United left to fly on its own
Unable to conclude a merger with several potential partners, airline chief Glenn Tilton must come up with a viable operating plan
By Julie Johnsson
Chicago Tribune reporter
May 31, 2008
United Airlines is turning its attention inward to the painful cost cuts it will need to survive a forbidding economic environment as a stand-alone company now that its merger talks with US Airways are ended and other tie-up possibilities exhausted.
It's an abrupt change of course for Chief Executive Glenn Tilton, a former oil executive who gained a reputation as a dealmaker after helping craft the $35 billion merger of Texaco and Chevron in 2001.
Tilton hasn't enjoyed similar success in the airline industry, where talks with Delta Air Lines, Continental Airlines and US Airways failed to yield the deal he long advocated.
Now, the pressure is on Tilton to prove he's an airman. Tilton, who prefers the role of high-level tactician, must show he has mastered the operating details that will determine whether United improves its customer service and financial results that lag peers, analysts said.
He also must articulate how Chicago-based United intends to navigate the uncharted territories of $130-per-barrel crude oil and a softening global demand for travel that is igniting a wave of airline bankruptcies.
"The airline has been operating on hold, if you will, for the past year to two years," said analyst Henry Harteveldt of Forrester Research. "Now, they have to say we're here, we're going to be survivors."
Financial experts at United, the nation's second-largest carrier, are studying the carrier asset by asset, route by route, for ways to best preserve its $2.9 billion cash reserves, said people close to the airline.
"Our action plan is aggressive, and we remain confident in our ability to put our company in a position to succeed," Tilton told employees Friday. He wasn't available for an interview.
United is exploring redistributing its fleet, including ending Boeing 747 flights from Washington-Dulles International Airport, cutting the number of flight attendants on larger planes and offering leaves of absence to employees to forestall layoffs, sources said.
The airline has awarded unpaid leaves to 134 flight attendants during June and July, typically busy travel months when its staffing is stretched, said Sara Nelson, spokeswoman for United's flight attendants union.
The carrier is pulling out of routes where rising fuel prices have wiped out profits. United plans to end service between Los Angeles and Hong Kong on Sept. 1. United also plans to replace the Boeing 747 jumbo jets plying the skies between Washington and Beijing with smaller, fuel-efficient Boeing 777s, sources said.
United also has said it will trim its domestic mainline flying by 9 percent later this year, grounding 30 gas-guzzling aircraft. Executives are contemplating deeper cuts after rival American Airlines said this month that it would cut domestic capacity by about 12 percent and retire close to 75 planes.
The operational changes and cost-cutting intensified after a critical May 15 board meeting, when directors determined the financial burdens of a merger with US Airways outweighed the gains, and at times sharply questioned United's direction, say people familiar with the discussions.
United is still pursuing a code-sharing deal that would bring Continental Airlines into the Star Alliance, the global marketing alliance that includes Germany's Lufthansa and Singapore Airlines. But Continental also is mulling overtures from American Airlines, as well as the merging Delta and Northwest Airlines, Continental's SkyTeam alliance partners.
An alliance that allowed United to take full advantage of Continental's Newark and Houston hubs could generate several hundred million dollars in new annual revenue, analysts said, but would fall far short of the benefits the carriers would have reaped from linking their international networks in a merger. It also wouldn't be sufficient to offset the $3.5 billion in higher fuel costs that United faces this year at current prices.
"The truth is there is going to be no merger with US Airways, and there is going to be no virtual merger with Continental," said Chicago restructuring expert William Brandt, president of DSI. "It's time to look at costs, to do what they should have done in bankruptcy with their routes. Some cities just don't work."
Brandt questions why United didn't tackle its cost structure earlier. He notes United emerged from three years in bankruptcy in 2006 with higher expenses than American, which avoided bankruptcy and kept its employee pensions intact.
Others question whether United's board will ultimately hold Tilton responsible for relying on a merger strategy that didn't pan out.
"It's got to be an embarrassment to United's board of directors," said aviation consultant Julius Maldutis. "What is United's business plan going to be now?"
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