jsled

By SUSAN CAREY

For the first time in years, United Airlines is off the ropes. This helps explain why parent UAL Corp., an ardent believer that consolidation can create a more sustainable industry, has renewed parallel merger talks with US Airways Group Inc. and Continental Airlines Co.

In 2008, the last time United separately explored mergers with those two, the company was in bad shape. Although it had emerged from a protracted bankruptcy reorganization in 2006, United still wasn't in fighting form.

Investors worried the company was a candidate for another visit to court protection due to its ebbing liquidity and large losses. Then fuel prices rocketed in the summer of 2008 and business travel tanked last year amid the economic downturn.

Now, in an improving economic environment, the Chicago-based carrier is clawing its way back to financial health by focusing on its on-time performance, cutting costs, rooting out complexity and boosting productivity. This work is making United a stronger standalone company and a more attractive potential merger partner.

The top-to-bottom makeover of the 84-year-old carrier is starting to bear fruit. United has become the most punctual of the big hub-and-spoke airlines. Although it retired 100 old planes from its 460-aircraft fleet as it shrank to deal with runaway oil prices and then the recession, United managed to hold the line on its unit costs while adding 20 destinations to its network. Normally, shrinking to that degree lifts unit costs, the cost of flying a seat a mile.

The carrier said it has cut its management head count by nearly 25% since 2008, and its frontline employees were 2% more production in 2009 compared with 2007.

United placed a huge order for new international planes and embarked on a marketing alliance with Continental, an airline that rejected it as a merger partner two years ago. In recent months, United has notched strong monthly gains in revenue per seat, outpacing its rivals. The company has also has reduced its net debt by more than 20% from when it left bankruptcy court protection in early 2006, to $7.9 billion at the end of 2009, including aircraft operating leases. The carrier also has raised funding. After ending 2008 with $2 billion in unrestricted cash, United ended last year with $3 billion and since has raised an additional $950 million.

"From the moment we filed [for Chapter 11] we said we can't build new things off a flawed base," said Glenn Tilton, the chief executive, in an interview that pre-dated the recent merger buzz. Mr. Tilton, a longtime oil executive who joined United in 2002, said this is no time for a "victory lap." But he said the company is in the best shape of his tenure.

Analysts still expect United to lose money when it reports its first-quarter results on April 27, but they are looking for a narrower loss than the year-ago deficit of $382 million. And most expect United to be profitable for all of 2010, which would be the first time since 2007.

The stock, at $21.66, is close to a two-year high, a far cry from the low of $3.07 touched last summer.

Still, challenges remain. United's unions want payback for the concessions they made in bankruptcy. Discount-carrier rivals are keeping down fares. Fuel prices remain high.

It's not certain how much United will suffer from the travel disruptions caused by the volcanic ash in Europe. Aviation consulting firm Boyd Group International estimates United took a revenue hit of nearly $22 million through Sunday from canceling international flights and losing domestic passengers who were going to connect to its international gateways.

United's chief U.S. rivals are also leaner, having cut the number of seats they offer, but they have heft: Delta Air Lines Inc., once the third-largest U.S. carrier by traffic, now is a very large No. 1 thanks to its 2008 merger with Northwest Airlines. United ranks third, behind American Airlines parent AMR Corp.

Antitrust regulators may take a dim view of a US Airways merger because of market-overlap issues. Some of United's unions already have come out against it. And it's not clear if Continental will change its stance on remaining independent, especially because it already enjoys a rich revenue stream from its new alliance with United. All three airlines declined to comment.

Whether a merger succeeds or not, United's turnaround required that it free itself from baggage it has been carrying for years.

"There were a lot of different plans under a lot of different leaders, leading to a company that was comfortable in non-performance," John Tague, president of United, said in an interview prior to news of the merger talks.

The airline was majority owned by its workers for the last half of the 1990s, which resulted in rich labor contracts and a revolving door for executives who tried to bring down expenses.

No area of the company has evaded an efficiency overhaul. For instance, United found it had 180 different diagrams on how the galleys on domestic planes should be set up. The goal, said Alexandria Marren , senior vice president of onboard service, is six layouts for where napkins, straws and coffee packets should be arranged.

Previously, "we made it so complicated" for the flight attendants, she said.

Similarly, United now uses just nine companies to clean its aircraft interiors. Eighteen months ago, it used two dozen. By cutting back on the number of companies it uses, it pays less for the services and has improved the quality of the work, said Joe Kolshak, the senior vice president of operations and chief architect of the punctuality initiative.

