agreement could save the company nearly $1 billion a year.
A senior United pilot who declines to be identified says he earned more than $260,000 last year -- that was before the pilots recently agreed to a 29% pay cut -- and flies fewer than 40 hours a month. But he is paid, under contract terms, for 75 hours. He legally parlayed five vacation days last month into 25 days off with full pay because United's contract forces the company to release a pilot from any scheduled flight that overlaps with one of his vacation days.
At Continental, a pilot of similar seniority flying a Boeing 767 earns $216,000 annually and flies an average of 56 hours a month. He usually gets paid only for the hours he's scheduled to fly, and he can't game the system for more paid time off.
Capt. Paul Whiteford, head of the Air Line Pilots Association at United, says pilot productivity has been hurt because the carrier in late 2001 retired two types of aircraft that were old, inefficient and not needed after United cut capacity. The move left as many as 1,000 pilots a month not working but getting paid while they awaited training on different models.
Although three-quarters of United's pilots are scheduled to fly 75 to 81 hours a month, the average comes down when nonflying activities -- vacation, sick leave, training and special assignments -- are added in.
Fighting 'Rigs'
United also is fighting the tradition of "rigs," contractual formulas that pay pilots and flight attendants for the time they spend sitting at airports or in hotel rooms. At United, ALPA and the Association of Flight Attendants contend that the rigs protect workers and help the carrier build more efficiency into its scheduling. Continental essentially did away with them in its 1983 bankruptcy.
Continental also did away with monthly caps on hours flown by pilots. At many airlines, a pilot's paid hours, including hours paid under rigs, was limited, restricting the flying a pilot can do to well under the federal limit and forcing the company to hire more aviators. United wants to raise its monthly cap to 92 hours from the current 81 or 85 hours. It also wants to cut the monthly guaranteed minimum pay to 60 hours a month from the current 75.
All told, United is seeking more than $600 million a year in productivity enhancements and work-rule changes from its entire work force. Privately, people familiar with union rules concede there is plenty of fat that can be cut. "There are lots of ways to achieve $150 million to $175 million in permanent productivity savings in the pilot contract," says an individual on the labor side who is familiar with that document. Adds another labor-side individual who knows the ins and outs of the flight-attendant agreement: "There is so much money slopping around in the vacation area. This contract is 30 years old."
The main difference in pilot contracts is that Continental's are cleaner and simpler, yielding a more efficient, cheaper operation. "Scheduling is basically a linear mathematical exercise, and the more constraints you put on it, the less-optimal the results are going to be," says Deborah McCoy, senior vice president of flight operations, who is also a Continental captain. "When I'm flying, I want to fly the most I can so my days off are at home, not at some 36-hour layover somewhere. That's what works best for the company, and the pilot."
Continental's management says that its pilots are protected, without rigs and rules, because the company must pay each pilot for scheduled hours, or actual hours, whichever is greater. Continental pilots average 15 days off a month, compared with United's 18-day average, but their total earnings aren't that different. It's just that Continental pilots have to fly more to earn the same paycheck.
While Continental outsources much of its heavy maintenance, at considerable savings, United does most of its in-house. It is limited by its contract with the machinists union to spend no more than 20% of its maintenance budget on outside contractors.
Continental has another lesson for United: how hard it is to become lean and productive in bankruptcy court. After Continental filed for Chapter 11 in 1983, then-Chief Executive Frank Lorenzo dissolved the carrier's labor contracts and laid off 65% of its workers. Many of the remaining employees, shorn of union representation, struck. Although the airline quickly got back into the sky with a skeleton staff, that break with labor led to years of abysmal service, a second trip through bankruptcy court in 1990 and a near brush with a third in 1994.
Years of cost-cutting ravaged Continental's service. In the decade between its first bankruptcy filing and its emergence from bankruptcy the second time in 1993, Continental recorded annual profits only three times. In the 1980s, it tallied cumulative losses of $1.6 billion, then piled on a further $173.3 million in losses between 1990 and 1994.
But with lower pay and flexible work practices, the payoff for Continental, now the world's seventh-largest carrier, finally came in the mid-1990s under Chief Executive Gordon Bethune. Mr. Bethune repaired notoriously poor labor relations and reinvigorated the work force without layering on a lot of extra pay and perks. Today, despite continuing losses and a heavy debt load, Continental is one of the best performers among the major airlines and is expected to be one of the first to return to profitability.
Continental pilots have regained union representation and won some contract provisions thrown out in the past bankruptcies. And they say they still need more, especially now that the company has reduced its flying, limiting promotions and putting longer layovers into schedules. "We're not satisfied with where we are today," says Capt. John Prater, chairman of the ALPA unit at Continental. "But we aren't looking for featherbedding either."
Meanwhile, some United employees still are shocked by the smorgasbord of changes their company is seeking. Randy Canale, a machinists-union leader and UAL director, said the union continues to hear from members "who are obviously in denial regarding United's precarious bankruptcy status."
In a confidential presentation to its creditors committee last month, United said its goal by 2005 is to reduce the labor unit cost of its mainline business to 3.26 cents a seat-mile, down from 4.77 cents. Continental's unit cost for labor now is 3.69 cents a seat-mile. Unit costs are measured as costs spread over available seat-miles. A seat-mile, the industry's standard unit of capacity, is one seat flown one mile. On top of the productivity savings United is seeking, it hopes to save $430 million a year by reducing benefits, and it wants to cut union wages by $1.23 billion annually.
The unions have been critical of the breadth of the changes United is seeking, set out in "term sheets" in December. Capt. Whiteford, United's ALPA chief and a UAL director, calls the one directed at his 8,600 members a wish list. "It goes from areas that probably should be addressed to those that are silly," he says.
Much of the union ire is focused on United's plans to reduce pension benefits and start the low-fare subsidiary, something Continental tried unsuccessfully in the early 1990s. Unions also are concerned that the higher productivity the company seeks would lead to fewer jobs.
With only a few weeks left before United could start the legal process to undo the contracts, fitful negotiations are picking up pace and union rhetoric is diminishing. The flight attendants on Saturday agreed to give the carrier a counteroffer this week. The machinists union, which represents the most workers and normally is the most militant, is making rapid progress and hopes to have a deal to offer its members before mid-March.
Write to Susan Carey at
[email protected] and Scott McCartney2 at
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