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United sheds baggage

$200 million cut from carrier's debt on defunct system

Chris Walsh, Rocky Mountain News

Published December 3, 2005 at midnight

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United Airlines has struck a tentative deal with the city that will allow the carrier to shave more than $200 million in debt related to its now-defunct automated baggage system at Denver International Airport.

In return, the nation's second-largest carrier will commit to routing more connecting passengers through the airport, a move that eventually will increase DIA's yearly revenues from concessions and fees by an estimated $9 million.

United also will abandon long-delayed plans for a new regional jet facility at DIA, which will save the airport money in construction and maintenance costs.

Most importantly, the move will help bolster United's future here. United and its discount carrier Ted control nearly 60 percent of the market at DIA and employ more than 5,500 workers in Denver.

"This is part of an overall plan to help United remain in Denver and get stronger," said Denver City Councilman Michael Hancock.

The agreement helps United further bolster its bottom line as it prepares to emerge from bankruptcy protection in February.

The deal, which involves amending the lease agreement between Denver and United, must still receive approval from City Council.

United, battling through bankruptcy for three years, pulled the plug on its $700 million, problem-plagued baggage system at DIA this fall and reverted to a manual process of moving luggage.

"We've been looking for ways to mitigate our costs everywhere, not just in Denver," said United spokesman Jeff Green. "This gives us the ability to cut back on the debt associated with the automated baggage system."

Denver officials said the agreement essentially will be a "wash" financially, at least in the near term. Increased revenues from concessions and passenger fees coupled with the savings from the mothballed regional jet facility will offset the decrease in United's payments.

Under the proposed agreement, DIA will retire and service $184 million of United's remaining debt tied to the baggage system.

DIA, the nation's fifth-busiest airport, said it wants to retire some debt now, when it's posting a record year both financially and in terms of passenger traffic.

"We are able to take those costs out while things are good," said DIA co-manager Vicki Braunagel. "We want to get rid of as much debt as we can."

United still owes more than $600 million for the baggage system. At its current payment rate of $60 million a year, United would end up shelling out more than $1.2 billion through 2025 when interest is added in.

The agreement calls for lowering United's annual payment to $55.1 million in 2006, $51.5 million in 2007 and $49 million from 2008 through 2025, when the lease expires.

As part of the deal, United also will:

• Cancel construction of its proposed regional jet operation on the east end of Concourse B. DIA, which previously agreed to help fund the facility as part of a lease arrangement with the carrier, will save $2 million a year as a result.

• Fly a minimum of four flights a day from each of its six gates on Concourse A, which United uses for its Ted service. The carrier said it currently is over that threshold. United's current lease requires it to fly three flights a day from each of the gates.

• Connect at least 7.5 million passengers through DIA in 2006, 7.6 million in 2007 and 7.7 million in 2008 through 2025. If it fails to meet those levels, the carrier will pay DIA an additional $6 in fees per passenger under that amount.

"From an economic development perspective, this truly is a positive thing for the city," said John Huggins, Denver's economic development director.

"It reinforces United's commitment to Denver as a main hub, and that benefits the airport financially and the city because it further anchors United to Denver."

United's baggage system, intended to serve all airlines at DIA, was initially heralded as one of the most advanced in the world. But the technology never worked properly and quickly became an embarrassment. United ended up using the system just to help sort, route and transport outbound luggage, while employing a manual process for inbound bags.

The project's price tag escalated as United and the airport tried to fix flaws. Construction costs ran $100 million higher than anticipated, and DIA had to spend $341 million in extra interest payments to try to get the system working.

One industry observer said the agreement between the city and United makes a lot of sense, especially for DIA, which will be in a better financial position.

"The city is smart to do this," said Evergreen-based aviation consultant Mike Boyd. "It certainly makes a lot of sense. And dumping the regional jet facility is a good move for everybody. Regional jets are yesterday's airplanes."

United, a unit of UAL Corp., tumbled into bankruptcy protection in late 2002. The carrier recently filed its official reorganization plan and hopes to emerge from Chapter 11 in February. During its time in bankruptcy, the carrier has cut more than $7 billion in costs and reduced its flights at DIA and its other hubs nationwide.

In Denver, the carrier faces increasing competitive pressures. While it has scaled back at DIA, Denver-based Frontier Airlines has grown significantly and now handles nearly 20 percent of the airport's passenger traffic. And discount king Southwest Airlines will launch service from DIA on Jan. 3, presenting new challenges for United.

Highlights of the deal

• Baggage system: United's annual payments for its baggage system will drop from $60 million this year to $55.1 million in 2006, $51.5 million in 2007 and $49 million from 2008 through 2025, when its lease with the city expires.

• Connections: The carrier commits to increasing the level of passengers connecting through DIA to 7.5 million in 2006, 7.6 million in 2007 and 7.7 million in 2008 through 2025. That would lead to an estimated $9 million in additional annual concession and passenger fee revenues for DIA.

• Concourse A: United will fly a minimum of four flights a day through 2025 from each of its six gates in Concourse A, which the carrier uses for its Ted service. United said it currently is exceeding that threshold.

• Concourse B: The airline will shelve plans for a new regional jet facility on Concourse B, saving DIA $2 million annually in construction and other costs.

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