Getting out of bankruptcy was just the start, said Rosemary Moore, senior vice president of government affairs. "The customer wasn't even on the radar screen," she said. "Shareholder value was another complete anomaly. Rigor was not a word in anybody's dictionary."

Write to Susan Carey at [email protected]

jdt30

Now if they could just remove the top portion of management UAL might be ok. One of my biggest fears, as a CAL pilot, is Tilton wanting to stick around. If a merger is to occur I would like to bring back Greg Brenneman the brains behind CAL's wost to first campain.

Shrek

Couple more things that need to be in place if Tilty wants his payday......

*Longevity for ALL furloughees
*50 seat scope remains
*Industry leading contract........no concessions (keep and strengthen UAL work rules and keep and strengthen CAL pay in the joint contract)
*All furloughees are recalled (keeping 50 seat scope will do this)
*Unrestricted stock in the combined company
*A no furlough clause that works........

Not necessarily in that order

jdt30

I completely agree. If we keep the 50 seat scope we could recall pilots from both carriers. I used if, I should use must keep 50 seat scope.

LifeNtheFstLne

I think that your proposed longevity for UAL furloughees will be one of the most divisive issues between our two pilot groups, if it comes to that. Perhaps I'm stating the obvious, but I'm echoing my coworker's sentiment. I'm not saying what's right, wrong, fair, whatever... I'm just talking. It would be a crushing blow to me personally, so naturally I'm a bit biased. How many years of ACTIVE service do the most senior UAL furloughees have?

jdt30

How about length of service for all furloughees once brought back, and longevity for pay. I've been at CAL for 41/2 years, I'm not a believer in someone that has been furloughed longer than they have been employed leap frogging me.

Groundhog

So let's see. You got hired at CAL around the end of 2005. The most senior UAL furloughee (not including the voluntaries) was a Jul/Aug '99 hire. Which means chances are good that about the time you were in the middle of your commitment, or just starting your regional career, or maybe just finishing flight training (if you were a 250 hour wonder), these guys were finishing their military career or leaving the left seat of their 4 to 5 year regional gig. And you're worried about them "frogging" you?
Don't worry Junior, it's not going to happen. With ALPA merger policy in play, the chances of furloughees being integrated into a list of active pilots approaches nil. But then, being the aviation professional that you are, you knew that.
So while these guys and gals are out on the street, trying to pull their lives together, you decide that this is the time to give them the finger, and remind them that they better not be having any thoughts on entitlement. Well played.

Life isn't fair. We all know that. In aviation, your career is based more on timing and luck, rather than experience or skill. We all knew that, and we accepted it coming in. The current furloughees from every airline are living it every day. And although some may rally around your keyboard bravado, know that the furloughees do not need some johnny-come-lately to remind them that their aviation dreams are irrevocably damaged.

Don't worry Junior, your position on the seniority list is safe. If a UA/CAL merger does happen, you don't have to be concerned about about a currently furloughed 10+ year UA pilot with over 6 years on the property "frogging" you.

Here's hoping that you don't have to live the nightmare of getting furloughed for an extended period of time.

Hog

Mish

As a twice furloughed UAL pilot, I can tell you my experience. Hired UAL March, 2000. Furloughed January, 2003. Recalled June, 2006. Furloughed September, 2009. 10 years seniority with 6 years actively flying.

Mish

jdt30

Groundhog,
Look, what I stated definately serves my best interest. I didn't say it was fair. I honestly would like CAL to stay independent that way integration doesn't become a problem. If I were a United pilot hired in 2000 and then furloughed I would definately be upset about a CAL pilot hired in 2006 being more senior to me. After this post I definately won't bring up seniority issues again. Nothing can be gained by stating my opinion on what's fair, because my outlook on what's fair is definately going to be different than a United pilot's.

I didn't mean to kick the furloughs while they are down, so I will apologize for being insensitive.

REAL Pilot

Kudos
As a 11 year UAL guy whose Dad was an Eastern Pilot during the Lorenzo rapings, their are plenty of "injustices" to go around. I sincerely hope in the event of a merger, the pilots can rise above their individual interests and understand what really drives this business. I won't preach yet, but certainly don't desire a USAir integration model. At least the Delta/Northwest guys come across as professionals and not some petty teenager. (for the most part- there is always the 10%)

Carpe Diem