In the United States Bankruptcy Court for the Northern District

Published on January 2017 | Categories: Documents | Downloads: 42 | Comments: 0 | Views: 393
of 82
Download PDF   Embed   Report

Comments

Content

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION In re: UAL CORPORATION, et al., Debtors. ) ) ) ) ) ) Chapter 11 Case No. 02 B ______ (Jointly Administered) Honorable [___________]

INFORMATIONAL BRIEF OF UNITED AIR LINES, INC.

James H.M. Sprayregen, P.C. Alexander Dimitrief, P.C. Andrew A. Kassof KIRKLAND & ELLIS 200 East Randolph Drive Chicago, Illinois 60601 (312) 861-2000 Counsel for the Debtors and Debtors-in Possession

Dated: December 9, 2002

TABLE OF CONTENTS Page I. II. PRELIMINARY STATEMEN T. .........................................................................................1 UNITED AIR LINES AND ITS CURRENT FINANCIAL CRISIS...................................4 A. B. C. D. III. United’s Operations. ................................................................................................... 4 The Employees of United. .......................................................................................... 4 United’s Revenues Have Collapsed............................................................................ 6 United Was Unable to Stop Burning Through Its Cash. ............................................ 8

THE LONG- TERM ROOTS OF UNITED’S FINANCIAL CRISIS. .................................9 A. B. C. The Airline Industry During the Regulatory Period. ................................................ 10 Deregulation and Its Effects on the Airline Industry and United Air Lines. ........... 12 The Struggles of the Industry from 1982 to 2000..................................................... 14 1. 2. Airlines Have Tried Short- Term Initiatives to Curb Costs. .............................. 15 The Current Industry Paradigm Has Forced Numerous Airlines Out of the Industry............................................................................................. 17

IV.

UNITED ULTIMATELY PROVED UNABLE TO SUS TAIN ITS COST STRUCTURE. .....................................................................................................................19 A. B. United Reduced All of the Expenses That Were Within Its Control. ...................... 20 Increasing Labor Costs.............................................................................................. 22 1. 2. 3. 4. C. D. ALPA. ................................................................................................................ 22 The IAM. ........................................................................................................... 22 The AFA. ........................................................................................................... 24 United Has Struggled With the Highest Labor Costs in the Industry. .............. 24

United Was Unable to Access the Capital Markets.................................................. 25 The Air Transportation Stabilization Board. ............................................................ 28 1. The Economic Recovery Plan. .......................................................................... 28 i

2. 3. 4. E.

The Enhanced Recovery Plan. ........................................................................... 29 United’s Unions Voted in Favor of the Coalition’s Proposal. .......................... 30 The ATSB Decides Not to Approve United’s Application. .............................. 31

United’s Access to Its Proposed DIP Financing Is Conditioned on Substantial Cost Reductions That Can Be Achieved Only if United’s Employees Agree to Substantial Concessions. ......................................................... 32 1. 2. 3. The DIP Negotiations. ....................................................................................... 32 The DIP Facilities. ............................................................................................. 34 The DIP Covenants............................................................................................ 35

V.

UNITED MUST RISE TO THE CHALLENGES OF A FUNDAMENTALLY DIFFERENT COMPETITIVE LANDSCAPE. ..................................................................36 A. B. C. D. The Lingering Effects of September 11.................................................................... 36 Internet Shopping. ..................................................................................................... 37 Business Traffic Has Shrunk to Record Lows.......................................................... 38 The Increasingly Formidable Competition Posed by Low Cost Carriers. ............... 40 1. 2. 3. 4. The Competitive Advantage. ............................................................................. 40 Expanding Presence........................................................................................... 42 Appealing to Business Travelers. ...................................................................... 43 The Impact on United. ....................................................................................... 43

VI.

UNITED’S PLAN TO EMERGE FROM BANKRUPTCY AS A PROFITABLE AND FORMIDABLE COMPETITOR IN A CHANGED AIRLINE INDUSTRY. .........45 A. B. Capitalizing on United’s Strong Market Position and Base of Assets to Sell a Superior Product Across an Unrivaled Network. ....................................... 46 United Will Continue to Reduce Its Non- Labor Costs. ............................................ 47 1. 2. 3. Aircraft and Other Leases.................................................................................. 47 United Express Partners..................................................................................... 48 Other Revenue and Cost Initiatives. .................................................................. 48

ii

C. D. E.

United Must Reduce Its Labor Costs. ....................................................................... 49 United and Its Unions Will Have to Take a Hard Look at Work Rules................... 53 United and Its Unions Must Work Together Constructively to Address the CBAs’ Restrictions on the Company’s Ability to Generate Revenue, Outsource Non-Core Activities and Furlough Employees. ...................................... 54 1. 2. 3. 4. Regional Jets. ..................................................................................................... 55 Code Sharing. .................................................................................................... 57 Furlough Limitations. ........................................................................................ 58 Outsourcing Limitations. ................................................................................... 58

VII.

UNITED IS NOT THE ONLY PRE-DEREGULATION CARRIER STRUGGLING WITH THE INEVITABILITY OF TRANSFORMING ITS BUSINESS MODEL. ..........................................................................................................59 A. B. C. D. E. American Airlines. .................................................................................................... 60 Continental Airlines. ................................................................................................. 61 Delta Air Lines. ......................................................................................................... 61 Northwest Airlines. ................................................................................................... 62 US Airways. .............................................................................................................. 62

VIII.

CONCLUSION. ..................................................................................................................64

APPENDIXES AFFIDAVITS SUBMITTED IN SUPPORT OF INFORMATIONAL BRIEF OF UNITED AIR LINES, INC. Affidavit of Frederic F. Brace Affidavit of Peter B. Kain Affidavit of Daniel M. Kasper Affidavit of Glenn F. Tilton SOURCES CITED IN INFORMATIONAL BRIEF OF UNITED AIR LINES, INC. (Volumes 1 - 3)

iii

I.

PRELIMINARY STATEMENT. United Air Lines was determined to avoid this day. The reason it could not is

rooted in Economics 101: United’s costs are out of line with the Company’s revenues, which began to collapse in 2001. Indeed, the degree to which United and the other major network carriers were already struggling with unaffordable cost structures before September 11 was laid painfully bare by the tragedies of that day and their aftermath. Despite having the industry’s best work force, assets and route structure, United was unable to stop burning through its cash. United’s revenues have plummeted mostly because Americans simply are not flying as much as they used to, especially not on business trips at full fares. More of the passengers who do continue to fly are opting for low cost carriers at the expense of United and the other full- service carriers. The resulting price competition has been compounded by the emergence of the Internet, which has made it easy for passengers to comparison shop for the lowest available fares. All of this has reduced the value of differentiators among airlines other than price. These shifts in the industry have hit United the hardest. The Company’s passenger revenues have plunged from $16.9 billion in 2000 to $13.8 billion in 2001 and a projected $11.8 billion for 2002. In response, United did everything within its control to bring its costs into line with the reduced revenue environment. The Company slashed costs in every aspect of its

operations except for safety – delaying or canceling capital investments, reducing schedules, downsizing the airline, cutting non-aircraft expenditures, bargaining for concessions from vendors, furloughing employees, and eliminating scheduled pay increases for salaried and management employees. But further cost reductions were needed. Before filing today’s petition, United sought savings from its unionized workforce in an amount and of a duration sufficient to stave off bankruptcy. Yet, despite concessions agreed to by its unions, the capital markets and

the Air Transportation Stabilization Board deemed United’s business plan to be insufficient to address the Company’s long-term issues, especially in a depressed revenue environment. As a result, United was left with no alternative but to file today’s petition for bankruptcy. 1 And now that United is in bankruptcy, its obligation to this Court and the

Company’s stakeholders has become to reorganize into a viable airline that will be able to compete in a “chronic weak-yield environment.”2 Against this backdrop, the harsh reality is that, despite periodic “boom years” (such as during the late 1990s) in which every single variable broke in the Company’s favor, United has been unable to achieve sustained profitability. For United to emerge from bankruptcy successfully, these proceedings will have to address United’s collective bargaining agreements (“CBAs”) with its unionized employees – because labor is by far United’s largest cost, because United’s labor costs are now the highest in the industry, and because the CBAs restrict United’s ability to reduce its costs and maximize its revenues in ways that are no longer affordable. Moreover, the covenants set forth in United’s Debtor-In-

Possession financing require that the cost savings begin immediately. To this end, the Company has already decided that the compensation of salaried and management (“SAM”) employees at United will be reduced effective December 16, 2002, the beginning of the Company’s next pay period. The base compensation of the 36 officers at United, including that of Chief Executive Officer Glenn Tilton, will be reduced by an average of 11 percent. Reductions in the salaries of non-officer SAM employees will be based on a

progressive scale pur suant to which employees with higher incremental incomes will be subject to higher reductions. Reductions will start at 2.8 percent for employees earning less than

$30,000 per year and increase to an effective reduction of approximately 10.7 percent for the highest paid non-officers.

2

It bears immediate emphasis that, in calling this Court’s attention to the unaffordability of the Company’s cost structure, United is not blaming any of its employees or their union representatives for United’s current crisis. To the contrary, United could not be more grateful to its employees and their unions’ leadership for their good- faith efforts and unprecedented cooperation in trying to resolve United’s financial dilemma outside of bankruptcy. At this juncture, however, the only conceivable way for United to reorganize into a profitable and vibrant airline capable of providing stable employment will be to reduce its labor and other costs dramatically, in part through changes to work rules that place United at an extraordinary competitive disadvantage. It also bears even further emphasis that, as before, United’s preferred course of action would be to reach consensual agreements outside of the Section 1113 process with all of its unions about the changes that must be made to the Company’s CBAs. To this end, United has already begun discussions with the leadership of its unions and stands ready to negotiate around the clock. It is only if these negotiations prove unsuccessful in achieving a consensual

restructuring that, as a decidedly last choice, United will seek this Court’s assistance pursuant to Section 1113. * * *

Section II of this Brief provides an overview of the immediate crisis that forced United into bankruptcy. Section III chronicles the roots of United’s inability to control its costs. Section IV details how United ultimately collapsed under the weight of an unsustainable cost structure. Section V explains why, as taught by the experiences of carriers that have previously succumbed to bankruptcy, short-term measures to address long-term structural problems at United will no longer suffice. Section VI provides an overview of United’s plan to secure fair

3

and equitable contributions from all of its stakeholders (including its management, suppliers, vendors and lessors as well as its employees) to realign its costs with its revenues and thereby ensure United’s long-term viability in a highly competitive industry. Section VII clarifies that United will not be alone among airline carriers in seeking substantial concessions from unionized employees as the industry heads into 2003. II. UNITED AIR LINES AND ITS CURRENT FINANCIAL CRISIS. A. United’s Operations. Operating since 1926, United Air Lines is the world’s second largest airline. United’s route network spans the United States, serving this country’s major business centers and smaller cities both directly and through hubs in Chicago, Denver, Washington, D.C. (Dulles), Los Angeles and San Francisco. United’s network also serves dozens of smaller communities that would otherwise be left without airline service. In addition, United enjoys a strong share of restricted international routes. In all, United transports approximately 200,000 passengers per day on over 1,765 daily departures to 119 destinatio ns in 26 different countries. 3 The Company is also a long-time contributor to the United States government, having committed 96 wide-body aircraft to the Civil Reserve Aircraft Fleet and providing military and government engine maintenance. 4 In these and many other respects, United serves as a vital component of this nation’s transportation infrastructure and, in particular, plays an indispensable role in maintaining the safety, efficiency, viability and competitiveness of U.S. commercial aviation. B. The Employees of United. United employs approximately 83,000 people worldwide, including

approximately 77,000 employees in the United States and more than 19,000 in Illinois, 5 and also indirectly supports thousands of additional jobs throughout the United States. 6 4 United’s

employees are presently represented by six unions. Approximately 8,600 pilots are represented by the Air Line Pilots Association (“ALPA”). About 20,000 flight attendants are represented by the Association of Flight Attendants (“AFA”). More than 12,000 mechanics and related

employees are represented by District 141-M of the International Association of Machinists (“IAM”). Nearly 25,000 customer service agents, and ramp and store employees are represented by District 141 of the IAM. In addition, about 20 meteorologists are represented by the

Transportation Workers Union (“TWU”), approximately 180 dispatchers are represented by the Professional Airline Flight Control Association (“PAFCA”) and roughly 425 engineers are represented by the Interna tional Federation of Professional and Technical Employees (“IFPTE”). Over the past 76 years, the men and women of United Air Lines have garnered the loyalty of millions of passengers. At last count, 73 percent of United’s customers used the airline as the ir primary carrier. 7 And it is an enormous credit to the Company’s employees that, despite all of the industry’s troubles, United has served its customers better than ever in 2002. In October 2002, United ranked first in on-time arrivals at nearly 90 percent (up from ninth in 2001) and first in fewest flight cancellations. In all, United’s performance in October 2002 was its best ever in all major categories. 8 It is therefore not without irony that today’s filing culminated the worst fifteen months in United’s financial history. United’s tremendous base of assets enabled United for the most part to compete despite its cost structure until 2001, which was already proving to be a tough year for the industry before September 11. 9 But the tragic events of that day exacerbated the Company’s problems in ways that United was unable to overcome.

5

C.

United’s Revenues Have Collapsed. The number of passengers i dropped at unprecedented levels in 2001:

Exhibit 1.

DROP IN INDUSTRY PASSENGERS , 2001.

15%

Percent Change In Revenue Passenger Miles (Year over Previous Year)

1991: Gulf war & U.S. recession (-2.3%)

Jan-Aug 2001 (0.6%)

10%

5%

0%
1980-1981: Oil crisis and U.S. recession (-3.9% & -1.1%)

-5%

Sep 01 – Jul 02 (-12.7%)

-10%

-15% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Jan-Aug 2001 Sep 01 - Jul 02

Notes: Revenue passenger miles for U.S. scheduled carriers. Pa rtial year figures reflect change over same period in the previo us year. Source: Air Transport Association.

The plunge in revenues for 2001 was even more unprecedented, as captured by Exhibit 2. Revenue per Available Seat Mile (“RASM”), the amount of revenue an airline receives per each unit (i.e., seat) of capacity it supplies to the market, ended up dropping by nearly 12 percent in 2001 and is on course to decline by as much as another 20 percent in 2002. 10

The airline industry typically measures volume by “revenue passenger miles” or “RPMs ,” with each RPM signifying a mile flown by a paying customer. For example, a 1,000 mile flight carrying 100 passengers generates 100,000 RPMs. In the same vein, “available seat miles” or “ASMs ” measures the capacity that an airline provides to the market. A 1,000 mile flight with 200 available seats represents 200,000 ASMs.

i

6

Exhibit 2.

CHANGE IN INDUSTRY R EVENUES , 1990 - 2001.

30% Gulf War / Recession 20% 10% YOY % Change in RASM 0% (10)%

Value Pricing Y2K

9/11 Disaster

(20)% (30)% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: ATA and UBS Warburg.

United has been hit the hardest. 11

Revenue has remained low – because

passengers have not returned as hoped, because of lower yields attributable to reduced demand and promotions necessary to entice the flying public to return to the air and because of increasingly formidable competition from low cost carriers like Southwest Airlines, American Trans Air (“ATA”) and newcomer JetBlue. 12

7

Exhibit 3.

UNITED ’S OPERATING LOSSES .

2,000 1,500

United Trailing Four Quarters Operating Income ($M)

1,000 500 0 -500 -1,000 -1,500 -2,000 -2,500 -3,000
2Q00 3Q00

Four Quarters Ending
4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02

Source: U.S. DOT Form 41. Note: Includes grants received in 2001 under the Air Stabilization Act.

United ended up losing $1.4 billion in the second half of 2001 alone and an additional $1.7 billion in the first nine months of this year. 13 Never before has United experienced such a sharp and sustained drop in revenue and profitability. D. United Was Unable to Stop Burning Through Its Cash. As a consequence, United depleted its cash reserves at a rate unlike ever before in its history. United’s operating “cash burn” (i.e., the amount by which operating cash

disbursements exceeds receipts)14 averaged more than $10 million per day over the fourth quarter of 2001. Massive cost-cutting efforts reduced this amount to $7 million per day by March 2002. And during the second quarter of 2002, United was able to reduce its operating cash burn to less than $1 million per day. But with a stalled recovery in July 2002 came a nearly $7 million operating cash burn during the third quarter. In November 2002, the Company’s revenues were higher than expected, but the Company still burned over $5 million a day.

