11-24-2017By 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]
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