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EDITIONS
Monday, 9 December, 2002, 12:57 GMT
United's future in limbo
Cars enter UAL Corp headquarters in suburban Chicago on Thursday.
Chicago-based United was unable to avoid insolvency


Now that United Airlines - the world's second largest airline - has filed for bankruptcy, employees along with investors may be wondering what has brought one of the most prestigious names in aviation to the brink.

It is easy to blame the Air Transportation Stabilization Board (ATSB), whose denial of a $1.8bn (1.1bn) loan guarantee virtually assured United's petition for bankruptcy on Monday in a Chicago court.

Passengers wait in line for a ticket agent at United's terminal in Chicago O'Hare International Airport.
Bankruptcy isn't expected to affect the flying public
The attacks of 11 September, also, have often been cited as a common cause for airline woes - fewer travellers mean reduced profits.

Then there is the economy.

Air carriers say the technology-stock bust and the economic recession have kept business travellers away, further hampering their ability to operate profitably.

Flawed business model

But analysts point out the industry was well immersed in recession before the 11 September terror attacks.

And while the economy certainly did not help matters, industry analysts also note that despite a recession and terrorism two other airlines - Southwest and Alaska - remain profitable.

United chronology
March 1931: United Air Lines created
December 1993: Employees gain 53% ownership in parent UAL
May 2000: Announces deal to buy US Airways
July 2001: US government blocks United/US Airways merger
September 2001: Terrorists crash United aircraft into World Trade Center and Pennsylvania field
September 2001: Announces plan to layoff 20,000 workers
February 2002: Announces $2.1bn yearly loss, a record
June 2002: Asks US government to back $1.8bn loan
October 2002: Share price falls to $1.42
December 2002: Transportation officials reject $1.8bn plea
December 2002: United goes bankrupt
Source:
Associated Press

"The industry is so badly managed... you're seeing the effect of that, [and] 11 September exacerbated the problem," says Richard Gritta, professor of finance and transportation at the University of Portland.

He says US airlines are not only financially imperilled but operationally challenged as well.

In other words, the very model on which domestic travel is based is hugely flawed.

'Hub-and-spoke'

With the exception of Southwest, Alaska and smaller JetBlue, major US carriers use a what is called a "hub-and-spoke" system, utilising a central portal where passengers converge en route to their final destination.

It is a 20-year-old system that has been both praised and cursed by airline travellers.

While it reduced the cost of travel in some large cities, it caused some airlines to pull out of some smaller markets all together, leaving cities, such as Youngstown, Ohio, without any commercial carriers.

In contrast, Southwest, Alaska and JetBlue operate on an older model, called point-to-point travel, flying passengers from one destination to another without going through a central hub.

Profit nightmare

More crucially, large commercial carriers, such as American, Delta, Continental as well as United, carry huge debt loads - as much as 70% of profits.

A lone passenger arrives for a flight at Chicago O'Hare International Airport on Wednesday.
United's home base is at Chicago O'Hare airport

An industry as volatile as the airline industry that is susceptible to such tragedies as 11 September should not be financed with that kind of debt load, says Professor Gritta.

In the case of United, with its employee owners, it has led to huge swings in profits, which leads bondholders and Wall Street to view the airline as a risky investment.

"What you get is a nightmare if revenues start to fall," Professor Gritta says.

Looming bankruptcy

Speaking of United employees, they have much to lose now that the airline has ducked for the cover of bankruptcy protection. That's why they rallied their unions to work together on a proposal to keep United afloat.

Speaking before the company sought bankruptcy protection, Sara Dela Cruz, spokeswoman for the union that represents United's 24,000 flight attendants, said: "The best option for the employees is to not enter bankruptcy, so we came up with a plan that would avoid that."

(While United employees own 55% of the airline, flight attendants, who comprise 30% of United's workforce, are not included in the scheme.)

"[But] we've had challenges since 11 September of last year, and we met them and will continue to do that", she said.

In the meantime, all Ms Dela Cruz and her 84,000 fellow employees can do is wait for what the bankruptcy court has to say.

Airlines around the world are cutting staff after the terror attack

Bankruptcy for United

Other US airlines

Europe's troubles
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