8

Thus, the Company was down to less than $800 million of unrestricted cash on hand as of today’s filing. And United anticipates burning approximately $20 - $22 million of cash per day for the rest of December and approximately $10 - $15 million of cash per day during January 2003. As a result, United could no longer stave off bankruptcy. Absent Chapter 11 protection, United would have been required to repay a $300 million revolver to Kreditanstalt für Wiederaufbau (“KfW”), with the grace period for an additional $575 million payment on airplane-backed securities set to expire on December 12, 2002. Although $195 million of these securities are held by KfW, the remaining $380 million are widely held among the public, making it extraordinarily difficult for United to negotiate an out-of-court restructuring of this debt. Making these $875 million in payments would have reduced United’s cash to unacceptably low levels. III. THE LONG-TERM ROOTS OF UNITED’S FINANCIAL CRISIS. The seeds of United’s inability to strike the right balance between its costs and revenues were planted years ago. Indeed, this issue is one of the principal reasons why United previously faced severe financial difficulties on at least three prior occasions, in 1987, 1990 and 1993. Each time, United was able to stave off a larger restructuring by obtaining temporary and short-term concessions from its unions. As before, management must shoulder a large portion of the blame. Among other things, United is now on its third Chief Executive Officer in the past four years. And, with the benefit of hindsight, the unsuccessful attempt to acquire US Airways in 2000 proved in many respects to have been a divisive distraction from the business that ought to have been at hand. But, disagree as reasonable people might about the reasons that United finds itself in bankruptcy, there is no longer any room for dispute that what United now requires is a permanent fix of the sort that necessitates a reorganization of its enterprise from the bottom up. 9

In the words of the Association of Flight Attendants, the “mature segment of the industry, including United, is vulnerable unless a sustainable balance of revenue and expense is found.”15 A. The Airline Industry During the Regulatory Period. Until 1978, the Civil Aeronautics Board (“CAB”) controlled virtually every aspect of airline economics, determining whether to let new airlines enter the market, what routes existing airlines could fly, and the fares that airlines could charge. 16 Competition from new entrants generally did not exist because the CAB almost invariably refused to permit any new airline to begin operations as a large passenger air carrier. 17 To ensure profitability, the CAB set higher fares on the more frequently traveled routes (precisely the opposite of what would have been dictated by unregulated competition). In the 1970s, for example, the CAB set prices to provide carriers with a twelve percent return if they filled their planes to only fifty- five percent capacity. 18 Through formulas such as these that allowed costs to dictate fares, the CAB in essence permitted the airlines to pass through cost increases to customers.19 This insulation against cost-based competition enabled the airlines to pay employees generous wages and benefits and to agree to inefficient work rules of the sort largely unheard of in other industries. 20 Because the CAB routinely passed on increased labor costs to passengers at the next fare increase, management had little need (or incentive) to draw ha rd lines in negotiations 21 with the large and well-organized unions that represented the vast majority of employees at the major carriers – notably the Air Line Pilots Association (ALPA), the Association of Flight Attendants (AFA), the International Association of Machinists (IAM), and the Transport Workers Union (TWU). 22 The unions engaged in “pattern plus” bargaining with each airline, advancing the increases they had received from their negotiations with the last airline as the measuring stick for additional increases. 23 This leapfrogging further reduced the 10

airlines’ incentive to resist union demands because the companies knew their competitors would undoubtedly accede to even greater demands in the near future. 24 As a result, airline unions “possesse[d] a high degree of relative bargaining power,”25 and “airlines got used to rubberstamping union demands.”26 The upshot was a steady increase in wages and benefits throughout the regulation period to levels well above what unionized employees could have earned outside of the airline industry. ii Although “pattern plus” bargaining kept wage rates among airlines fairly close,27 unionized, “[a]irline workers were among the highest paid in the American industry” at the time deregulation ended. 28 Unions were also able to secure highly-restrictive work rules that required airlines to hire more employees than necessary to run their operations. iii Two of the more paradoxical work rules that came to life during this era remain in place at United today. Minimum pay guarantees require United to pay pilots and flight

attendants a minimum amount each month, regardless of the amount of time the employees actually worked. Vacation overrides enable pilots and flight attendants to stretch out vacations by timing them to overlap with hand-picked, clustered flight schedules (known as “IDs”).29

ii To be sure, airlines did not always agree to all union demands. Strikes were not unheard of in the regulatory era, and a Mutual Aid Pact (which provided struck airlines with a share of the additional profits earned by competitors while the struck airlines stopped operating) enabled Northwest and a few other carriers to resist some of labor’s more far-reaching requests. Michael A. Katz, The American Experience Under the Airline Deregulation Act of 1978 – An Airline Perspective, 6 Hofstra Lab. L. J. 87, 92 (1988); John M. Baitsell, Airline Industrial Relations 342 - 46 (Harvard University 1966). S till, the airlines by and large lacked the incentive to risk disrupting their operations (via “blue flus” or otherwise). Katz, 6 Hofstra Lab. L. J. at 92 - 93.

In his time -honored study of airline industrial relations, John Baitsell summarized this point for pilots, though his observations apply with as much force to all airline employee groups: “In the area of scheduling the strongest indication of a relative imbalance of power is the continual loss of pilot utilization that has been suffered by airline management. Work rules have proliferated to the point where airlines are unable to obtain a reasonable amount of flying from each pilot.” Baitsell, Airlines Industrial Relations at 349.

iii

11

Overrides can turn a “two-week vacation” into a month away from work, at full pay and without any penalty, as illustrated by the following December schedule for a United 747-400 captain:

Sun OFF 1 OFF ID VAC ID 8 15 22 29

Mon OFF 2 OFF ID VAC VAC ID 9 16 23 30

Tues OFF 3 OFF VAC VAC OFF 10 17 24 31

Wed OFF 4 ID VAC ID VAC 11 18 25

Thurs OFF 5 ID VAC ID 12 19 26

Fri OFF ID VAC ID

6 13 20 27

Sat OFF ID VAC ID

7 14 21 28

In this real- world example, the pilot scheduled a vacation (“VAC”) from December 16 until December 25. The pilot then bid for IDs from December 11 - 16 and December 25 - 30. The pilot was not scheduled to work from December 1 - 10 or on December 31. By arranging for the last and first days of his two IDs to overlap with the first and last days of his scheduled vacation (on days 16 and 25), the pilot was able to take off all 12 days in the scheduled IDs (i.e., days 11 15 and 26 - 30). This creative scheduling enabled the pilot to parlay ten days of vacation time into an entire month off from work with full pay. B. Deregulation and Its Effects on the Airline Industry and United Air Lines. The proponents of deregulation believed that, if freed from the shackles of government, the airline industry would become more competitive, provide a better range of price and service options and become more efficient. The swift passage of the Airline Deregulation Act of 1978 thrust airlines into a competitive hotbed, freeing carriers to set fares and establish 12

flight schedules based on market forces. But airlines also suddenly found themselves unable to count on “cover” from regulators to pass on increased costs to consumers. 30 Instead, airlines were forced almost overnight “to make the transition to an environment in which financial performance was driven by cost, price, and service.”31 Nearly 200 new airlines flooded into the marketplace, 32 with upstarts such as People’s Express offering bargain-basement fares that enabled more people to fly than ever before. 33 These new competitive pressures “forced the airlines to come up with a more efficient way of using their fleets in order to compete for customers on the basis of low cost, convenient, and attractive service.”34 The larger carriers abandoned point-to-point service in favor of “huband-spoke” networks. 35 The words “hub” and “spoke” create a vivid image of how this system works. A hub is a central airport through which flights are routed, and spokes are the routes that planes fly out of the hub airport. 36 The resulting network offered “greater frequency of service with its fleet of aircraft than had been possible with point-to-point service.”37 United capitalized on its size, hub-and-spoke model and customer loyalty programs to fend off competition from upstart airlines and outcompete long-standing rivals who failed to adapt to the new environment. 38 But creative marketing and changing route structures alone were hardly sufficient. United and its competitors soon found it necessary to engage in suicidal fare wars. Airlines slashed their on-board amenities as they sought to increase (or preserve) market share by filling their planes at rock-bottom prices. 39 But throughout all of these fundamental transformations of the industry, one vestige of the regulatory era remained: Unions retained disproportionate bargaining power to maintain regulation-sized labor costs, together with the ability to impose massive losses on carriers if their demands were not met.40 In many respects, deregulation’s expansion of the

13

industry strengthened the unions’ bargaining power. 41 Open entry into markets and the increased overlap among competing airline route systems meant that a strike would likely be tantamount to a death sentence. 42 In short, “aviation became deregulated only on one side: free competition for revenue; costs largely immovable.”43 Pre-deregulation carriers struggled mightily in what

ultimately proved to be a losing battle against cost structures that their shrinking yields could not sustain. 44 Exhibit 4. INDUSTRY R EVENUES VERSUS COSTS , 1984 - 2002. iv
12.0 11.0 10.0

Cents/ASM

9.0 8.0 7.0

6.0 5.0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Q1-Q3

RASM

CASM

Sources: U.S. DOT Form 41, 2002 airline earnings reports and 10-Qs. Note: Carriers include American, United, Continental, Northwest, Delta, America West, and US Airways. Includes grants received in 2001 under the Air Stabilization Act.

C.

The Struggles of the Industry from 1982 to 2000. Braniff Airways became the first casualty of deregulation in May 1982. v

Continental Airlines filed for bankruptcy in September 1983, but kept operating as it abrogated

Like revenues, which are generally measured according to RASMs, costs are typically measured and compared by “cost per available seat mile,” or “CASM.” CASMs are ordinarily measured in cents and are computed as total operating costs divided by an airline’s ASMs (available seat miles). Braniff resumed operations a year later with dramatically reduced labor costs agreed to by its unions. But after eking out meager profits for a few years, Braniff again succumbed to bankruptcy in 1989. The airline was acquired out of bankruptcy and operated as a charter service for several years until shutting down for good in 1992.
v

iv

14

its labor contracts and endured a prolonged strike. Western Airlines and Republic Airlines both faced financial crises which they ultimately resolved by merging with stronger partners (Delta and Northwest, respectively). By 1992, the industry had suffered more than 150

bankruptcies, witnessed 50 mergers and, in the process, had “lost all the profit it had made since the Wright Brothers flight at Kitty Hawk, plus $1.5 billion more.” 45 Virtually every airline hailing from the days of regulation has at some point found it necessary to “cut costs in order to cut fares or say good-bye to a franchise that had taken decades to build.”46 But controlling labor costs has been anything but easy “in an industry with substantial union strength and a labor relations environment characterized neither by cooperation nor trust.”47 If anything, the industry consolidation bred by deregulation48 left carriers even more vulnerable to crippling strikes. A smaller airline with several hundred pilots or mechanics might be able to find enough replacements to continue operations. But a large airline like United cannot even begin to replace more than eight thousand pilots, and thus has little choice but to shut down during a strike, incurring millions of dollars of fixed costs every day without any offsetting revenues. Indeed, on the one occasion that United did try to withstand a pilot strike in 1985, the results were disastrous. vi 1. Airlines Have Tried Short -Term Initiatives to Curb Costs.

Unable by and large to prevail at the bargaining table, airlines have sought to control the cost of labor through means less conventional than simple wage reductions or work
vi United’s pilots struck in response to the Company’s desire to implement B -scale wages like those at American. The strike cost the Company millions of dollars in operating revenue and cemented American’s position as a lasting rival at United’s O’Hare hub. See Thomas Petzinger, Jr., Hard Landing 236-38 (Random House 1995). As United’s marketing chief said at the time, the strike “was the worst thing to happen to the company in 50 years . . . . Before the strike we were the greatest airline in the country, maybe the world. Afterward, we weren’t.” Id. at 238; see also James Ott & Raymond E. Neidl, Airline Odyssey: The Airline Industry’s Turbulent Flight into the Future 24-25 (McGraw-Hill 1995) (discussing the bitter consequences of the 1985 pilot’s strike for United).

15

rule modifications. 49 For example, in the early 1980s, American Airlines implemented a threetier wage structure pursuant to which new employees on the “B-scale” and “C-scale”50 were paid lower salaries than incumbent members of the union. Eastern Airlines instituted a “Variable Earnings Plan” (or “VEP”) pursuant to which the airline’s employees agreed to condition a percentage of their salaries on the airline’s profitability. Eastern’s unions agreed that, if

Eastern’s earnings fell below a certain benchmark, members would receive 96.5 percent of their full pay. 51 If profits exceeded the benchmark, members would receive 103.5 percent. 52 And Pan Am paid for its “ninety- niner” fare to anywhere in the United States by imposing an across-theboard 10% wage cut, with a promise to “snap back” the unions’ pay three years later. 53 Yet United arguably broke the most ground by creating the largest employeeowned company in the United States in 1994. ALPA, the IAM and non-union employees were awarded 55 percent ownership of United’s common stock, along with three out of twelve board seats, in exchange for a six- year agreement involving pay-cuts and work rule concessions.54 By vesting the employees with a new stake as the largest owner of United, the ESOP sought to align the interests of United’s pilots, mechanics, and other employees with those of the Company and thereby ease the traditionally adversarial nature of the management- labor relationship. None of these measures proved to have long-term success. American’s “B-scale” and “C-scale” programs collapsed under the resentment of low-paid newcomers over receiving unequal pay for equal work. 55 At Eastern, a continuing deterioration in the airline’s financial performance fueled an antagonism between management and labor that ultimately led to the carrier’s downfall. And although United’s ESOP yielded short-term cost reductions, it was back to “leapfrogging as usual” as soon as the ALPA and IAM contracts became amendable in 2000.

16

2.

The Current Industry Paradigm Has Forced Numerous Airlines Out of the Industry.

Even before the tragic events of September 11, vicissitudes in the economy caused those airlines with insufficient financial cushions to absorb steadily increasing labor costs to vanish from the industry (some temporarily, others permanently). 56 Nearly two hundred

airlines have filed for bankruptcy or otherwise exited the industry since Congress passed the Deregulation Act of 1978. 57 Among the casualties were several stalwarts of the airline industry. For example, starting in 1980, Pan Am, desperately needing to raise cash, sold off its most valuable assets at fire-sale prices, including its landmark building in New York, the Intercontinental Hotel chain, and its prized signature routes to the Pacific, London, and Latin America. 58 This series of cash infusions enabled Pan Am to limp through another decade until chronic losses ultimately forced a household name out of business. 59 Similarly, after suffering a net loss of more than $1 billion from 1980 through 1987,60 Eastern lost over $355 million in 1988 and another $225 million in the first quarter of 1989.61 Eastern’s “above- industry labor costs contributed substantially to its deteriorating

financial condition.”62 After a devastating strike by Eastern’s mechanics that was honored by the airline’s pilots, Eastern filed for Chapter 11 in March 1989. 63 Continued labor unrest ultimately forced Eastern to shut down its operations for good in January 1991. 64 Trans World Airlines (“TWA”) likewise suffered through years of losses following deregulation. 65 Aided by employee concessions and a strong economy, TWA turned its financial condition around in the late 1980s. 66 But losses from the Gulf War required further concessions. This time, the unions refused, and “[q]uick fix solutions such as selling off

profitable routes, properties, and equipment, as well as proposed mergers were not enough to keep TWA out of Bankruptcy Court.”67 In January 1992, TWA filed what would prove to be the 17

first of three petitions for bankruptcy. In 2001, on the verge of liquidation, TWA was acquired by American Airlines. Continental is the only pre-deregulation airline to emerge from bankruptcy successfully. In the early years of deregulation, the airline suffered losses exceeding $500 million that were caused primarily by Continental’s inability to compete with new entrants coming into the airline industry because its labor costs were significantly higher than the new entrants. 68 In September 1983, Continental filed its first petition for bankruptcy. Continental imposed “‘emergency work rules’ which reduced the salary and benefit packages of pilots by nearly 50%,”69 terminated its existing pension plans and rejected its collective bargaining agreements (albeit under Section 365 instead of Section 1113, which was not to be enacted until a year later). 70 After exiting bankruptcy in June 1986, Continental again encountered serious financial problems, and, in December 1990, filed a second petition for reorganization. 71 This time around, Continental reached an agreement with its pilots on “substantial reductions in the pilots’ salaries and benefits.”72 These concessions created a “rippling effect” that “engendered similar cost savings and concessions from Continental’s other employee groups.”73 Continental’s mechanics agreed to an “indefinite” deferral of a scheduled pay increase, its flight attendants agreed to a “pay freeze” and similar deferral of pay increases, and management and other employees agreed to further concessions.74 Continental thus emerged from its second bankruptcy in April 1993 with the lowest cost structure of any major network carrie r in the industry. In fact, United estimates that, with Continental’s labor cost structure, United’s annual labor costs would be reduced by approximately $2 billion (or roughly 28 percent). 75

