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Chris Walsh, Rocky Mountain News

Published January 28, 2006 at midnight

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Three years and 51 days.

A few failed attempts to secure government loan guarantees and several high-profile union battles.

More than $7 billion in cost cuts, nearly 25,000 job losses, missed deadlines and countless delays.

What a long, turbulent flight through Chapter 11 it's been for United Airlines.

And now the largest, lengthiest, most expensive bankruptcy case in the history of the U.S. airline industry finally is drawing to a close.

United is set to emerge from Chapter 11 next week as a leaner, more competitive company armed with $3 billion in financing - defying gloom-and-doom predictions issued by numerous critics along the way.

The carrier says it's poised to battle low-cost rivals and larger airlines by holding down expenses and offering multiple levels of service to entice elite fliers, international travelers and penny-pinchers alike.

But Denver's largest carrier also is about to open another uncertain, potentially difficult chapter in its 80-year history.

Industry experts and analysts laud United for its ability to navigate through an extremely contentious and complex bankruptcy. Some, however, question whether the nation's second-largest carrier cut expenses enough to compete in a cutthroat, volatile industry environment, citing the fact that United still isn't making money. Others wonder if it made the right strategic moves to find success in the long run.

Another spike in fuel prices, an economic downturn or a terrorist attack, they say, could shove United back to where it was three years ago: hemorrhaging money and struggling for survival.

"So far, United at least has managed to get out of bankruptcy on its own, which puts it above failed airlines like Eastern and Pan Am," said Marc Richards, a partner in the business reorganization and bankruptcy group of law firm Blank Rome LLP in New York. "But is the company fully fixed? It's hard to tell at this point."

To succeed, observers say, United must quickly return to profitability, continue to keep a lid on costs and glean revenue premiums from its various products to avoid the fate of other large airlines that emerged from bankruptcy only to stumble back in at some point down the road.

Massive overhaul

United certainly needed a massive overhaul when it limped into Chapter 11 more than three years ago.

After slipping into a sea of red ink in 2000 as the economy began to falter, two of United's planes were hijacked in the Sept. 11, 2001, terrorist attacks. The subsequent travel downturn and darkening economic landscape sent United to the brink of extinction.

The airline, which had posted about $4 billion in losses during a two-year period, tried but ultimately failed to secure a loan guarantee from the government to help keep it afloat. Less than a week after the rejection, United filed for bankruptcy protection with $21.2 billion in liabilities and just $800 million in cash on hand.

United, a unit of Chicago-based UAL Corp., has made sweeping changes since then, facing numerous challenges - two more failed attempts to get loan guarantees, rising oil prices, the threat of worker strikes - along the way.

"If I were able to draw a visual image of the beginning (of bankruptcy) to today, it would be one continuous experience of knocking down internal and external barriers," said Glenn Tilton, United's chief executive officer.

One of United's biggest accomplishments was slashing $7 billion in expenses across the company. To that end, United:

• Cut about 25,000 jobs as it axed domestic flights and outsourced work to other companies and other countries.

• Renegotiated aircraft leases, shed 107 planes and shifted many shorter flights to smaller jets operated by regional partners. It also reduced by half the number of different aircraft types it flies.

• Eliminated its four employee pension plans with the help of a bankruptcy court, replacing them with 401(k)-style benefits. The move erased $10 billion in pension obligations and $645 million in annual expenses.

• Tore up contracts with its labor unions twice, drastically lowering employee wages and benefits but saving United a combined $3.2 billion a year.

• Shuttered six call centers nationwide, including one in Denver that handled inbound calls from "specialty" clients, such as Olympic athletes. United also closed and consolidated other operations, such as flight attendant airport bases.

• Implemented a variety of fuel-saving measures, such as lowering aircraft weight by getting rid of heavy food-preparation equipment, taxiing at airports using only one engine and training pilots on new flight techniques.

• Reduced its overall debt by about $13 billion, lowering future payment and interest obligations.

'Cut as much as they can'

The restructuring has allowed United to align its costs more closely with carriers such as Southwest, Denver-based Frontier and JetBlue, which can offer low fares by keeping expenses in check.

United's cost per available seat mile - a key expense measure - was 10.7 cents in 2005, compared with 11.3 cents in 2002. Excluding fuel expenses, its seat-mile costs last quarter were about 7.4 cents - a huge improvement from just a few years ago.

"I think United cut as much as they can after three years in Chapter 11. There's not a lot more they can do at this juncture," said Helane Becker, an analyst who covers the airline industry for securities firm Benchmark Co. in New York. "In our view they're probably positioned as well as they can be at this time."

In addition to cutting expenses, United shook up its management team and made moves to increase revenues.

It started new Denver-based low-cost arm Ted to lure leisure travelers, increased international routes to boost profit margins and started charging customers for meals, curbside baggage check-in and other amenities that used to be free.

On the performance end, the carrier tracks well against industry averages in on-time arrivals and departures, customer complaints and mishandled baggage.

Something for everyone

United also has shifted its business strategy. Its goal now, essentially, is to offer something for every customer.

That philosophy is in stark contrast to where the rest of the industry is headed.

Low-cost airlines typically offer economy-only seating, fly mainly to U.S. destinations and provide few on-board amenities. Larger airlines have cut back in first-class amenities, axed pillows and blankets and standardized their services.

United, however, doesn't think the "cookie-cutter" approach will work for its business. After taking some amenities away, such as free meals in first class, customer feedback indicated that it was taking the wrong approach.

Its recent moves have included bolstering international flights and shifting dozens of flights to its Ted operation, which aims to compete for leisure and thrifty travelers looking for the cheapest fare. United also moved more flights onto smaller regional jets equipped with first-class cabins and upgraded economy seating.

