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SMALL BUSINESS

Worst Airline Ever?

By JOE BRANCATELLI,

Portfolio

Posted: 2008-06-10 20:48:08

(June 10) - Pick through the slag heap of the nation's big network carriers and it's easy to find the worst of the worst: United Airlines.

Just 29 months removed from the longest, costliest, and least-effective bankruptcy in aviation history, the nation's second-largest airline is once again facing a financial abyss. United's first-quarter net loss of $537 million was more than its two main competitors combined. Last month it paid a huge premium to avoid a default on its loan covenants. Its 4 percent decline in passenger traffic in May was twice as steep as that of any of its competitors.

Last week's announcement that it would ground 100 aircraft, reduce capacity by 10 percent, and shed thousands more workers was startling given the huge contraction it already experienced while in bankruptcy. A 19-month search for a merger partner resulted in rejections from Continental Airlines and US Airways, a carrier that was desperate to sell itself to United just eight years ago. The airline's shares slid into single digits last week from a 52-week high north of $50.

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United's day-to-day operations have also deteriorated markedly. Its no-frills Ted sub-brand is being closed, the airline's second expensive failure in the low-cost arena this decade. Travelers are furious about service cuts -- the airline has eliminated some meals and some luxurious perks -- on United's high-priced P.S. (for premium service), which runs in the high-profile Transcon Triangle between New York, Los Angeles, and San Francisco. And in April, United's overall on-time performance slumped to 72.7 percent, five points below the industry average and 18th among the 19 carriers tracked by the U.S. Department of Transportation.

United's woes since the 1978 deregulation of the airlines are legendary. A mid-1980s pilots strike dragged on for almost a month. United failed as a travel conglomerate called Allegis in the late 1980s and ended up selling off all the hotel chains and car-rental interests it purchased. A flawed Employee Stock Ownership Plan in the 1990s tainted the entire concept of employee ownership of public companies. A merger attempt with US Airways in 2000 became a nationwide scandal after it was revealed that top managers at the carriers would have reaped hundreds of millions of dollars on the deal. A concurrent civil war with its own employees led to weeks when 75 percent of United flights ran late and passengers and baggage were stranded for days in distant locations. Then came 9/11, when two United jets were hijacked by terrorists.

But it was United's collapse into bankruptcy just before Christmas of 2002 that is at the heart of the airline's current crisis. Despite a 38-month stay, hundreds of millions of dollars of employee concession, and the largest pension default in corporate history, United emerged as a fiscal and operational mess. Worse, the airline's new chief executive, Glenn Tilton, a former oil-company executive, embraced every old, failed idea ever tried by big network carriers.

Instead of a simple, cost-effective and passenger-friendly roster of in-flight services and streamlined fleet operations, United left bankruptcy in February 2006 with 26 separate in-flight seat configurations. It dabbled in everything from the upmarket P.S. to the downmarket Ted. It had five types of narrow-body jets, four types of wide-body aircraft and eight flavors of regional jets. Travelers were confronted with flights outfitted with an ever-shifting mix of one, two, three, or even four classes. (By contrast, the industry's only consistently profitable airline, Southwest, flies just one type of aircraft and offers just one class of service.) United's finances were equally chaotic. It left bankruptcy saddled with $17 billion in debt and its $3 billion exit financing was secured with mortgages on virtually all of the airline's assets.

And oil is the original sin at the post-bankruptcy United. The five-year plan of reorganization (P.O.R.) cooked up by Tilton and chief financial officer Frederic "Jake" Brace predicted crude would average $50 a barrel. It was laughable even then. When United filed the P.O.R. in February 2006, oil was already selling above $65 a barrel -- and a panel at the World Economic Forum in Davos, Switzerland, had just discussed the ramifications of $120-a-barrel crude.

As a result, United's future as a going concern is an open question. One thing that isn't in doubt, however, is the financial wherewithal of the airline's upper management.