18

To borrow a phrase from Tom Plaskett, the former President of Pan Am, it is a “national embarrassment” that the only major network carrier to have succeeded in containing its labor costs (at least until the next rounds of “leapfrog bargaining”) was able to do so only by surviving two bankruptcies and a long strike. Indeed, Plaskett proved prophetic when he

lamented in 1991 that the circumstances leading to Pan Am’s demise were not something unique to Pan Am. Indeed, the result was the culmination of a long process and series of events that began in 1978. That’s when the drama really began. That’s when the old script was thrown out the window and all of us in the airline industry were pushed out on stage together and told by our government to improvise. Now, more than a decade later . . . believe me, the show is far from over. . . . Whether you blame it on deregulation and excessive competition, recession, poor management, recalcitrant unions, or just plain bad luck, the reality is that the U.S. airline industry is in terrible trouble.”76 A decade later still, the “show” remains “far from over.” IV. UNITED ULTIMATELY STRUCTURE. PROVED UNABLE TO SUSTAIN ITS COST

2000 capped several of the industry’s best years, with the major carriers earning more than $6.5 billion. 77 It was telling, however, that these profits reflected a net income margin of only 2.3 percent for the industry and just 1.9 percent for United, 78 as compared to an average net income margin of 8.5 percent for the 30 Dow Jones Industrials. vii In 2001, as industry revenues plunged by nearly 12 percent, 79 the major airlines lost $ 7.7 billion. This year, the major network carriers are on pace to lose more than $8 billion. 80 The “net losses of the Big 3
vii The 30 Dow Jones Industrials and their net income margins for 2000 were Alcoa (6.5%), American Express (11.9%), AT&T (4.7%), Boeing (4.1%), Caterpillar (5.2%), Citigroup (12.1%), Coca-Cola (10.6%), DuPont (7.9%), Eastman Kodak (10.1%), Exxon Mobil (6.9%), General Electric (9.8%), General Motors (2.4%), HewlettPackard (7.3%), Home Depot (5.6%), Honeywell (6.6%), Intel (31.2%), IBM (9.2%), J.P. Morgan Chase (17.4%), Johnson & Johnson ( 16.6%), McDonald’s (13.9%), Merck (16.9%), Microsoft (41.0%), 3M (2.4%), Phillip Morris (10.6%), Procter & Gamble (8.9%), SBC Communications (15.5%), United Technologies (6.8%), Wal-Mart (3.3%) and Walt Disney (4.8%).

19

(American, United, and Delta) [have] reached depths – in both absolute and relative terms – heretofore seen only in carriers destined to fail (Pan Am, in its final years, for example).”81 A. United Reduced All of the Expenses That Were Within Its Control. When its revenues began to collapse, United started cutting costs in every aspect of its business except for safety. 82 United vastly downsized its operations by reducing the

number of aircraft, slashing expenditures and furloughing roughly 20 percent of its employees.83 United also took a series of ever-escalating actions to try to staunch its financial bleeding: • September 2001 – United cut daily flights. Prior to September 11, United operated 2,400 daily flights. Shortly following the terrorist attacks, United decreased this number by nearly 25 percent, down to 1,850 flights per day. 84 September 19, 2001 – United downsized its workforce. On September 19, 2001, United announced furloughs of approximately 20,000 employees across all work groups in the company, including over 1,500 non- union employees. The Company’s workforce reduction resulted in an overall savings of $374 million in salaries and related costs for the first six months of 2002, compared to the first six months of 2001. United also reduced its number of management and salaried employees by 23 percent. 85 September 27, 2001 – United suspended stock dividends. dividends on its common stock. 86 United suspended



• • •

October 15, 2001 – United again cut its number of daily flights. United cut its flight schedule even further, down to 1,654 daily flights. 87 October 31, 2001 – United retired aircraft. United grounded a total of 90 aircraft as part of the September capacity cuts, including the last of its Boeing 727-200 fleet and its entire 737-200 fleet. These were the oldest aircraft in United’s fleet and the most costly to operate and maintain. United also grounded 10 of its largest aircraft, the B747-400.88 October 31, 2001 – United turned to United Express. United transitioned six cities previously served by United’s mainline jet service to its less costly United Express regional jet service. 89 November 16, 2001 – United reduced new aircraft deliveries. During November 2001, United reduced planned new aircraft deliveries for 2002 and 2003 and deferred deliveries of 43 out of 67 scheduled new aircraft. In 2003, United will accept none of the 18 deliveries originally planned. 90





20



Fourth Quarter, 2001 – United suspended airport construction plans. United dropped or suspended a number of major airport construction plans. These projects included over $1 billion for a new terminal at Dulles Airport, $313 million for a new terminal at JFK Airport in New York City and $51 million for a stations operations center at O’Hare airport. 91 Fourth Quarter, 2001 – United obtained concessions from its vendors and suppliers. United negotiated concessions from its vendors and suppliers, who provide aircraft maintenance and parts, catering, and various services. United saved $80 million in price reductions or avoided price increases over 2001 and 2002, and will save more than $40 million annually from 2003 to 2005. United also saved approximately $320 million over 2001 and 2002 by canceling or reducing the volume of orders. 92 January 3, 2002 – United closed reservation centers. In early January 2002, United closed five reservations centers, saving an estimated $30 million annually. 93 March 2002 – United eliminated base commissions on ticket sales. In March 2002, United eliminated base commissions on tickets, a percentage fee that travel agents received on the sale of every ticket. The elimination of base commissions will save approximately $200 million per year. 94 April 1, 2002 – United suspended wage increases for salaried and management employees. In April 2002, United cancelled a scheduled pay increase for its salaried and management employees. 95 October 21, 2002 – United closed more reservation centers and transitioned more stations to United Express. United announced that it will close three more reservation centers on January 4, 2002. United also announced that it will convert five more stations to United Express. United also closed a line at its Indianapolis maintenance center. These measures will generate an expected savings of $100 million per year. 96 October 23, 2002 – United closed international stations and shifted to smaller aircraft on some international routes. United announced that it will close four additional international stations in January 2003. United will also begin using smaller aircraft on a number of its international routes. These measures are expected to save $120 million annually. 97 November 8, 2002 – Additional Furloughs. The Company announced that it will furlough an additional 350 pilots and 2,700 flight attendants beginning in early 2003.98















21

B.

Increasing Labor Costs. Meanwhile, however, the Company’s labor costs steadily increased at the most

rapid pace in the industry from 1998 - 2001: Exhibit 5. INCREASE IN LABOR COSTS PER AVAILABLE S EAT M ILE, 1998 - 2001.
35%

Change in Labor Cost per ASM: 1998-2001

30%
26.0%

25% 20% 15% 10%

23.0%

22.0%

13.0%

12.0%

5.0%

5.0%

5% 0% American United Delta Continental US Airways Southwest Northwest

Source: U.S. DOT Form 41

1.

ALPA.

United’s 8,600 pilots are represented by the Air Line Pilots Association. The largest portion of the increase in United’s labor costs from 1998-2001 is attributable to the fouryear pilot contract to which the Company agreed in October 2000, when the revenue picture remained bright. This contract immediately increased pilot wages (retroactive to the amendable date of April 12, 2000) by a weighted average of 23 percent, with two subsequent weighted average annual increases to date of 4.7 percent. 99 2. The IAM.

United’s largest union is the International Association of Machinists. IAM 141 represents nearly 25,000 of United’s customer service agents and ramp and store employees, 22

while IAM 141-M represents more than 12,000 mechanics and related employees. The IAM agreements were open for re-negotiation at the time that September 11 struck. Although United resisted huge increases, the IAM insisted upon “leveling the playing field” with the pilots by securing its own industry- leading contracts before there could be any discussion of concessions. In December 2001, President Bush convened a Presidential Emergency Board (“PEB”) to forestall a strike. During these proceedings, the IAM’s expert witness testified that “there is no innate right for any corporation to stay in business if it can’t afford to pay all of its factors of production at the rates that the market dictates.”100 He went on to declare that it will be the employees who have the most to gain and the most to risk with . . . the continuity of this company . . . . The public’s interest will be protected, because there’s sufficient capacity in this industry to absorb United – excess capacity, I should say. And there’s certainly ample precedent throughout the history of the airline and railroad industry to indicate that the public interest in the world will not come to an end if there is a major consolidation. But the employees’ interests must prevail. 101 In January 2002, United reluctantly acceded to the PEB’s recommendation to increase the wages of its IAM-represented employees substantially, but on the understanding that the parties would then negotiate concessions from those higher rates. In March 2002, United agreed to a 25 percent base pay increase for mechanics and an 18 percent increase for utility employees. 102 Two months later, United’s IAM-represented public contact and ramp and store employees received a 23 percent base pay increase. 103 A substantial portion of these increases was retroactive to July 12, 2000, the amendable date of the IAM contracts. Payment of the retroactive increases is scheduled to be made in 8 quarterly installments beginning on December 15, 2002 and concluding on October 15, 2004.

23

3.

The AFA.

United’s 20,000 flight attendants are represented by the Association of Flight Attendants. In March 2002, United’s flight attendants received a 2 percent increase in base pay as scheduled in their collective bargaining agreement and an additional 5.49 percent increase through arbitration. 104 4. United Has Struggled With the Highest Labor Costs in the Industry.

As a result, United paid the highest labor costs (as measured by percentage of operating revenue) in the industry in 2001. Exhibit 6. LABOR COST AS A PERCENTAGE O F OPERATING R EVENUE, 2001.
Labor Cost as % of Operating Revenue
60% 48.5% 45.5% 44.6% 43.9% 42.7% 35.7% 35.1% 28.7% 26.2% 22.9% 20%

50%

40%

30%

10%

0% United US Airways American Delta Northwest Southwest Continental JetBlue AirTran Frontier

Source: U.S. DOT Form 41.

And because these cost increases took hold in the midst of the most dramatic revenue decline that United has confronted in its history, labor costs as a percentage of revenue have now reached a historical high at United:

24

Exhibit 7.

UNITED ’S LABOR COSTS AS A PROPORTION OF TOTAL OPERATING R EVENUE.
50%
48.5%

Labor Costs as % of Operating Revenue

45%

40%
36.1% 36.5% 36.5% 33.7% 35.5% 36.5% 34.9% 37.3%

38.0% 37.7%

35%

33.5%

30%

25%

20% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: U.S. DOT Form 41.

C.

United Was Unable to Access the Capital Markets. The Company’s problems biggest financial setback since September 11 may have

been the capital markets’ loss of confidence in United, as evidenced by the Company’s inability to access financing on reasonable terms outside of bankruptcy. Although ten other airlines were able to access the public capital markets to secure over $8 billion of financing even in the wake of September 11, United was shut out. And, despite having approached some 25 banks (ranging from JP Morgan to Northern Trust) and other potential lenders (such as Boeing and Oasis Leasing), United was rebuffed at nearly every turn. 105 Since September 11, the major credit agencies have downgraded United more than any of its competitors by a total of 15 notches to “junk.”106 During much of the period since September 11, Standard & Poors rated United as a “CCC” (as compared to a “BB-” for American, five notches ahead of United, and an “A” for Southwest, thirteen notches ahead of United), and Moody’s rated United at “Caa3” (as compared to a “B1” for American, five notches ahead of United, and a “Baa1” for Southwest, eleven notches ahead of the Company). 107 25

The degree to which investors have harbored reservations about risking money on United is most forcefully captured by the investment community’s flight from the prederegulation network carriers. In May 1999, Southwest’s market capitalization was only 28 percent of the combined market capitalization of the major network carriers. United stood in third place. Exhibit 8. M ARKET CAPITALIZATION OF M AJOR CARRIERS IN M AY 1999.
45,000 40,000
Alaska $1,088 Continental $2,339

$39,708
Northwest $2,702

America West $904

Market Capitalization of Airlines ($M)

35,000 30,000 25,000 20,000 15,000 10,000

US Airways $4,245

Delta $8,193

United $8,374

$10,785
American $11,864

5,000
Frontier $270

$577

AirTran $307

0 Southwest Other Majors Other Low Cost Carriers
Note: Figures are as of market closing on 5/31/1999, with the exception of Frontier Airlines (market closing date of 6/18/1999). Sources: Global Airline Alliances, Merrill Lynch, 6/2/1999; Yahoo Finance; Frontier Airlines 10- K.

As of mid-November 2002, however, Southwest’s market capitalization has grown to more than double that of the major network carriers’ combined. Equally striking is how the market capitalization of newcomer JetBlue exceeds that of all the major network carriers and is six times bigger than United’s. United has fallen to ninth place, behind all of the other network carriers.

26

Exhibit 9.

M ARKET CAPITALIZATION OF M AJOR CARRIERS IN NOVEMBER 2002.
13,000

Market Capitalization of Airlines ($M)

12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

$11,550

America West $77M Continental $540M Northwest $616M

$4,447

US Airways $40M United $244M Alaska $588M American $998M

$2,005

Frontier $178M AirTran $292M JetBlue $1,535M

Delta $1,344M

Southwest
Note: Figures are as of market closing on 11/12/2002.

Other Majors

Other Low Cost Carriers

Unable to tap into new sources of capital, United exhausted all available sources of liquidity: • • • • • United tapped out all of its credit lines, drawing down over one billion dollars; the Company received grants totaling $782 million from the ATSB after September 11, 2001; United received $590 million in tax refunds; the Company sold all of its shares in Cendant Corporation, raising $330 million; during the first quarter of 2002, United closed on a private debt financing that raised $250 million on prohibitive terms that reflected the Company’s poor credit rating; and during the third quarter of 2002, United engaged in a sale- leaseback transaction that raised approximately $72 million.



As United burned through this $3 billion of additional capital, it became apparent that United would require still additional financing.

27

D.

The Air Transportation Stabilization Board. United made a final attempt to access the capital markets and avoid bankruptcy by

applying for loan guarantees from the Air Transportation Stabilization Board (“ATSB”), a new agency created by the federal government after September 11, 2001 to provide loan guarantees to airlines that could provide a “reasonable assurance” of being able to repay the loan. 108 1. The Economic Recovery Plan.

Of course, doubts about precisely this issue were the very reason private lenders and the capital markets refused to extend United financing in the first place. To convince the ATSB that it could repay the proposed loan, United needed to cut capacity, increase revenue, and reduce its labor and non- labor costs. To this end, in the Spring of 2002, amidst what seemed to be a rapidly- improving economic environment, the Company presented each union with an Economic Recovery Plan (“ERP”) proposing to reduce wages immediately by between five and ten percent, with “snap backs” to contract rates over the next three years. United’s initial

application to the ATSB, submitted on June 24, incorporated these proposed wage reductions. With few exceptions, however, the unions opposed the ERP. ALPA’s Master Executive Council (“MEC,” the group that heads ALPA for a particular airline) agreed to submit the ERP to its membership. 109 The AFA resolved to reject the ERP and “send a clear message to both UAL and the UAL flight attendants that the AFA United MEC will not engage in concessionary bargaining with United Air Lines.”110 The IAM also refused to participate. 111 More bad news soon followed. The ATSB signaled that United’s proposed

business plan and labor cost reductions were insufficient in part because what had appeared to be an industry recovery as of early 2002 was stalling. By July, United’s passenger unit revenue had dropped 10 percent lower than the Company’s earlier forecasts, causing a $1 billion decrease in the Company’s projected passenger revenues for the second half of 2002. 28

2.

The Enhanced Recovery Plan.