Looking to provide higher-end services for premium customers, United beefed up its first-class offering, reintroducing free hot meals on domestic flights and upgrading to lie-flat seats on international routes. It also introduced premium service between New York and California that offers DVD players and specialty drinks.

And this year, United plans to spend $400 million to refurbish the inside of its planes and buy new equipment.

The result: Customers get a wide variety of options to choose from when flying.

The strategy seems to be working. United says its 70-seat regional jets, its premium coast-to- coast flights and its Ted service are all proving financially successful and are performing better than what they replaced in a variety of measures including profitability.

The carrier, though, does not break out financial numbers for those services.

"We are blazing our own trail in terms of what products and offerings we have," Jake Brace, United's chief financial officer, said in a recent interview.

Industry observers say United's greatest asset - and a key ingredient to the new strategy - is its coveted route network.

United, its regional service and Ted fly to 210 destinations in 28 countries and two U.S. territories. Add in the carrier's multiple partnerships - which let United frequent-flier members earn and use miles on other worldwide airlines - and the carrier can bring customers almost anywhere across the globe.

"They have a fabulous route structure with lots of penetration in Europe, great Asian routes and a huge system in the U.S.," said Jan K. Brueckner, professor of economics at the University of California, Irvine. "They've got all the makings for a very successful airline, they just need to get rid of several other problems, and that's partly what's happened in bankruptcy."

Strong support, criticism

The carrier has received strong validation in recent weeks. Creditors, who will receive 4 cents to 8 cents on the dollar, voted to accept United's reorganization plan, leading to bankruptcy court approval earlier this month.

Banks have expressed strong interest in pumping money into the company.

United managed to secure $3 billion in debt that it will use to repay some creditors, bolster its cash balance and help fund day-to-day operations. The carrier said a swarm of other banks are looking to get in on it, too, and have offered up $4 billion more than the airline intended to borrow. United has been able to leverage that to improve the terms of its financing.

But critics abound.

Some industry experts say the carrier has not yet cut costs enough to survive in a precarious industry struggling with volatile oil prices, heavy competition and a consumer base conditioned to rock-bottom fares.

They point to United's financial numbers: Despite its progress, the carrier continues to lose money, a trend that stretches back 22 consecutive quarters.

United bled $17 billion in the fourth quarter, although that's mainly due to reorganization costs that will be settled for a fraction of the amount recorded, wiping out most of the charges. Excluding reorganization costs, the carrier lost $297 million in the fourth quarter, an improvement over the $630 million it lost in the year-ago period but a loss nonetheless. It improved operating financials in the quarter but, again, still posted a $182 million loss.

If United can't make money while in bankruptcy, some say, how can it expect to do so once it emerges?

"I really think they have not finished the job of cutting costs," said California-based aviation consultant Alan Sbarra. "United let this big opportunity go by. I think they should've done a lot more to restructure costs and make sure they're competitive in the current environment."

United's expenses are still higher than those of discount carriers - its biggest threat domestically. In Denver, United's second-largest hub, the carrier already faces new competition from newcomer Southwest Airlines, which could depress profit margins.

"Whether the cost structure will be low enough for the company to be competitive remains a question," Ray Neidl, an analyst with Calyon Securities in New York, wrote this week in a message to clients.

Other airlines, most recently US Airways, have made the mistake of not cutting costs enough while in bankruptcy - emerging only to fall back in a few years later.

Oil prices key

Perhaps the biggest factor in United's ability to succeed is oil prices.

The carrier pinned its business plan - which predicts a profit this year and $1 billion in annual net income by 2010 - on $50-a-barrel oil.

The current price? About $68 a barrel.

"I'm really concerned about United's plan," said Henry Harteveldt, a vice president at Forrester Research in San Francisco. "I don't know if we'll ever see that oil price point again."

United says the $50-a-barrel mark is a long-term estimate and that the company can break even at current prices by raising fares and extracting more revenue from premium services.

Other industry experts, though, are skeptical United will be able to raise fares enough to compensate for higher oil prices. And many in the industry believe air travel is becoming a commodity, meaning United could struggle to persuade customers to pay higher prices for more amenities.

There also are some intangible issues, such as morale. Customer service is vital in the airline industry. Many United workers remain deeply upset over how the carrier cut wages, benefits and pensions yet is planning to reward top executives and managers with a large chunk of stock in the reorganized company.

As for its critics, United simply hits the mute button.

The carrier says employees remain focused and continue to provide top-notch service.

And the positive response from banks and debt-rating agencies is enough validation for the carrier's management team.

"There are pundits that have no stake or accountability in this company," said John Tague, United's executive vice president for marketing, sales and revenue. "The critics we're most concerned about are our customers and those that pass investment judgment on this company."

Overview

• 4 cents to 8 cents: Amount unsecured creditors will receive for every dollar they're owed, in the form of stock in the reorganized United

• $45 million: Estimated amount of stock United's top eight executives will receive upon the carrier's emergence

• 8 percent: Stake that 400 United managers will receive in stock of the company

• $7 billion: Total cost cuts United made since entering bankruptcy in December 2002

• $13 billion: Amount of debt United will shed when it leaves bankruptcy

• $3 billion: Amount of financing United will receive to exit bankruptcy

• $3.5 billion: Top estimate of United's equity value upon emergence

• $50: Price for a barrel of oil on which United based its financial projection

• $67.76: Price for a barrel of oil on Friday

FINANCIALS • Revenue 2002: $14.3 billion

2005: $17.4 billion