Tilton and his top executives emerged from the bankruptcy with 8 percent of the new United Airlines and a fast-vesting bonus plan that the New York Times called "insanity squared." Many of United's management team have been flipping their shares as soon as they vested, yielding tidy profits as the airline's shares topped out above $50. But rather than curb their enthusiasm now that the market has soured on the airlines in general and United in specific, Tilton et al will pitch a new executive-incentive plan at the airline's annual meeting in California on Thursday. If approved, it will create 8 million new shares for the benefit of the top brass.

In other words, no matter how rough the ride for United's employees and passengers, it will continue to be smooth sailing in the executive suite.

2008-06-10 13:01:46

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311 comments

B1purtle 03:06:31 PM Jun 12 2008

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I'D like to drag those CEO's out into the street and shoot them like in the former Sovet Union, maybe then they might realize its not right to ruin employee's lives and loot companies in the interest of greed. I have flown in many "third world" countries and let me tell you they make american air transportation look like crap! but then again most other countries arent obsessed with profit above all else like in the United States of Rich People Screw the Average Joe.

ChicagoPunkie 02:56:34 PM Jun 12 2008

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NovaNew II 03:30:13 AM Jun 12 2008 WROTE:
............... As far as I'm concerned, anyone who works for them deserves to be laid off because they made me more than "pissed off" and didn't even care.
-----------
Oh, that's nice and so mature. You would want more than 50K employees out of work, families screwed, losing their homes, kids lives being turned upside down and that many more people on unemployment? For everyone to lose their health coverage? You're sick!!! I almost want to say I hope you lose your job and your home. But then I would sink to your level.

Jwrmnfzy1 02:39:50 PM Jun 12 2008

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Yep ! I'd like to see all the airlines refuse to fly for the summer to protest fuel prices ! that should get our no account governments notice !
The truckers need to blocade the oil refinery gates and not let any tanker trucks in or out !
That should get our "eunuchs in a brothel" politicians attention !

AmberHrt1 10:55:55 AM Jun 12 2008

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United was fine with me until last March when I was stranded in Chicago for hours upon end. It wasn't the airline's fault...bad weather, spring break crowds...but I ran across the rudest most indifferent United emplyoees I'd ever seen. Everyone was complaining. Don't they teach customer relation skills to their workers or is it so bad they just don't care.? This corporate attitude of serving the CEO s first and customers last is going to backfire when we all get fed up enough. It's the ruin of America...this widespread consuming corporate greed.

OCEANGIRL72855 05:59:29 AM Jun 12 2008

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Just had the worst flying experience of my life on United this past week - Thursday thru Sunday! Flight left Indy 2 hrs late, had to have cart to get us to our connection in Chicago. Oh yes - one of the gate personnel changed us to a flight for the next morning handed me the tickets and said "your on your own"!!!!! FInally found a kind gate agent and she helped us. I need a wheelchair and not one was ever available upon my arrival at a destination! Coming home Sunday - I had to wait out on the tarmac under the jet for above mentioned wheel-chair after I managerd to climb down stairs with the help of a really nice flight attendant! Then almost missed the flight back home due to this delay - airport personnel had to run yes RUN us to the gate to get us on the jet and we just did make it. Oh yes- did I mention that my luggage didn't make it out of Chicago with me? It finally did arrive the next day, just in time for us to clean up prior to my nieces graduation, the whole reason f

Ris0815 05:51:58 AM Jun 12 2008

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Again why doesnt big business lobby against rising gas prices so we can spend money on things we want

Giaw66666 05:34:54 AM Jun 12 2008

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I USED to love US Airways and have been loyal to them, flying ONLY them, until I had a MEDICAL excuse and they refused my refund.

United? Not my favorite. They booked some flights ( commuter)close together and even though I made it to the gate with 10 minutes to spare they had already closed up and left. I had to wait 8 hours until my next flight. I heard they're the worst as far as ETA so no wonder they left early!

Jeff M1999 05:30:44 AM Jun 12 2008

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I agree that US Air is the worst, rude attendants, customer service, attitudes, Etc. I flew with them one time and it was the worst experience I ever had. They sent me a $100 voucher I never used. I have mainly stayed with Delta. Maybe one out of every 20 calls to them was rude. A very acceptable number.

And I agree with Otto, I have flown 10 countries in the past 2 years with 8 different carriers and I am happy and proud to be an American.