These developments prompted United to develop a far more comprehensive recovery plan, known as the Enhanced Recovery Plan. Based on comments from the ATSB staff, United determined that it would require approximately $2.5 billion in annual cost reductions, with $1.5 billion of this amount having to come from labor. The Company presented its proposal for $9 billion in total labor cost reductions over 6 years to the unions on August 28,112 and former CEO Jack Creighton set a deadline of September 15 to reach new labor agreements. Acknowledging the depth of United’s economic crisis, 113 the Company’s unions formed a “Union Coalition” to develop a new plan that they believed would enable the Company to obtain financing. 114 On September 25, 2002, the Coalition offered a plan to save $5 billion over 5 years – $500 million a year less than United had requested. 115 United bargained for additional concessions, but without success. With large debt repayments coming due in less than two months, 116 United needed concrete agreements in place right away to persuade the ATSB to approve its application. For this reason, United reluctantly agreed to $5.8 billion in labor cost reductions that would be spread over 5 and one-half years – again, some $500 million per year less than United had originally sought. Of this total, $1.4 billion was again attributable to salaried employees and management, who were slotted for pay cuts of 2.8 - 10.7 percent and to forego future increases. 117 Proposed labor cost reductions were not the only elements of United’s new business plan. United also proposed to reduce capacity in 2003 by 6 percent as compared to 2002 and defer deliveries of 25 aircraft scheduled for 2004 and 2005. This effort to rightsize capacity resulted in an estimated $1.2 billion in profit improvements over the duration of the business plan. (At the same time, the resulting furloughs of 6,000 employees reduced the total 29

savings agreed to by United’s employees from $5.8 billion to $5.2 billion.) Moreover, a wideranging series of revenue enhancements and cost savings in areas other than labor were to shore up United’s bottom line by $7.7 billion. All told, over the next five and a half years, United’s proposed business plan was to improve the Company’s financial performance by $14.1 billion from 2002 - 2008. The plan was premised on a robust recovery of revenues by the industry. As its base case, United projected 9.3 to 9.7 percent annual growth from 2003-2005 in revenue per available seat mile. After several private lenders declined to loan any money to United based on this business plan, United updated its application to the ATSB, pending the approval of the Coalition’s proposal by the membership of the unions. This application represented United’s last shot to avoid bankruptcy. 3. United’s Unions Voted in Favor of the Coalition’s Proposal.

The meteorologists represented by the Transport Union Workers were the first to ratify the Coalition proposal on November 10, 2002. The pilots followed suit on November 18, 2002. The ramp, gate and customer service agents of IAM 141 signed on to the Coalition framework on November 28, 2002. On the same day, however, the mechanics of IAM 141-M appeared to deal a blow to United’s ATSB application by narrowly rejecting the Coalition’s proposal. Nevertheless, the flight attendants ratified the Enhanced Recovery Plan on November 30, 2002. And, based on their continued commitment to United’s future, the members of IAM 141-M were scheduled to vote again on a slightly- modified proposal on December 5, 2002.

30

4.

The ATSB Decides Not to Approve United’s Application.

On December 4, 2002, however, the ATSB voted not to approve United’s proposal. 118 The ATSB flatly declared that United’s proposal had fallen short in trying to

address the fundamental challenges confronting United: [The] business plan does not position the company to meet the challenges of the current airline industry environment and to achieve long-term financial stability. The Board believes that, even if the company were to receive the proceeds of a guaranteed loan, there is a high probability that United would face another liquidity crisis within the next few years.119 The ATSB also faulted United’s business plan for being “predicated upon a significant near-term rebound in revenue.”120 The ATSB observed that, in addition to being out of step with industry and analyst forecasts, United’s revenue forecast “does not make sufficient allowance for the likely effects of continued expansion by low-cost carriers in United’s markets as well as other potential structural changes affecting industry revenue.”121 The ATSB went on to note that, even under “more reasonable revenue forecasts,” United would not be able to “support [its] cost structure as presented in the business plan:” 122 The Board notes that even with the benefit of United’s proposed cost reduction initiatives, United would remain among the highest cost carriers in the industry. If competitors are successful in achieving additional cost savings, United’s relative cost position could weaken further. 123 The ATSB’s message was loud and clear: United cannot return to profitability unless the Company joins forces with its employees and other stakeholders to revamp United’s cost structure and business model.

31

E.

United’s Access to Its Proposed DIP Financing Is Conditioned on Substantial Cost Reductions That Can Be Achieved Only if United’s Employees Agree to Substantial Concessions. Because of its inability to access the capital markets and the uncertainty about the

ATSB application, United was forced to begin exploring options for obtaining a Debtor in Possession (“DIP) financing facility in connection with a Chapter 11 filing. 1. The DIP Negotiations.

To this end, United began preliminary negotiations with GE Capital Corporation (“GECC”), JP Morgan Securities, Inc. (“JP Morgan”), and Citigroup in late September, 2002.124 In consultation with their outside financial advisor, Rothschild Inc., United decided to initiate discussions with these particular lenders (and subsequently Bank One, NA (“Bank One”) and the CIT Group) because these lenders each possessed significant expertise in Debtor in Possession Financing. 125 Meetings with the potential debtor in possession lenders about DIP financing continued through early October, 2002. During this time, United continued its efforts to obtain out-of-court financing from these same lenders. By early October it became clear that these lenders, like all the other lenders contacted by United, had no interest in making any out-of-court loans to United. 126 On October 15, 2002, United received a draft term sheet from GECC for a proposed $2 billion debtor in possession loan. After receiving GECC’s proposal, United

intensified their negotiations with JP Morgan and Citigroup in an effort to obtain the best possible loan terms. Shortly thereafter, United began negotiations in earnest, on a parallel track, with Bank One. 127 Bank One’s status as a potential lender differed from the others in one critical aspect. Bank One’s affiliate, First USA Bank, N.A. (“First USA”), is a party to a contract with 32

UAL Loyalty Services, Inc. (“ULS”), whereby First USA issues co-branded credit cards with United that allow cardholders to accrue mileage credit for travel awards redeemable through the Mileage Plus program for purchases made with the credit cards (the “First USA Agreement ”). Pursuant to the First USA Agreement, First USA buys Mileage Plus miles from ULS that are transferred to cardholders’ Mileage Plus accounts when purchases are made on the cardholders’ First USA/United credit cards. The First USA Agreement provides ULS with a tremendous source of revenue. Because of the existence of this unique collateral, Bank One was willing to provide a larger initial debtor in possession loan than the other lenders. 128 By early November 2002, United was engaged in extensive and ongoing negotiations with JP Morgan/Citigroup, and negotiations with Bank One were beginning to intensify. In mid-November, United considered a revised proposal from GECC, so as to

continue their efforts to obtain the best possible loan terms. Given United’s projected cash burn rate over the following several months, United and its financial advisers determined that the Company needed immediate access to an $800 million facility and the potential to access an additional several hundred million down the road. Unfortunately, no single lender was willing or able to lend the necessary amount of money to United on any terms. Consequently, it became apparent that a loan of sufficient size could only be obtained through a financing structure that included all of the lenders being considered. Accordingly, United began negotiations with all four lenders (and then subsequently the CIT Group) to arrange a multi- lender debtor in possession financing facility or facilities. 129 Throughout the negotiation process, the lenders questioned the achievability of the Debtors’ revenue projections. Like the ATSB, the lenders considered the Debtors’ internal financial projections to be aggressive, in light of the current revenue environment. The lenders’

33

collective reservations about the Debtor’s financial projections further necessitated a multilender (or “club”) facility, whereby each lender would underwrite a portion of the loan, thereby spreading the risk among the lenders. 130 In addition to questioning United’s revenue projections, the DIP lenders also demanded significant additional cost concessions. The business plans upon which United’s proposed DIP financing terms ultimately were based contain substantial cost reduction initiatives far beyond those proposed to the ATSB. Indeed, absent United’s proposed significant additional cost reductions, the DIP lenders would not have agreed in the first instance to provide the DIP financing to United. But the DIP lenders did not simply take United’s word that the additional cost savings would be achieved. Instead, as explained in more detail below, they erected

stringent financial covenants that require United to achieve the promised cost savings. If United fails to do so, it will violate the DIP covenants and be subject to a default on the DIP loan. Consequently, in order to maintain access the DIP facility (and ultimately to survive), United must achieve these significant additional cost savings. 2. The DIP Facilities.

After several weeks of intense, arms- length negotiations that included numerous meetings among representatives of United and the various potential lenders, United successfully negotiated two separate DIP facilities that met the Company’s projected short- and long-term capital needs. The DIP lenders committed to making the loans on the morning of December 8, 2002 and definitive term sheets reflecting the material terms of the facilities were agreed to several hours later. 131 The first facility is a stand-alone $300 million amortizing term loan issued by Bank One, secured by, among other things, the revenue from the First USA Agreement (as amended) (the “Bank One DIP”). This $300 million is immediately available to United upon the 34

expiration without an appeal of the ten-day appeal period pursuant to Bankruptcy Rule 8002(a) following United’s assumption of the First USA Agreement. Bank One demanded that this loan be secured by the revenue stream from the First USA Agreement and that, as a condition to loan funding, that ULS assume the First USA Agreement. 132 The second facility is a $1.2 billion loan from Bank One, JP Morgan, Citigroup, and the CIT Group (the “Club DIP”). This facility makes available $500 million of initial capital at the same time as the Bank One DIP, with the remaining $700 million becoming available upon United’s achieving a specified level of EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent), as well as some additional cost reductions. 133 3. The DIP Covenants.

As one might expect in view of the size of the DIP loan and the rate at which United has been burning cash, the DIP lenders have taken numerous steps to protect their interests. As is customary with DIP financings, the DIP lenders demanded much of the

Company’s unsecured assets as collateral, including aircraft, spare parts, international route authorities, and certain airport slots. But this collateral package, which was essentially the same package offered by United to the ATSB, was not enough. 134 The DIP lenders expressed skepticism about United’s business plan. In their view, regardless of the size of the DIP loan, United’s cost structure would preclude the Company from achieving profitability. Based on this feedback, United went back to the DIP lenders with a more conservative business plan that projected substantially less revenue growth. Based on the revised plan, the lenders ultimately agreed to provide DIP financing for United. But before doing so, the lenders insisted on significant loan covenants. 135 If United fails to achieve the financial targets (subject to a relatively small margin of error) in the business plan upon which the DIP loans were based, United will breach the 35

covenants and face a possible default on the loans.

A default would allow the lenders to

foreclose on the collateral, which in turn would likely spell the end for United. Consequently, United will need to achieve significant cost savings within the first few months of the bankruptcy process to avoid defaulting on the DIP loans. Without substantial labor savings, United will not be able to meet this threshold. In short, absent significant cost reductions in the immediate future, United will not be able to access the capital that is required for a successful reorganization. 136 V. UNITED MUST RISE TO THE CHALLENGES OF A FUNDAMENTALLY DIFFERENT COMPETITIVE LANDSCAPE. Part of United’s decline may be attributable in part to the normal cycles in the economy. But there can be little serious dispute that deeper issues have surfaced to cause a sea change for United and the other major network carriers. 137 Or, as the Chairman of the Business Travel Coalition has put it, the major airlines cannot keep “their heads in the sand saying business travel is off because of the economy, period.”138 A. The Lingering Effects of September 11. First, the tragic events of September 11 continue to have a severe and sustained effect on the airline industry. Passenger traffic has remained down. 139 Revenues have continued to fall. Losses have continued to mount. viii Fear of terrorist attacks against American targets has resulted in U.S. carriers losing share to foreign carriers on international routes. On United’s top 20 international routes, for example, the Company lost three points of market share to foreign

viii Recently filed 10-Q’s reported the following losses at other major airlines through the first three quarters of

2002: $22.6 million at Alaska Airlines, $161.4 million at America West, $2.77 billion at American Airlines, $342 million at Continental, $909 million at Delta, and $310 million at Northwest.

36

carriers between July 2001 - July 2002. In short, the aftermath of September 11 has been far more devastating and enduring than anything the airline industry has ever faced. 140 B. Internet Shopping. The ability to search the Internet for lower fares has increased the downward pressure on the price being paid by United’s customers. 141 The price transparency facilitated by the Internet has transformed consumers into powerful comparison shoppers. 142 The resulting price competition will continue to reduce United’s yields. 143 Exhibit 10. PROPORTION OF R EVENUE BOOKED VIA THE INTERNET

24%

Percentage of All Airline Passenger Revenues

22.0%* 22% 20% 18.0%* 18% 16% 14.0% 14% 12% 10% 8% 6% 4% 2% 0% 1999 2000 2001 2002 2003 5.0% 9.0%

Note: *Estimates. Source: “The Online Travel Marketplace 2001-2003: Forecasts, Business Models and Best Practices for Profitability”, 2001, PhoCusWright .

Today, eighteen percent of all bookings now are made on the Internet, compared to only five percent in 1999. 144 As more air travelers scour the Internet for the cheapest fares, 145 the resulting “price transparency” will continue to pressure airlines to lower their fares to win and keep customers. 146 This shift has accentuated the normal market pressure on carriers to match the prices offered by their competitors. 147

37

C.

Business Traffic Has Shrunk to Record Lows. Businesses are discovering that they can make do with less commercial air travel.

Corporations are increasingly turning to “ubiquitous technological substitutes to the commercial air transportation product,”148 especially video conferencing and web-based meetings. 149 A recent survey found that 42 percent of business travelers had used teleconferencing as a substitute for taking trips over the past year. 150 In another survey last April of purchasing executives from 184 corporations conducted by the Business Travel Coalition, 74 percent said that least some of the travel cutbacks would be permanent. 151 For these reasons, industry trade press reports have suggested that “emerging bandwidth technologies may make the business traveler an endangered species….”152 Business passengers also remain less eager to fly because of the increased time required to clear security. An extra hour or two of security-related delays may not deter a family from taking a three-week vacation, but may very well affect a business traveler’s decision whether to fly between Chicago and New York in a single day to attend a three-hour meeting. Industry surveys confirm that although 47 percent of leisure travelers are willing to arrive at airports two hours before their flights, only 24 percent of business travelers are prepared to do the same. 153 As for employees who continue to travel on business, 68 percent of the companies surveyed by the Business Travel Coalition plan to increase their companies’ use of low- fare airlines. 154 A considerable number of United’s corporate clients are flying fractio nal ownership jets more frequently than ever before. 155 And employees who continue to travel on United are being required to work their schedules around the inflexibility of restricted (and, therefore, less expensive) tickets. 156 Businesses have also caught the Internet bug.
157

“By some estimates, full-

fare traffic dropped by forty percent between mid-2000 and 2001, and this, of course, has sent 38

shock waves through the industry.”158 They continue to reverberate as of this filing. Since 1999, the proportion of passengers purchasing premium fares (unrestricted fares typically used by business travelers) at United has fallen even more dramatically. 159 Exhibit 11. PROPORTION OF DOMESTIC R EVENUE FROM PREMIUM PASSENGERS .
44% 40% 36% 32% 28% 24% 20% 16% 12% 8% 4% 0% 1999 2000 2001 2002

41.0% 35.6%

21.9% 19.8%

Proportion of Domestic Revenues from Premium Passengers

Notes: Data from second quarter of each year. Premium fares in clude first class, business class, and unrestricted coach. Source: U.S. DOT DB1A Database.

In 1999, 41 percent of United’s domestic passengers purchased unrestricted, premium fares. 160 Just two years later, that percentage had fallen by nearly 50 percent to below 22 percent of domestic passengers.161 Likewise, the proportion of United’s domestic revenues from premium passengers has fallen from 22.4 percent in 1999 to just 12.7 percent in 2001.162 This decline in high- fare business traffic appears to be both more severe and permanent than those endured during previous downturns in the economy. 163 In the words of Darryl

Jenkins, director of George Washington University’s Aviation Institute: “We’ll never have as much business travel as we saw in the late 1990s, and airlines are going to have to adjust to that new reality.”164

39

D.

The Increasingly Formidable Competition Posed by Low Cost Carriers. “Low cost carriers” are smaller airlines that are able to charge lower fares by

operating on a high- volume, low cost business model. 165 Unlike major network carriers that fly six or seven types of aircraft, low-cost carriers typically stick to one type of aircraft, thus minimizing maintenance, operating and training costs. 166 Low cost carriers also are able to hold down their costs because they began their operations with many functions being outsourced and minimal downtime between flights and have been able to preserve these competitive advantages in their collective bargaining agreements. 167 They also use less senior labor forces who are entitled to less vacation, require less sick leave and are more accepting of flexible work rules that allow for more efficient operations. 168 1. The Competitive Advantage.

