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UAL Corp.’s bankruptcy filing Monday pits the company’s management against labor in a feud likely to reverberate throughout the entire industry, and one that could ground United Airlines forever. Elk Grove Township, Ill.-based UAL filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago, setting the stage for the industry’s largest reorganization ever. United, which was spending nearly $8 million in cash per day prior to the filing, is expected to lose more than $2.5 billion this year. United entered bankruptcy with only $800 million in cash on hand, plus commitments for up to $1.5 billion in debtor-in-possession financing from Bank One Corp., Citibank, CIT Group and J.P. Morgan Chase & Co. However, almost half of that financing package hinges on the company reaching undisclosed cost-reduction targets, which analysts said could prove challenging. “The company is going to have to achieve some significant near-term cost cuts in order to get access to the capital,” said one reorganization expert close to the case. “United obviously believes it can meet those benchmarks, but I would suggest that it will not be easy.” Standing in the way of United bringing down costs is a group of contentious labor unions that analysts say may be unwilling to negotiate. The company’s employees own 55 percent of UAL’s equity thanks to a 1994 reorganization, shares that are likely worthless now that the company is bankrupt. A coalition of labor groups agreed in principle to a plan earlier this year that they claimed would have saved the airline $5.2 billion between now and 2008. But observers say the plan included substantial forgone raises and projected revenue improvements, noting that the actual cash savings were significantly less than advertised. Jim Higgins, an analyst with Credit Suisse First Boston, warns that UAL could pay the price for management’s tardiness in discussing bankruptcy with employees. Higgins said labor groups fail to appreciate the depth of the cuts that are needed, which could make it hard for United to strike an adequate deal with its unions. “Our belief that UAL may be tipped into a Chapter 7 liquidation remains, given UAL’s thin liquidity position, its failure to prepare its employees for Chapter 11 and the internal dissension among its labor groups and management,” Higgins wrote in a report Monday. Absent “deep and permanent” cost cuts, UAL will emerge from bankruptcy enfeebled or even fail to exit altogether, said Blaylock & Partners LP analyst Ray Neidl. That could spell the end of United. “We believe that either of these two outcomes would lead UAL onto the same long road to decline that Pan Am and Eastern Airlines went down,” Neidl wrote, alluding to carriers who closed after declaring bankruptcy. UAL’s unions say they are willing to help. United pilot Paul Whiteford, chairman of his company’s unit of the Air Line Pilots Association, said the restructuring effort “must involve continued cooperation and collaboration among ALPA, United management and all of the company’s labor unions.” Most experts view UAL labor as key to a successful reorganization because large creditors, especially aircraft lessors, are unlikely to put up much of a fight. The domestic airline industry is mired in the worst economic slump since deregulation, and aircraft owners are unlikely to find other interested parties should they pull their planes from United. “Nearly 25 percent of the domestic capacity is parked in the desert right now,” the reorganization expert said. “Lessors have the choice between taking less from United or getting zero return on their investment, so they are going to play ball.” United is also unlikely to see a vulture investor or other potential acquirers take an interest without significant cost cuts, analysts said. Many in the industry agreed with the decision by the federal Air Transportation Stabilization Board to reject United’s application for a loan guarantee due to troubles in the company’s business plan, “No amount of cash is going to make those problems go away,” one observer said. The company’s difficulties are expected to get worse before they get better. United representatives said Monday that the company expects to burn through as much as $22 million a day in December and up to $15 million per day in January, historically the slowest months for the airline. Though previous airline bankruptcies have led to fare cuts that weakened competitors, UAL’s filing is not expected to step up financial pressure on United’s rivals. Fares are already near historical lows, and the other big airlines are in much better financial health than United, giving them the ability to weather a storm. In fact, most observers view UAL’s bankruptcy as a boon for the industry. United’s losses could be just the jolt necessary to bring other airlines’ employees to the bargaining table for some out-of-court restructuring, analysts said. “Ten years from now we might look at the United bankruptcy as a watershed event,” said one executive at a rival airline. “The question is whether United will be around to appreciate it.” Copyright �2002 TDD, LLC. All rights reserved.

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