More challenges await United Airlines

United's losses are threatening to ground the carrier

David Schepp BBC News Online's North America Business Reporter

Shares of beleaguered UAL Corp, parent to United Airlines, have risen strongly since it signed a tentative agreement on a new contract with machinists, helping to avert the threat of strike action.

But even before the International Association of Machinists (IAM) vote on the deal - the ballot is set for 5 March - UAL's management is moving to slay other dragons that are keeping the Chicago-based airline from the profitable side of the moat.

The discipline of the market may be needed for United to put together a restructuring that makes sense

Steve Morrison
economics professor

Before the deal was signed, United saw its bookings drop as wary travellers avoided flying the airline in expectation of a strike.

"The carrier should see a return in traffic as it is now apparent that there will be no strike," says Merrill Lynch analyst Michael Linenberg.

"Nonetheless," he adds, "UAL is far from being freed of labour issues."

More labour negotiations

United, the No 2 US airline, is looking to continued labour negotiations as a way to stem the flow of red ink, leaking at a rate of $10m (£7m) a day.

"The overall economy is clearly going to impact our cash-burn situation," UAL's chief financial officer Jake Brace has previously said.

United's labour costs, among the highest in the business, are a considerable drain on the company's bottom line.

Analysts expect United will look to its five other unions for wage concessions as the airline struggles toward profitability.

Next up, United must bargain with tens of thousands of unionised service personnel, including reservation agents and airport workers.

"United's going to need a lot of concessions," says Neil Bernstein, labour-law expert at Washington University.

Fierce competition

United has suffered with the rest of the airline industry, both from overcapacity and from the US economic slowdown, exacerbated by the 11 September terrorist attacks.

Analysts say what the airline industry needs most, however, is a reinvigorated US economy that will revive profitable business travel, which has suffered during the recession.

The attacks of 11 September severely impacted US air travel

But the behemoth airline must also deal with a number of upstarts that have taken aim at some of the airports it serves, including key airline hubs such as Chicago and Denver.

Stiff competition and traveller wariness led UAL earlier in the month to announce full-year net losses of $2.1bn (£1.49bn) for 2001, the worst in airline history.

The loss beats the $957m UAL lost in 1992, this year's $1.7bn loss at bigger rival AMR Corp, parent of American Airlines, and the $2bn loss at smaller competitor US Airways.

Government bailout

Analysts also note that UAL should not look to further government intervention to shore up its finances.

As part of the $15bn airline-bailout package that breezed through Congress in the days immediately following 11 September, United was allocated $4bn, of which it has so far received $640m.

That bailout package has bought ailing carriers more time, American Airlines CEO Don Carty told the trade publication, Aviation Daily.

Mr Carty said, however, that the loan guarantees have also delayed "any future consolidation" and made it harder for the airline industry "to bring supply and demand back into equilibrium."

It is a point economist and analysts agree with, saying the market imposes discipline upon firms to make smart business decisions.

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

Some wonder if United will ultimately have to follow that other US corporate icon, discount retailer Kmart, into Chapter 11 bankruptcy protection.

"The discipline of the market may be needed for United to put together a restructuring that makes sense," says Steven Morrison, economics professor at Northeastern University.