“The primary cost disadvantage faced by the major network carriers is in labor, where lower productivity, more- generous benefits, and higher average pay result in labor costs some 50 percent higher than those of low-cost carriers.”169 By way of example, Southwest’s cost advantages over United have more than doubled since 1998:

40

Exhibit 12.

SOUTHWEST VS . UNITED UNIT COSTS
13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0

Operating Cost per ASM (cents/mile)

11.64
4.47¢

9.25
1.93¢

7.32

7.17

1998 Southwest United

2001

Source: U.S. DOT Form 41. Includes grants received under the Air Stabilization Act.

Southwest’s advantages in labor costs have become especially pronounced: Exhibit 13. SOUTHWEST VS UNITED UNIT LABOR COSTS .
5.0

Labor Cost per ASM (cents/mile)

4.5

4.73

4.0

3.5

3.75
0.86¢

1.7¢

3.0

3.03 2.89

2.5

2.0

1998 Southwest
Source: U.S. DOT Form 41.

2001 United

41

This difference has become so dramatic that the Company would save $2.2 billion per year if United operated with Southwest’s employee costs. 170 Labor costs account for more tha n half of Southwest’s overall cost advantage over United. 171 2. Expanding Presence.

While not new to the airline industry, low-cost carriers have evolved considerably in recent years, measurably increasing their share of the domestic market. 172 They now account for nearly 20 percent of U.S. domestic air capacity, up from 6 percent during the downturn of the early 1990s. 173 They have also expanded their presence to 719 of the nation’s top 1,000 citypairs and now out-carry every major network carrier in the cities where their flights overlap.174 Their share of domestic O&D passengers (“origin and destination passengers,” as opposed to connecting passengers) has also tripled since 1990: Exhibit 14. LOW COST CARRIERS ’ S HARE OF DOMESTIC O&D PASSENGERS .
26%

Low Cost Carriers' Market Share of Domestic O&D Passengers

24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1990 1992 1994 1996 1998 2000 7.0% 8.3% 10.0% 13.6% 16.3% 18.4% 19.0% 18.2% 18.5% 19.4% 20.6%

23.9% 22.8%

1st Quarter 2002

Note: Data for 2002 is from the first quarter. Source: U.S. DOT DB1A Database.

As Captain Duane Woerth recently reported to ALPA’s Executive Board: Ten years ago, except for Southwest in Texas, Arizona, and California, low-cost carriers were only a nuisance in most of the country; now they are a major force and at least three of them are 42

well financed with strong balance sheets. . . . [They] now pose a serious threat to network carriers and their futures. 175 3. Appealing to Business Travelers.

Seizing upon the heightened price-consciousness of corporate America, low cost carriers are also capturing what the CEO of American Airlines has aptly characterized as the major network carriers’ “prize customer – the business traveler – in bigger numbers than ever before. We have no choice but to match their fares in many of these markets, even though we offer a much more attractive product. And that’s not a sustainable solution . . . at least not for long.”176 In particular, JetBlue is offering higher levels of service than have traditionally been available from low-cost competitors, including larger than average seats and high-end video entertainment. This is another reason why Delta’s CEO has joined the industry chorus warning that pre-deregulation carriers “must find innovative ways to win the competitive battle on many fronts including strategies to meet the growing strength of low-cost carriers such as Southwest Airlines, AirTran and JetBlue.”177 4. The Impact on United.

More than 70 percent of United’s passengers currently fly in markets served by low-cost competitors. 178 This percentage dwarfs the number from ten years ago, when low-cost carriers flew in less than 14 percent of the markets served by United. 179

43

Exhibit 15.

PROPORTION O F UNITED PASSENGERS IN CITY-PAIRS WITH LOW COST COMPETITION, 1990-2002.
78%
72.9% 72.1%

Percentage of United's O&D Passengers in Markets with Low Cost Competition

72% 66% 60% 54% 48% 42% 36% 30% 24% 18% 12% 6% 0%
1990 1992 1994 1996 1998
13.6% 19.4% 17.3% 31.8% 37.6% 47.1% 57.1% 59.4% 64.4% 60.9%

71.4%

2000

1st Quarter 2002

Notes: Low Cost Competition defined as present in markets where low cost carriers had at least a 5% share of O&D passengers. Source: U.S. DOT DB1A Database.

Over the past decade, low cost carriers’ traffic has grown at a rate so much greater than United’s that their share of domestic revenues now exceeds that of the Company’s. Low cost carriers have not only exceeded United’s overall share of O&D passengers, but have also won away an ever- larger share of O&D passengers at United’s hubs that presently stands at an all- time high. 180

44

Exhibit 16.

SHARE OF DOMESTIC R EVENUES , 1990 - 2002.
18%

Domestic Passenger Revenue Share

16% 14% 12% 10% 8% 6% 4% 2% 0% 1990 1992 1994 1996 1998 United 2000 1st Quarter 2002

Low Cost Carriers
Note: Data for 2002 is from the first quarter. Source: U.S. DOT DB1A Database.

In the past two years, low cost carriers have surpassed United’s share of O&D passengers even in United’s hometown of Chicago. This competitive pressure is not going to stop anytime soon. To the contrary, since 2000, Southwest and JetBlue have begun offering nonstop service in six of United’s top ten city-pairs that accounted for 13.7 percent of United’s domestic revenues in the first quarter of 2002. 181 VI. UNITED’S PLAN TO EMERGE FROM BANKRUPTCY AS A PROFITABLE AND FORMIDABLE COMPETITOR IN A CHANGED AIRLINE INDUSTRY. Even though United’s current and foreseeable revenue base has decreased precipitously, the Company’s collective bargaining agreements have played a significant role in making it difficult for United to maximize its revenues and to reduce its costs. As the AFA itself recently declared on its website, United “is particularly at risk” because it “is the high cost carrier, bleeding cash and its balance sheet offers little cushion.”182 In light of how dozens of once-proud and vibrant airlines have collapsed under the weight of their enormous costs, it is imperative for the Company t work with all of its stakeholders to close the gap between o

45

United’s revenues and expenses and thereby reorganize United into an efficient network carrier that can compete successfully against both its traditional full-service rivals and the low cost carriers. In this respect, continued cooperation from the Company’s unions will be critical for the indisputable reason that labor is the single most important cost differentiator among airlines. 183 Exhibit 17. UNITED AIR LINES ’ UNIT COSTS VS UNIT R EVENUES , 1984 - 2002.
12

11

ESOP Period

10

Cents/ASM

9

8

7

6

5 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Q1-Q3

United RASM
Source: U.S. DOT Form 41. Note: Includes grants received in 2001 under the Air Stabilization Act.

United CASM

A.

Capitalizing on United’s Strong Market Position and Base of Assets to Sell a Superior Product Across an Unrivaled Network. United retains a tremendous base of assets – the best employees in the business, a

tested and proven hub & spoke model, routes that are the envy of the industry, loyal customers, modern facilities and the youngest fleet of planes. Before 2001, United continuously made investments in its future whose benefits can still be realized. From 1990 through 2000, United devoted more than $3 billion to maintaining its standing as one of the world’s best airlines.184 United now has the youngest and the least varied fleet among the major network carriers. 185 And

46

until 2001, United’s formidable assets enabled it consistently to outperform the competition in terms of stage length adjusted unit revenues. 186 The most promising avenue for United to return to profitability is for the Company to capitalize on its singular advantage over Southwest and the other low cost carriers: the reach and breadth of its network. Low cost carriers are generally confined largely to those markets with sufficient traffic to support point-to-point service. By contrast, United’s hub and spoke system enables United to serve a much wider set of city pairs. For example, during the first quarter of 2001, Southwest served passengers on 1,344 domestic city pairs as compared to 13,252 (or roughly ten times as many) for United and United Express. 187 Operating a large network allows United to serve (and thereby derive revenue from) a wide array of communities. Maintaining a broad network also makes a greater number of destinations available to frequent flyers for earning Mileage Plus credit, which further differentiates United’s product from that of low cost carriers in those markets featuring head-tohead competition. To this end, greater flexibility in using Regional Jets and in code sharing with other airlines would permit United to expand its network cost-effectively. B. United Will Continue to Reduce Its Non-Labor Costs. United will continue to take steps to ensure that its route network is as strong as possible. To that end, United will eliminate stations, such as the previously announced cessation of services to Caracas, Santiago, Dusseldorf, and Milan. 188 Overall, United expects a six percent decrease in its flight capacity as a result of these moves. 189 This reduction in flights will enable United to retire approximately fifty additional airplanes. 1. Aircraft and Other Leases.

The Company is seeking immediate authority to reject a number of real property and aircraft leases and to abandon a number of mortgaged aircraft. In addition, as part of the 47

Section 1110 negotiation process, the Company will embark upon a “mark to market” program with respect to the more than 450 aircraft in its fleet that are leased and mortgaged aircraft. Capturing the spread of hundreds of millions of dollars between existing rates and the deterioration in the underlying value of the aircraft since these financing arrangements were executed is a priority of the highest order. 2. United Express Partners.

United is also in the process of obtaining concessions from its United Express partners – Air Wisconsin, Atlantic Coast and SkyWest. 190 Each of these airlines flies turboprops and regional jets on routes that would not be profitable for United to service with mainline aircraft. These carriers receive fees for each departure based on their expected operating costs plus a certain percentage, and they are also eligible for performance bonuses. United has already made proposals to each of these carriers that would save United $70 - $80 million per year. 191 In addition, two regional carriers that do not presently serve United have also submitted competing bids. One of the United Express carriers has already agreed to freeze its fees at 2001 levels through the end of 2002 and to retire high-cost turboprops, resulting in an expected savings of $23 million for United. 192 3. Other Revenue and Cost Initiatives.

United has also engaged in a “bottom up” examination of every facet of its business except for safety to develop revenue and cost-savings initiatives. For example, United will competitively source purchasing for parts, saving over $100 - $200 million dollars. 193 And like other carriers, United will eliminate corporate discounts for leisure class fares, revise upgrade prices and policies and more strictly enforce ticketing and pricing rules for advancepurchase and other discounted fares, capturing over $100 million in additional revenue. 194

48

C.

United Must Reduce Its Labor Costs. The wages, benefits, and work rules of its unionized employees are by far

United’s largest costs, ix representing nearly 40 percent of United’s total operating costs. 195 Indeed, while United’s non- labor costs compare favorably to those of its competitors, United’s labor costs are among the highest in the industry. For example, United pays its pilots $1 million more per day than American and Delta pay its pilots. 196 In total, with the exception of US Airways, which tellingly preceded United into bankruptcy, United operated with the highest labor cost per available seat mile in 2001: Exhibit 18. LABOR COSTS , 2001.

7.0

Unit Labor Costs per ASM (cents)

6.0 5.0 4.0

5.63* 4.73

4.56 4.16 4.11 3.45 3.03

3.0 2.0 1.0 0.0

2.7 2.29 2.16

Source: U.S. DOT Form 41. *Does not reflect significant reductions in labor costs resulting from bankruptcy reorganization.

US Airways

Northwest

Continental

Southwest

American

Frontier

United

Delta

AirTran

JetBlue

In the airline industry, “[l]abor – including costs associated with union workers and management – is a bigger expense than all of the following combined: fuel, airplanes, interest, insurance, maintenance, materials, landing fees, commissions, communications, advertising and food.” Scott McCartney, Breaking Down How Airlines Spend Money, Wall St. J. Nov. 4, 2002.

ix

49

This disadvantage persisted through the first six months of 2002, the most recent period of time for which industry-wide data from the U.S. Department of Transportation is available. United’s non- labor costs x were among the lowest in the industry: Exhibit 19. NON-LABOR COSTS PER ASM, 1/02 - 6/02.
7¢ 6¢
Non-Labor Costs per ASM

6.33¢

6.14¢

6.06¢

5.98¢ 5.88¢

5.88¢

5.82¢

5.77¢

5.75¢

5¢ 4¢ 3¢ 2¢ 1¢
Continental US Airways American Frontier Alaska America West United

4.31¢

4.17¢


Delta

Northwest

Southwest 2.24¢ Frontier

Source: United Airlines.

But its unit labor costs were among the highest: Exhibit 20. LABOR COSTS PER ASM, 1/02 - 6/02.
6¢ 5¢
Labor Costs per ASM

4.83¢

4.75¢

4.72¢ 4.08¢ 3.79¢ 3.76¢ 3.44¢ 2.92¢ 2.28¢ 2.09¢

4¢ 3¢ 2¢ 1¢

Continental

US Airways

American

United

Northwest

Southwest

America West



Source: United Airlines.

Exhibits 19 - 24 adjust the Department of Transportation’s “Form 41 data” to arrive at CASMs that control for inconsistencies among carriers’ cost data attributable to various non-operational factors such as fuel pricing variations, corporate structures, financial reporting practices, aircraft financing discussions, fringe expenses and special charges.

x

50

Jet Blue

Delta

Alaska

Jet Blue

Adding labor to non- labor costs also renders United’s total unit costs among the highest in the industry: Exhibit 21. TOTAL COSTS PER ASM, 1/02 - 6/02.
12¢ 10¢ 8¢
Costs per ASM

10.89¢ 10.70¢ 10.50¢

10.12¢ 9.96¢ 9.64¢ 9.58¢ 8.10¢ 8.00¢ 7.23¢ 6.26¢

6¢ 4¢ 2¢ 0¢
American

US Airways

Continental

United

Source: United Airlines.

Adjusting these cost figures to account for differentiations among the airlines in the average lengths of their routes (i.e., “stage lengths”) xi crystallizes United’s competitive disadvantage in this area. principal competitors: United’s non- labor CASM remains comparable to those of its

xi Adjusting for stage lengths is a generally-accepted practice in the industry for such comparisons because carriers incur a significant portion of their costs during takeoffs and landings. Thus, a carrier that flies longer routes and whose planes take off and land less often (such as United) seemingly incurs lower costs than an airline that flies mostly shorter routes (such as U.S. Airways) simply because of the difference in flight lengths. To filter out this distortion, “stage length adjusted” costs are calculated as though the other airlines’ routes were the same length as United’s.

51

Southwest

America West

Northwest

Frontier

Jet Blue

Delta

Alaska

Exhibit 22.

STAGE LENGTH ADJUSTED NON-LABOR COSTS PER ASM, 1/02 - 6/02.


6.07¢
Unit Non-Labor costs per ASM (cents)

6¢ 5¢ 4¢ 3¢ 2¢ 1¢
Continental

5.75¢ 5.75¢ 5.34¢ 5.24¢ 5.14¢ 5.08¢ 5.01¢ 4.78¢ 3.98¢ 3.26¢

US Airways

United



American

America West

Jet Blue
Frontier Jet Blue

Delta

Frontier

Source: United Airlines.

But United’s stage-adjusted labor costs per ASM were the highest: Exhibit 23. STAGE LENGTH ADJUSTED LABOR COSTS PER ASM.
6¢ 5¢
Labor Costs per ASM

4.75¢

4.63¢ 3.99¢ 3.68¢ 3.42¢ 3.34¢ 3.32¢ 2.28¢

4¢ 3¢ 2¢ 1¢ 0¢
United

Northwest

2.05¢ 1.98¢ 1.95¢

Continental

US Airways

Southwest

American

Alaska

Northwest

Source: United Airlines.

Indeed, United’s unit labor costs were so much higher as to elevate United’s total CASM to the highest in the industry:

52

America West

Delta

Southwest

Alaska

Exhibit 24.

STAGE LENGTH ADJUSTED TOTAL COSTS PER ASM.
12¢
10.50¢ 10.38¢

10¢ 8¢
Costs per ASM

9.41¢

9.02¢ 8.77¢ 8.56¢

8.40¢ 7.30¢ 6.99¢ 5.93¢ 5.53¢

6¢ 4¢ 2¢ 0¢
United American

US Airways

Continental

Frontier

Jet Blue

Source: United Airlines.

D.

United and Its Unions Will Have to Take a Hard Look at Work Rules. But these figures do not tell the entire story. Although the pay and benefits of

United’s employees are among the highest in the U.S. economy, their productivity is not. For example, although Southwest on average flies smaller aircraft and has a shorter average length of flight than United, Southwest’s output per employee is more than 20 percent greater than United’s employee output. 197 In particular, the work rules at United allow its pilots to fly the smallest number of hours per pilot in the industry. In 2001, for example, United pilots had on average flew just 60 percent of the hours flown by Southwest’s pilots each month. 198

53

Southwest

Northwest

America West

Delta

Alaska

Exhibit 25.

FLYING HOURS PER PILOT, 2001.
Average Monthly Block Hours per Pilot
70 62 60 51 50 50 50

49

47

46

45 40 39 36

40

30

20 Southwest AirTran Frontier US Airways Continental JetBlue Alaska Delta Northwest American United

Source: U.S. DOT Form 41. Note: Computed as total aircraft block hours divided by total number of pilots and co -pilots.

In short, United ranks at or near the top of the “pre-deregulation network airlines [that] are disadvantaged . . . since they are burdened with strict, and often wasteful work-rules, that were established before deregulation.”199 E. United and Its Unions Must Work Together Constructively to Address the CBAs’ Restrictions on the Company’s Ability to Generate Revenue, Outsource Non-Core Activities and Furlough Employees. The Company’s CBAs also limit United’s ability to generate additional revenues, especially the “scope clause”xii of the pilots’ agreement. The resulting difficulties for United are best captured by a comparison with the “scope clause” in Southwest’s contract with its pilots. Southwest’s scope provision does little more than establish the union as the pilots’ sole bargaining representative and provide that the CBA will remain binding on a successor that

A “scope clause” is the section of an airline labor contract that historically established the scope of the CBA (i.e., what jobs or types of work were covered by the agreement). Over the years, however, these clauses have expanded at United to encompass a variety of job security issues (such as furlough restrictions, ALPA CBA 1-H-1) and restrictions on business activities (such as the use of Regional Jets, Id. at 1-C-1). Kain Aff. ¶ 7.

xii

54

receives “substantially all” of Southwest’s assets. Southwest’s scope clause takes up less than three pages, ending with an express acknowledgement that the “right to manage and direct the work force, subject to the provisions of this Agreement, is vested in the Company.”200 By contrast, the scope clause in United’s pilot contract is more than ten times as long. In those thirty-plus pages, the CBA imposes a host of restrictions on United’s ability to operate, requiring the Company to: • • • • • • limit its use of “regional jets” and code sharing according to a number of complex formulas, employ a minimum number of pilots, maintain a minimum number of aircraft, fly a minimum number of hours, not furlough pilots, and/or not transfer or lease its pilot training center or equipment. 201

The upshot for United’s competitive posture is as indisputable as it is straightforward: Southwest is free to adapt to changing economic circumstances in ways that United is not. 1. Regional Jets.

United’s pilot contract severely restricts the Company’s use of “Regional Jets,” or “RJs,” smaller aircraft that enable United to expand its network to less-traveled destinations that could not be serviced profitably with United’s mainline aircraft. 202 Regional Jets help feed additional passengers on to United’s mainline hub flights, capture revenue in (and provide service to) cities too small to support mainline service, extend United’s presence to cities that United otherwise cannot profitably serve and augment the service that United is able to provide via its network to passengers in mainline cities. 203

55

In short-haul markets (under 500 miles), for example, Regional Jets have a 4 percent unit revenue advantage over mainline flights, 204 and United’s use of Regional Jets provides it with unit costs that are 52 percent lower than United’s mainline short- haul flights.205 United’s use of Regional Jets allows United to compete profitably in short-haul markets with Southwest and other low cost carriers. 206 Despite the enormous revenue potential, several provisions in United’s pilot contract restrict the Company’s ability to use RJs: • • United cannot fly RJs with more than 50 seats. (ALPA CBA 1-B-2, 1-M12, 1-M-28) To operate RJs at all, United must maintain at least 451 larger aircraft (ALPA CBA 1-C-1-f-(1)) The Company may operate more than 65 RJs only if it also maintains a fleet of 595 larger aircraft. (Id. at 1-C-1-f-(2)) The number of available seat miles that United can schedule for RJs is limited to a percentage of the available seat miles scheduled for United’s larger aircraft, which varies depending on the number of RJs. (Id. at 1-C1-d; 1-M-14) Ninety percent of RJs’ non-stop flights must arrive or depart from a specified list of airports, most of which are United’s hubs or other major stations. (Id. at 1-C-1-b) RJs cannot fly direct routes between many of these same airports. (Id. at 1-C-1-a-(1), 1-M-17) United cannot reduce its number of pilots below 9592 as a result of RJs. (Id. at 1-C-1-g)







The cumulative effect of these and other limitations is that United presently receives only a fraction of the potential direct revenue and increased feed available from RJs. 207 Moreover, United’s ability to weather economic downturns is hindered by the contract’s limitations on United’s ability to use RJs on routes between major airports. 208 These labor contract restrictions decrease United’s profitability and place United at a competitive disadvantage – particularly with respect to Delta and Continental, which enjoy much greater leeway in deploying RJs as part of their networks. 209 56

2.

Code Sharing.

The pilot contract also limits United’s ability to “code share.” Code sharing means that planes flown by other carriers are listed in the computer reservation systems as United flights. As with Regional Jets, United can use code sharing as a source for greater revenue. 210 For example, United has entered into a code share agreement with US Airways that is projected to generate more than $200 million per year, all off of a $20 million investment.211 Under the pilots’ CBA, however, United may only permit another carrier to use its code on one percent of the hours flown on domestic flights by United pilots (ALPA CBA 1-C-2-a-(1)) and may not code share flights between any two of the following types of locations: United’s hubs, “key” airports (defined to include Washington-National, JFK, LaGuardia, Miami, Newark and Seattle/Tacoma) and cities from which non-stop United flights to foreign destinations arrive or depart. (Id. at 1-C-2-a-(2)) The pilot agreement also restricts United’s ability to share revenues with foreign air carriers. Revenue sharing is an arrangement in which foreign partners apply each other’s code to their aircraft and mutually decide how to split the revenue. Under the pilot contract, however, if United enters into a revenue-sharing agreement with a foreign member of the “STAR” alliance, it must maintain the same ratio of available seat miles into markets served by both the Company and its revenue-sharing partner as it did before the agreement. (ALPA CBA 1-C-3-d-(1)) The CBA also prohibits United from receiving a share of profits greater than its ratio of available seat miles. (Id. at 1-C-3-d) The effect of these provisions is that United cannot permit a foreign carrier with a higher profit margin to achieve a greater market share in markets served by both United and the foreign carrier in exchange for a higher percentage of those additional profits to United, even though the bottom lines of both United and its partner would be enhanced by this arrangement. 212 57

3.

Furlough Limitations.

The present restrictions in United’s CBAs against furloughing employees greatly limit any cost savings to the Company from downsizing the airline in response to changing economic conditions or competitive considerations. The anti- furloughing provisions apply to all non-probationary pilots and most IAM-represented employees who were employed by United as of January 26, 1994. (ALPA CBA 1-H-1; IAM Mechanics CBA Letter 94-5M) These

employees cannot be laid off unless the furlough is “a direct result” of labor disputes, government actions, wars or national emergencies, or the inability of suppliers to provide sufficient critical materials for the Company’s operations. Mechanics CBA Letter 94-5M) Indeed, the ALPA CBA explicitly states that pilots cannot be furloughed for “any economic or financial considerations including, but not limited to, the price of fuel, aircraft or other supplies, the cost of labor, the level of revenues, the state of the economy, the financial state of the Company, or the relative profitability or unprofitability of the Company’s thencurrent operations.” (ALPA CBA 1-H-5-d). Thus, even when United is losing billions of dollars, the Company cannot reduce its work force to match reductions in capacity. 4. Outsourcing Limitations. (ALPA CBA 1-H-5-d; IAM

United’s inability to outsource functions that outside vendors can do more inexpensively saddles the Company with unnecessarily high costs. These restrictions are

principally contained in the Company’s CBAs with the IAM. United cannot contract out work if this outsourcing results in laying off any IAM-represented employee (IAM Mechanics CBA, Art. 2.E) and cannot outsource more than twenty percent of its “maintenance” work (Art. 2.D). If these provisions were modified, the Company could measure the performance of the operations against the broader market and potentially save hundreds of millions of dollars each year by 58

outsourcing work that could be provided far more inexpensively by outside vendors without any loss of quality or impact on safety. VII. UNITED IS NOT THE ON LY PRE-DEREGULATION CARRIER STRUGGLING WITH THE INEVITABILITY OF TRANSFORMING ITS BUSINESS MODEL. United is not the only pre-deregulation carrier trying to come to grips with a cost structure that cannot be afforded any longer. As was recently confirmed by David Siegel, President and CEO of US Airways, “[e]very mature network airline is struggling with how to adapt to fundamental changes in the airlines business, where high c osts will no longer be subsidized by passengers paying premium fares and low-cost airlines have become a major force in the industry.”213 In particular, United will not be alone in trying to reduce its labor costs. As noted by Salomon Smith Barney in late October 2002, “total labor [expenses] continue to rise (+4%) . . . while carriers over the last 2 years have been able to reduce structural costs . Assuming little low- hanging fruit to cut in ‘other costs,’ our analysis suggests that ‘next up’ for the airlines will be substantial cuts to wages to better match the fall-off in revenues.”xiii All of the airlines immediately took drastic steps to cope with September 11. American Airlines reduced its flight schedule by 20 percent, announced lay offs of at least 20,000 employees, discontinued or reduced service on a number of international routes and closed eleven travel centers. 214 Delta reduced its capacity by 16 percent and announced staffing reductions of 13,000 employees. 215

xiii Brian D. Harris, Standing in the On -Deck Circle – Labor (Salomon Smith Barney, Oct. 28, 2002). Harris goes on to note that, with “the cyclical majors expected to lose about $7 billion in 2002 and current revenues about 7% below 1995’s level, we find it interesting that labor costs for the cyclical majors would have to decline by roughly a third for the carriers to break even this year (everything else held constant) . . . . [T]his analysis strongly indicates that significant labor cost reductions . . . will be a key driver, if not the primary driver to the [industry] recovery.”

59

Battling to stay afloat with depressed revenues, airlines continued their efforts to reduce costs throughout 2002. Carriers have severely reduced capacity and, in the process, furloughed tens of thousands of employees. Even with billions of dollars in federal grants, each major network carrier has found it necessary to take drastic measures to stay afloat: A. American Airlines. After initially announcing its need for $3 billion in annual cost savings, American cut capacity, reduced its number of fleet types from 14 to 7, consolidated its headquarters and changed its ticketing fees. 216 In mid-November, American began to experiment with a new fare structure in 23 domestic markets. American has reportedly “slashed walk- up coach prices by 40%, while at the same time hiking some leisure fares on those routes.”217 But these steps soon proved insufficient. On November 25, 2002, American

announced that it needed to increase its savings by an additional billion dollars per year in “permanent, structural cost reductions.”218 To achieve this level of savings, American has

reduced its domestic capacity by an additional 3.3 percent, 3.2 percent more than it had originally planned. 219 The effect of this aggressive cost reduction strategy on labor became apparent just last week when American announced the elimination of 1,100 flight attendant positions. 220 At least one industry analyst had already concluded a month ago that, to meet its cost-savings target, American “will need to extract concessions from unions, a daunting process for a carrier with a history of troubled labor relations.”221 Sure enough, American began this process in a meeting held with its union leaders on the Friday before this filing. Specifically, American asked all of its employees to forego pay increases in 2003 as part of what American described as an effort to “buy enough time to find the additional $2 billion in permanent, annual structural changes needed to survive.” In a letter to all union representatives, CEO Don Carty and COO Gerard 60

Arpey also wrote: “The restructuring of our labor agreements is inevitable and fundamental to our long-term goal of remaining competitive and restoring profitability.”222 B. Continental Airlines. Continental expects its cost savings to date to total $350 million annually when fully implemented and $80 million over the course of 2002. 223 Continental has furloughed 11,000 of its 56,000 employees since September 11. Additionally, Continental has reduced the number of aircraft types in its fleet from nine to four. Continental also retired 49 aircraft and will retire at least eleven more in 2003. 224 As a result, Continental predicts that its domestic capacity in August 2003 will be approximately 17 percent below domestic capacity in August 2001.225 But this will not be enough. According to Continental Senior Vice-President and Chief Financial Officer Jeff Misner, Continental’s current cost cutting initiatives “will not be sufficient to return the company to profitability in the existing environment.”226 C. Delta Air Lines. Delta has reduced its number of flight attendants by 9.4 percent, eliminated service to 6 countries and 10 cities, announced a new low cost unit, deferred aircraft deliveries, accelerated retirement of its older planes, introduced new ticket fees, and taken other cost saving measures. 227 In addition, Delta has deferred delivery of all 29 mainline aircraft it was scheduled to receive in 2003 and 2004, thereby reducing its capital expenditures by $1.3 billion over the next two years. In addition, Delta announced it was retiring 15 wide-bodied MD-11 aircraft form service and replacing them with B767 aircraft. 228 This change is expected to reduce Delta’s domestic capacity by an additional 2.0 percent on top of the 10.6 percent mainline capacity reduction implemented in the third quarter of 2002. 229 On November 18, 2002, Delta announced that it would change the pension plan for its non-union workers (who constitute a majority of its employees in the United States) from 61

a traditional plan to a cash-balance pension plan. approximately $500 million over the next five years. 230 D. Northwest Airlines.

Delta anticipates that this will save

Immediately following September 11, Northwest eliminated 8,900 jobs and reduced its flying schedule by 20 percent. Northwest has since targeted $200 million in annual cost savings.231 It reduced management payroll expenses by 5 percent, closed numerous

reservation centers, suspended three Asia/Pacific routes, deferred spending on advertising and management training and initiated new ticket fees. 232 But these changes proved to be inadequate. On September 4, 2002, Northwest called for the elimination of 670 temporary positions. About one month later, it eliminated an additional 1,600 flight attendant positions and announced that nearly 150 pilots would be furloughed by February 2003. In addition, Northwest decided to close its Atlanta aircraft

maintenance facility, eliminating an additional 100 jobs. 233 Now in its fifth round of cutbacks since February 2001, Northwest plans to cut ticket distribution costs, renegotiate prices with suppliers, and lower airport costs. 234 E. US Airways. Before today, of course, US Airways had taken the most severe step of any major airline by filing for Chapter 11 bankruptcy on August 11, 2002. Starting in 2000, that airline’s profitability began to collapse because of competitive pressures, unfavorable economic trends, and rising fuel and labor costs. 235 As with the other major airlines, low cost carriers played an important role in US Airways ’ declining fortunes. 236 US Airways determined that to survive, it needed $1.2 billion in annual cost reductions. 237 To reach this number, US Airways

implemented a number of cost saving measures to reduce its flow of red ink before filing for

62

bankruptcy, including consolidating its reservation centers, deferring aircraft deliveries, introducing new ticket fees, and eliminating base commission for travel agent-issued tickets. 238 But the biggest contributor by far to US Airways’ cost reduction efforts was organized labor. US Airways’ unions agreed to wage, vacation, and medical benefit concessions totaling $840 million on average per year for the next six and one-half years. 239 Most of the unions agreed to concessions prior to US Airways’ bankruptcy filing, though the mechanics, fleet services, and passenger service employees did not accept new contracts until after the filing. Each pilot’s wages were reduced by at least 26 percent, and some were cut by as much as 37.4 percent. 240 Other employees agreed to wage reductions of between 6.8 percent to 13.2

percent. 241 The unions also agreed to relatively low raises over the next several years, often of one or two percent per year. 242 But even these reductions may prove insufficient for US Airways to emerge from Chapter 11. On October 26, 2002, the New York Times reported that US Airways would also require more “productivity changes” to save an additional $100 - $300 million in annual costs.243 In late November, US Airways confirmed that, in addition to closing a heavy maintenance hangar in Tampa and a reservations call center in Orlando, the airline will now also have to furlough an additional 2,500 employees (bringing the total up to 16,500) 244 and seek changes in “some of the most inefficient work rules in the industry that drive up our costs in ways we can no longer afford in this new, tough revenue environment.”245 Securing these changes has since become a matter of life or death for US Airways. Last Friday, US Airways’ DIP lender warned in no uncertain terms that, unless the airline’s unions agree to provide an additional $200 million in additional wage and benefit

63

concessions, the DIP lender will pull its financing and propel US Airways into a Chapter 7 liquidation. 246 VIII. CONCLUSION. Bankruptcy was never anyone’s first choice. But Chapter 11 will by no means constitute United’s last act. To the contrary, the Company is intent upon joining forces with its employees and other stakeholders to restructure United into an efficient and vibrant airline that will emerge from bankruptcy able to rise to the competitive challenges posed by this nation’s transformed airline industry on a sustainable and profitable basis. In the meantime, in the best of the Company’s traditions, United will continue to provide its customers with safe and uninterrupted service of the highest quality. Dated: December 9, 2002 Respectfully submitted,

___________________________________ James H.M. Sprayregen, P.C. Alexander Dimitrief, P.C. Andrew A. Kassof KIRKLAND & ELLIS 200 East Randolph Drive Chicago, Illinois 60601 (312) 861-2000 Counsel for the Debtors and Debtors-in Possession

64

1 The Debtors are the following entities: UAL Corporation, UAL Loyalty Services, Inc., Confetti, Inc., Mileage Plus Holdings, Inc., Mileage Plus Marketing, Inc., MyPoints.com, Inc., Cybergold, Inc., iTarget.com, MyPoints Offline Services, Inc., UAL Company Services, Inc., UAL Benefits Management, Inc., United BizJet Holdings, Inc., BizJet Charter, Inc., BizJet Fractional, Inc., BizJet Services, Inc., United Air Lines, Inc., Kion Leasing, Inc., Premier Meeting and Travel Services, Inc., United Aviation Fuels Corporation, United Cogen, Inc., Mileage Plus, Inc., United GHS, Inc., United Worldwide Corporation, United Vacations, Inc., Four Star Leasing, Inc., Air Wis Services, Inc., Air Wisconsin, Inc., Domicile Management Services, Inc.

Samuel Buttrick & Robert Ashcroft, Airlines: Industry Update 1 (UBS Warburg, Nov. 8, 2002) (Tab 18). All sources cited in this brief are attached behind the indicated tab numbers to the accompanying appendices. These figures reflect how United has downsized significantly over the past 18 months. Before September 11, 2001, United operated a fleet of more than 600 jet aircraft that departed on approximately 2,400 flights per day. Brace Aff. ¶ 10.
4 5 6 7 8 3

2

Tilton Aff. ¶ 9. Id. Id. Tilton Aff. ¶ 10. Tilton Aff. ¶ 10.

9 Unisys R2A Transportation Management Consultants, Unisys R2A Scorecard: Airline Industry Cost Measurement, Oct. 2002, at 10 (“Year-over-year yields declined by more than 2¢ per RPM (14%) for the US majors (exclusive of Southwest) from the 1st Quarter 2001 to the 1st Quarter 2002. So far as we recall, that kind of shortterm price collapse is unprecedented.”) (Tab 19). 10 11 12 13 14

See Kasper Aff. ¶ 20. See Brace Aff. ¶ 7. Id. UAL 2002 Form 10-Qs; Brace Aff. ¶ 8.

As the phrase implies, “operating cash burn” measures cash flow from operations, and excludes one-time items like principal payments on debt or government aid. Operating cash burn provides the best comparison over a period of time and among companies because it excludes unusual cash gains or losses that do not result from the Company’s regular course of business. By contrast, “total cash burn” measures total cash flow, including all items. “Total cash burn” is most important in determining how close the Company is to reaching the minimum cash balance for operations.
15 Association of Flight Attendants, Why United is at http://www.unitedafa.org/features/concessions_main.htm (emphasis added) (Tab 20).

Risk ,

available

at

16 Mark C. Mathiesen, Comment, The Bankruptcy of Airlines: Causes, Complaints, and Changes, 61 J. Air L. & Com. 1017, 1021-22 (1996) (Tab 8); Michael A. Katz, The American Experience Under the Airline Deregulation Act of 1978 – An Airline Perspective, 6 Hofstra Lab. L. J. 87, 88 (1988) (Tab 9); Kasper Aff. ¶ 3. The CAB typically denied or approved with restriction requests to establish new routes. John E. Robson, Airline Deregulation

65

Twenty Years of Success and Counting, Regulation, Spring 1988, at 17 (“Further, the process was expensive and time-consuming. In a widely-cited example of the CAB process at its worst, it took the board eight years to give Continental Airlines permission to fly between San Diego and Denver.”) (Tab 21). Especially in the early days of regulation, the CAB created route monopolies by permitting only one airline to operate between many city pairs. John M. Baitsell, Airline Industrial Relations 46-47 (Harvard University 1966) (Tab 1). Where multiple carriers operated, the CAB eliminated price competition by requiring that all carriers charge the same fares. William E. Thoms & Sonja Clapp, Labor Protection in the Transportation Industry, 64 N.D. L. Rev. 379, 397-398 (1988) (Tab 10); Kasper Aff. ¶¶ 3-4; see also Robson, Airline Deregulation, at 17 (“there was no price competition under regulation” (Tab 21). Moreover, the CAB often parceled out new routes to struggling carriers to help them improve their profitability, rather than to the airline that would have been able to exploit the new route most efficiently given its existing route structure. Gautam Gowrisankaran, Competition and Regulation in the Airline Industry, FRBSF Economic Letter, Jan. 18, 2002, at 1 (Tab 22).
17 18

Katz, 6 Hofstra Lab. L. J. at 88 (Tab 9).

Bruce Dikeman & Tom Cash, Why Did Airline Deregulation Produce Today’s Industry Structure? Should Our Lawmakers Have Predicted How the Industry Would Emerge? 4-5 (Industrial College of the Armed Forces 1993) (Tab 23). Kasper Aff. ¶ 6; Katz, 6 Hofstra Lab. L J. at 92 (Tab 9); Robert W. Poole, Jr., & Viggo Butler, Airline . Deregulation: The Unfinished Revolution 3 (Reason Public Policy Institute and Competitive Enterprise Institute, March 1999) (Tab 24).
20 19

Katz, 6 Hofstra Lab. L. J. at 92 (Tab 9); Poole & Butler, Airline Deregulation at 3 (Tab 24).

21 Katz, 6 Hofstra Lab. L. J. at 92-93 (Tab 9); Kasper Aff. ¶¶ 4-6; Barry T. Hirsch & David A. McPherson, Earnings, Rents, and Competition in the Airline Labor Market, 18 J. Lab. Econ. 125, 127-28 (2000) (Tab 11); H. Josef Hebert, Airline Turmoil, Associated Press, Washington Dateline, Mar. 27, 1988 (stating that “[labor] knew that [prior to deregulation] the government would pass the increase costs on [to the consumer] in the form of higher fares”) (Tab 25). 22 The sole exception among the major airlines is Delta Air Lines, whose pilots are the only employee group represented by a union (ALPA). 23 Baitsell, Airline Industrial Relations at 331, 336-37, 348-349 (stating that “ALPA has been able to divide and conquer the airline industry) (Tab 1); Hirsch & McPherson, 18 J. Lab. Econ. at 127 (Tab 11); see generally Katz, 6 Hofstra Lab. L. J. at 91-92 (Tab 9).

24 Baitsell, Airline Industrial Relations, at 336-37 (Tab 1); see generally Roger Lowenstein, Into Thin Air, N.Y. Times, Feb. 17, 2002, at Sec. 6 p. 40 (stating that airlines leapfrog one another when negotiating with unions, granting successively better terms to unions, to avoid a strike) (Tab 28).
25 26

Baitsell, Airline Industrial Relations at 347 (Tab 1). Lowenstein, Into Thin Air (Tab 28).

27 Baitsell, Airline Industrial Relations at 348-49 (Tab 1); Katz, 6 Hofstra Lab. L.J. at 97 (Tab 9). 28 See Katz, 6 Hofstra Lab. L.J. at 92-93 (Tab 9); see also Michael Whitaker, Competition In The Airline Industry After September 11, 2001, 14 DePaul Bus. L.J. 319, 321 (2002) (“I think some of what you see now with labor difficulties comes from this time when the airlines would readily agree to a pay raise and then tell the government it is time for us to raise our fares and it would say ‘okay.’ There was not a lot of control there.”) (Tab 12).

66

See generally Baitsell, Airline Industrial Relations, at 57-110 (providing a background of similar work rules) (Tab 1).
30 31

29

Hirsch & McPherson, 18 J. Lab. Econ. at 128 (Tab 11).

Id.; see also Paul Stephen Dempsey, The State of the Airline, Airport and Aviation Industries, 21 Transp. L.J. 151 (1992) (“Implementation of the new policy was immediate and comprehensive.”) (Tab 13).
32 Wayne O’Leary, Deregulation Blues, The Progressive Populist, Nov. 1, 2000 (Tab 30). Incredibly, only one of those 176 airlines survived until 1988; the rest went bankrupt or were absorbed by mergers. Id. 33 Poole & Butler, Airline Deregulation at 6 (“Southwest’s aggressive low prices have greatly expanded the market. For example, in 1996, before Southwest’s arrival, daily passenger traffic to 14 Providence markets was 1,471. One year later, with Southwest having cut the average fare from $291 to $137, the daily passenger count had increased to 5,100.”) (Tab 24); Mark S. Kahan, Airline Agony Across the Board, May 1992, at 22, 24 (“These and many other new low fares . . . fueled the initial euphoria of deregulation.”) (Tab 95). 34

Robson, Airline Deregulation Twenty Years of Success and Counting, Regulation, Spring 1998, at 19 (Tab

21).
35 John M. Nannes, Statement before the Committee on the Judiciary U.S. House of Representatives Concerning Airline Hubs and Mergers (June 14, 2000) (Tab 26); Paul Stephen Dempsey, The Social and Economic Consequences of Deregulation: The Transportation Industry in Transition 87 (Quorum Books 1989) (Tab 3). 36 37

See Nannes, Statement Concerning Airline Hubs and Mergers. Id.

38 See generally Dikeman & Cash, Why Did Airline Deregulation Produce Today’s Industry Structure? at 1516 (“[T]he initial objective of the hub systems was survival during the early turbulence of deregulation, the concept soon evolved into a highly effective operation that would eventually dominate the industry, create barriers to entry and reduce competition.”) (Tab 23); Gowrisankaran, Competition and Regulation in the Airline Industry, at 2 (Tab 22); Paul Stephen Dempsey & Andrew R. Goetz, Airline Deregulation and Laissez-Faire Mythology 228 (Quorum Books 1992) (“Since deregulation, all major airlines have created hub-and-spoke systems, funneling their arrivals and departures into and out of hub airports, where they dominate the arrivals, departures, and infrastructure”) (Tab 4). 39 Moerdler, Deregulation – The United States Experience, 6 Hof. Lab. L.J. 177, 179 (1988) (Tab 14); see also Labich, Winners in the Air Wars, Fortune, May 11, 1987, at 79 (stating that “People Express failed in part because many passengers would no longer suffer the indignities heaped on them by People’s no-frills approach”) (Tab 27); Dempsey, The Social and Economic Consequences of Deregulation at 49 (explaining that deregulation “created an economic environment in which a series of cutthroat rate wars was inevitable”) (Tab 3). 40

Hirsch & McPherson, 18 J. Lab. Econ. at 128-29 (Tab 11).

41 James Ott & Raymond E. Neidl, Airline Odyssey: The Airline Industry’s Turbulent Flight into the Future 3 (McGraw-Hill 1995) (stating that over a period of five years in the 1980s, average wages and benefits of airline industry employees increased by an average of $10,000 per employee) (Tab 5). Deregulation also strengthened the unions’ bargaining power by abolishing the Mutual Aid Pact. See Herbert R. Northrup, The Railway Labor Act – Time For Repeal?, 13 Harv. J.L. & Pub. Pol’y 441, 515 n. 237 (1990) (Tab 15).

67

42 Kasper Aff. ¶ 6. According to ALPA Government Affairs Director Paul Hallisay, “[e]liminating the Mutual Aid Pact was an ALPA-led effort, fully supported by the AFL-CIO, to restore the balance in the collective bargaining process.” ALPA’s AFL-CIO Affiliation , Air Line Pilot, April 1999, at 14 (Tab 31). 43 Lowenstein, Into Thin Air, at Sec. 6 p. 42 (likening airlines to “flying utilities” due to their high fixed costs) (Tab 28); see Gowrisankaran, Competition and Regulation in the Airline Industry at 1, 3 (Tab 22). 44 Hirsch & McPherson, 18 J. Lab. Econ. at 125-26 (Tab 11); see Francis Grab, Share the Pain, Share the Gain: Airline Bankruptcies and the Railway Labor Act, 24 Transp. L.J. 1, 8 (1996) (Tab 16); see also Dempsey & Goetz, Airline Deregulation and Laissez-Faire Mythology at 12 (stating that after deregulation, “industry profitability plummeted to the worst losses in the history of domestic aviation” such that “[d]uring the first decade of deregulation, the industry as a whole made enough money to buy two Boeing 747s”) (Tab 4). 45 The MacNeil/Lehrer News Hour (Educational Broadcasting and GWETA television broadcast, Dec. 12, 1991) (Tab 32); Paul S. Dempsey, ‘Successful’ Reform? Horrid Results, L.A. Times, April 8, 1991, at B5 (Tab 33); see also Dikeman & Cash, Why Did Airline Deregulation Produce Today’s Industry Structure? at 1-2, 26 (Tab 23); Dempsey & Goetz, Airline Deregulation and Laissez-Faire Mythology 12 (Quorum Books 1992) (stating that after deregulation, “industry profitability plummeted to the worst losses in the history of domestic aviation” such that “[d]uring the first decade of deregulation, the industry as a whole made enough money to buy two Boeing 747s”) (Tab 4). 46 47

Thomas Petzinger, Jr., Hard Landing, 173 (Random House 1995) (Tab 6). Hirsch & McPherson, 18 J. Lab. Econ. at 126 (Tab 11).

48 Dempsey, The Social and Economic Consequences of Deregulation, at 86-91 (explaining that “the airline industry has become an oligopoly, and in many major markets, a monopoly”) (Tab 3); Bruce Dikeman, Why Did Airline Deregulation Produce Today’s Industry Structure? at 26-29 (Tab 23). 49

Rigas Doganis, The Airline Business in the 21st Century 112 (Routledge 2001) (Tab 7).

50 Through its b- and c-scale systems, American sought to “cut labor costs” at a time when it “was losing money in the wake of airline deregulation and rising fuel prices.” Renneisen v. American Airlines, Inc., 990 F.2d 918, 919 (7th Cir. 1993). See also Ott & Neidl, Airline Odyssey, at 25 (describing the comp etitive effect that American Airlines’ three-tiered wage system had on United) (Tab 5). 51 52 53

Petzinger, Hard Landing, at 168 (Tab 6). Id. Id. at 189-90.

54 See Ott & Neidl, Airline Odyssey, at 30-32 (describing United’s Employee Stock Ownership Plan (“ ESOP”) in detail) (Tab 5). United’s flight attendants did not participate in the ESOP. Other airlines, such as Delta, Northwest and TWA, have also offered shares and stock options in return for union concessions on pay. In 1993, Northwest, for example, secured a three-year package of wage concessions from its employees in exchange for stock, effectively freezing pay at the 1992 levels. Id. at 45-46. The wage concessions saved Northwest nearly $900 million. Id. 55 56 57

Petzinger, Hard Landing, at 130-32 (Tab 6). Bruce Dikeman, Why Did Airline Deregulation Produce Today’s Industry Structure? at 1 (Tab 23). Dempsey, Flying Blind: The Failure Of Airline Deregulation, at 11 (Tab 2).

68

58 Elizabeth E. Bailey, Airline Deregulation Confronting the Paradoxes, Regulation, Summer 1992, at 20-21 (Tab 34); Dempsey & Goetz, Airline Deregulation and Laissez-Faire Mythology at 128-29, 148 (Tab 4). 59 Petzinger, Hard Landing, at 230-32 (Tab 6); Dempsey & Goetz, Airline Regulation and Laissez-Faire Mythology, at 128-29 (Tab 4). 60 In re Ionosphere Clubs, Inc., 108 B.R. 901, 906 (Bankr. S.D.N.Y. 1989), vacated by 121 B.R. 428 (S.D.N.Y. 1990). 61 62 63 64

Id. Eastern Airlines, Inc. v. ALPA, 861 F.2d 1546, 1547 (11th Cir. 1988). In re Ionosphere Clubs, Inc., 108 B.R. at 908. See generally Dempsey & Goetz, Airline Deregulation and Laissez-Faire Mythology, at 109-16 (Tab 4).

65 See In re Trans World Airlines, Inc., 185 B.R. 302, 306-7 (Bankr. E.D. Mo. 1995); see generally Dempsey & Goetz, Airline Deregulation and Laissez-Faire Mythology, at 136-39 (Tab 4). 66 67

See In re Trans World Airlines, Inc., 185 B.R. at 307. Id.

68 See In re Continental Airlines Corp., 38 B.R. 67, 69 (Bankr. S.D. Tex. 1984). In 1979, Continental lost $27.4 million; in 1980, $76.8 million; in 1981, $138.6 million; in 1982, $119.9 million; and in 1983 (up to September 24, the date of filing), $159.2 million. Id . “These losses were caused in some part by the fact that the new entrant airlines have lower labor cost and can and did charge lower fares than Co ntinental could charge and still make money on routes where they were flying in competition.” Id. 69 In re Continental Airlines, Inc., 145 B.R. 404, 406 (Bankr. D. Del. 1992). In retaliation, ALPA called for a strike of all Continental pilots. The ensuing strike lasted more than two years. Id. In October 1985, while Continental was still engaged in reorganization in the bankruptcy court, ALPA and Continental entered into a settlement agreement, thus ending the strike. Id. 70 In re Continental Airlines Corp., 38 B.R. at 69. Continental’s rejections occurred before Congress enacted Section 1113 of the Bankruptcy Code. 71

See id.

72 In re Continental Airlines, Inc., 145 B.R. at 406-07. As consideration for these concessions, Continental promised in the MOU to increase pilot salaries in the future, to provide a pension credit to pilots and other employees, to establish funds for pilots to seek legal and professional advice, to provide free coach passes to certain pilots, and to help pilots make lateral moves in the event that a substantial part of the company was liquidated. Id. at 406-07. 73 Motion for an Order Approving the Amended Memorandum of Understanding Between Continental Airlines, Inc. and the Pilot Operations Group, ¶ 14, filed in In re Continental Airlines, Inc., 145 B.R. 404. 74 75

Id. at ¶¶ 15-20. Brace Aff. ¶ 4.

69

76 Thomas G. Plaskett, Remarks at the Meeting of the Harvard Business School Club of Dallas (Dec. 5, 1991) (reprinted in Hard Landing at 394-395) (Tab 36).

Press Release, United S tates Department of Transportation, Airline Industry Profits Fell in 2000, BTS Year-end Financial Report Shows (June 11, 2001) (Tab 38).
78 Scott McCartney & Melanie Trottman, Low-Cost Airlines Crunch Big Carriers, The Seattle Times, June 19, 2002 (Tab 39). 79 80

77

Kasper Aff. ¶ 20. Mark Niesse, Delta Warns Of $350 Million Loss, Associated Press, Sept. 27, 2002 (Tab 40).

81 Unisys R2A Transportation Management Consultants, Unisys R2A Scorecard: Airline Industry Cost Measurement, at 1 (Oct. 2002) (Tab 19). 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

See Brace Aff. ¶ 10. Id. Id. ¶ 11. Id. ¶ 12. Id. ¶ 13. Id. ¶ 14. Id. ¶ 14. Id. ¶ 15. Id. ¶ 16. Id. ¶ 17. Id. ¶ 18. Id. ¶ 19. Id. ¶ 20. Id. ¶ 21. Id. ¶ 22. Id. ¶ 23. Id. ¶ 24. Kain Aff. ¶ 3.

100 Presidential Emergency Board No. 236, Vol. 1 at 145 (Jan. 9, 2002) (Tab 41).

70

101 Id. at 146-47. 102 See Kain Aff. ¶ 4. 103 Id. 104 Id. ¶ 5. 105 Brace Aff. ¶ 25. 106 Brace Aff. ¶ 26. 107 United currently is rated D by Standard & Poors, its lowest rating, and Caa3 by Moody’s . 108 14 C.F.R. § 1300.17 (2002). 109 Press Release, UAL, UAL and Pilots Finalize Proposal on Financial Recovery Program (June 14, 2002)

(Tab 42).
110 UAL AFA, MEC Concession Resolution (June 20, 2002) (Tab 43); Press Release, UAL AFA, United Air Lines Flight Attendants Refuse to Give Concessions (June 21, 2002) (Tab 44). 111 Machinists’ Union at United Rejects 10% Percent Wage Cut Proposal, Associated Press, July 10, 2002

(Tab 45).
112 Press Release, UAL, United Air Lines Statement on Enhanced Recovery Plan (Aug. 29, 2002) (Tab 46); Keith L. Alexander, United Asks Unions for Deep Cuts; Employees Balk at Plan to Slash Pay, The Washington Post, August 30, 2002, available at 2002 WL 25999751 (Tab 47). 113 E.g., Press Release, United Air Lines Union Coalition (Oct. 10, 2002) (acknowledging “United’s current financial crisis”) (Tab 48); Press Release, IAM, Union Coalition at United Air Lines Agrees on $5 billion Recovery Plan (Sept. 25, 2002), available at http://www.iam141.org/bulletin.htm#9-25b and http://www.iam141m.org/united.htm (“‘In recognition of United’s precarious financial condition and in accordance with our collective bargaining agreements, the IAM agreed to enter into discussions with the carrier in an attempt to avoid a United Air Lines bankruptcy,’ said District 141-M President Scotty Ford.”) (Tab 49); Greg Davidowitch (UAL AFA MEC President), Flight Attendants’ Statement on Union Coalition Plan (Sept. 25, 2002) (“Being a part of the solution that assists United in surviving its near-term financial crisis is central to our goal of ensuring that the Flight Attendants’ long-term interests are represented.”) (Tab 50); Greg Davidowitch (UAL AFA MEC Pres ident), United Air Lines Flight Attendants Continue to Work with Union Coalition to Refine Plan (Sept. 19, 2002) (“All parties understand the seriousness of the situation and the timeline United faces with respect to significant financial obligations coming due.”) (Tab 51). 114 Letter from the Union Coalition to Glenn Tilton (Sept. 4, 2002) (Tab 52) (“The employees of this airline are anxious to achieve an out-of-court recovery, and we give you our commitment that we are ready to work with you in order to accomplish that result. We are interested in practical solutions designed to address the difficult situation in which we find ourselves. Those solutions should, in our view, be sufficient to give the Company access to the capital markets, either with or without an ATSB loan guarantee, thereby stabilizing the Company and giving it the time to address the many other difficult issues confronting it.”) Id. 115 Francine Knowles, UAL’s Unions Offer $5 Billion in Cost Cuts, Chicago Sun Times, Sept. 26, 2002, at 2002 WL 6473172 (Tab 53). 116 UAL Corporation 10-Q for the Second Quarter of 2002 (Aug, 14, 2002) (“In the absence of federal loan guarantees, the Company has insufficient access to the capital markets to refinance the debt due in the fourth

71

quarter. While UAL's current cash reserves are sufficient to repay these obligations, the cash reserves then remaining could be insufficient to support the Company's ongoing obligations if it continues to generate negative cash flow from operations.”).
117 Press Release, UAL, UAL Announces Compensation Arrangement for Non-Union Employees in Connection with Financial Recovery Program (Nov. 18, 2002). (Tab 54) 118 Letter from Daniel Montgomery, Executive Director of the ATSB to Frederick Brace, Executive Vice President and Chief Financial Officer of United (Dec. 4, 2002). (Tab 55) 119 Id. at 1. 120 Id. at 2. 121 Id. 122 Id. 123 Id. 124 Brace Aff. ¶ 37. 125 Id. ¶ 38. 126 Id. ¶ 39. 127 Id. ¶ 40. 128 Id. ¶ 41. 129 Id. ¶ 42. 130 Id. ¶ 43. 131 Id. ¶ 44. 132 Id. ¶ 45. 133 Id. ¶ 46. 134 Id. ¶ 47. 135 Id. ¶ 48. 136 Id. ¶ 49. 137 Kevin Mitchell, On the Precipice of the Abyss: The Urgent Need for Labor and Airfare Reforms, Statement to the FAA Commercial Aviation Forecast Conference (March 12-13, 2002), available at http://www.btctravelogue.com/faaforecast.htm. (“Major network airlines in the US face the ‘Perfect Storm’ of angry business travel customers, a surging low-fare airline segment and ubiquitous technological substitutes to the commercial air transportation product. The survival of the major network airlines industry as we know it . . . are at stake.”) (Tab 56).

72

138 Wendy Zellner & Michael Arndt, American’s Latest Test Flight, Business Week, Dec. 2, 2002, at 47. (Tab

57)
139 See Kasper Aff. ¶¶ 47-51 (citing Air Transport Association reports). 140 Id.; see also Exhibit D. 141 Id. ¶¶ 14-16. 142 Id. 143 Id. 144 Id. at viii (citing The Online Travel Marketplace 2001-2003: Forecasts, Business Models and Best Practices for Profitability (2001)). 145 Id. ¶¶ 14-16 (citing The Online Travel Marketplace 2001-2003: Forecasts, Business Models and Best Practices for Profitability (2001)); Martha Brannigan, Airlines to Lobby Government for More Aid as Losses Mount, The Wall Street Journal, Sept. 23, 2002 (noting that the “Internet is badly undermining the industry’s price structure, letting travelers shop for bargain fares more efficiently”) (Tab 58). 146 Doganis, The Airline Business in the 21st Century at 223 (Routledge 2001) (listing “the growing commoditisation of the airline product as distribution becomes more dependent on Internet sales” as a primary reason why “the long-term trend in average yields is likely to be downward”) (Tab 7). 147 Id. at 174 (Internet fares that can easily be monitored and matched by competitors “further reinforce the market power of consumers and the downward pressure on fares and yields”). 148 Mitchell, On the Precipice of the Abyss (Tab 56). 149 Kasper Aff. ¶ 17. 150 Id. 151 Barbara De Lollis, ( Many Companies Plan More Cuts In Air Travel Spending), USA Today, Aug. 15, 2000, at http://careers.usatoday.com/service/usa/national/content/news/economy/2002 -04-23-biz-travel (citing Press Release, BTC, BTC Opposed To U.S. Government Aid To Airlines, (Sept. 23, 2002) (citing April 2001 BTC survey)) (Tab 59). 152 Steep Drop in May Revenue Worse than Bleak Forecast, Airline Financial News, June 25, 2001 (quoting UBS Warburg) (Tab 60). 153 Brace Aff. ¶ 8. 154 Scott McCartney, Low-Cost Airlines Crunch Big Carriers, The Seattle Times, June 19, 2002, available at 2002 WL 3903427 (Tab 39). 155 See Kasper Aff. ¶ 18 (citing U.S. DOT DB1A Database). 156 McCartney, Low-cost Airlines Crunch Big Carriers (Tab 39). 157 Doganis, The Airline Business in the 21st Century, at 165 (Tab 7).

73

158 Joseph Schwieterman, From Consolidation To Crisis: The Airline Industry In Transition, 14 DePaul Bus. L.J. 269, 273 (2002) (Tab 17). 159 Kasper Aff. ¶ 39 (citing U.S. DOT DB1A Database). 160 Id.; see Exhibit H. 161 Id.; see Exhibit H; Exhibit I. 162 Id. 163 Press Release, BTC, BTC Opposed To U.S. Government Aid To Airlines, 127 (Tab 61); Ott & Neidl, Airline Odyssey, at 15 (explaining that airline travel among customers known in airline lingo as “VFRs”– Visiting Friends and Relatives–is outpacing travel among business travelers upon whom airlines have traditionally relied to pay a premium price) (Tab 5). 164 Eric Torbenson, Airlines Plead For Help; Outlook Still Gloomy For Big Carriers, The Dallas Morning News, Oct. 9, 2002, at 1D (Tab 62); Schwieterman, 14 DePaul Bus. L.J. 269, 271-72 (2002) (“[r]eal yields in the airline industry are abysmal right now. . . . The bad news of this week is that the airlines have realized that their efforts to bring fares back up to normal levels will be exceedingly difficult.”) (Tab 17). 165 See Dominated Hub Fares, U.S. Department of Transportation (Jan. 2001) (Tab 63); The Low Cost Service Revolution, U.S. Department of Transportation (1996) (Tab 64). 166 McCartney, Low-Cost Airlines Crunch Big Carriers (Tab 39); Ott & Neidl, Airline Odyssey, at 67 (stating that Southwest Airlines’ decision to use only Boeing 737s in its United States network has kept that airline’s maintenance and training costs to a minimum (Tab 5). 167 McCartney, Low-Cost Airlines Crunch Big Carriers (Tab 39); Ott & Neidl, Airline Odyssey, at 76-77 (describing the cost savings attributed to Southwest Airlines’ “10-minute turnaround”) (Tab 5). 168 Ott & Neidl, Airline Odyssey, at 22 (explaining that United is unable to reorganize its routes to resemble Southwest Airlines’ efficient point-to-point network because United’s labor contracts “reduce productivity and allow[] little flexibility”) (Tab 5). 169 William Greene and Robert Susman, How Costs Dictate Strategy – A Primer, Morgan Stanley (October 31,

2002) (Tab 65).
170 Unisys R2A Transportation Management Consultants, Unisys R2A Scorecard: Airlines Industry Cost Measurement 13 (Nov. 2002) (Tab 66). 171 Id. 172 William S. Swelbar, The Role and Impact of Low Cost Carriers, MIT Global Airline Industry Program (March 26, 2002) (“Low Fare/Niche carrier growth has continued to penetrate the largest U.S. markets, and no region of the U.S. is immune.”) (Tab 69). 173 McCartney, Low-Cost Airlines Crunch Big Carriers (Tab 39). 174 Swelbar, The Role and Impact of Low Cost Carriers (Tab 69); Doganis, The Airline Business in the 21st Century 135 (By 1999, “[t]raffic growth and revenues [for low cost carriers] were sharply up as passengers, including business passengers, switched from the majors who were pushing up fares sharply to compensate for falling yields and rising fuel prices.”) (Tab 7).

74

175 Report of Captain Duane Woerth to the 90th Executive Board of ALPA (Sept. 10-13, 2002) (Tab 70). 176 Remarks of Don Carty, President & CEO, American Airlines, July 1, 2002, at http://www.amrcorp.com/hotline/c02july02.htm. (Tab 71); Doganis, The Airline Business in the 21st Century, at 223 (listing “the impact of low-cost carriers” as a primary reason why “the long-term trend in average yields is likely to be downward”) (Tab 7); Swelbar, The Role and Impact of Low Cost Carriers (Tab 69). 177 Low-Cost Carriers Put Squeeze On Delta, Bloomberg News, April 27, 2002 (Tab 72); David Grizzle, a Senior Vice President at Continental Airlines, agrees: “We’ve finally reached the point, perhaps, where [low cost carrier] penetration may be fatal” to the major carriers’ business models. McCartney, Low-cost Airlines Crunch Big Carriers (Tab 39). 178 Kasper Aff. ¶ 35 (citing U.S. DOT DB1A Database); see Exhibit F. 179 Id. 180 Id ¶¶ 36-37; see also Schwieterman, 14 DePaul Bus. L.J. 269, 271 (2002) (“The success of many low-cost carriers has been remarkable in recent months.”) (Tab 17); see also Exhibit G. 181 Kasper Aff. ¶ 45. 182 Association of Flight Attendants, "Why United is at Risk," available http://www.unitedafa.org/features/concessions_main.htm (Dec. 1, 2002) (emphasis added) (Tab 20). 183 Greene & Sussman, How Costs Dictate Strategy (Tab 65). 184 Tilton Aff. ¶ 11. 185 Id. 186 Id. 187 Kasper Aff. ¶ 57. Moreover, the number of domestic city-pairs that United actually carried passengers on

at

in 2001 is far fewer than the number of markets in their global route network. For example, the number of unique airport pairs in United’s global route network stood at 31,626 in 2001. Id.
188 Tilton Aff. ¶ 14. 189 Id. 190 Id. ¶ 17. 191 Id. 192 Id. 193 Id. ¶ 16. 194 Id. 195 Id. ¶ 18.

75

196 Report of Captain Duane Woerth to the 90th Executive Board of ALPA at (September 10 - 13, 2002). (Tab

70).
197 Kasper Aff. ¶ 24. 198 Unisys R2A Transportation Management Consultants, Unisys R2A Scorecard: Airline Industry Cost Measurement 18, 22 (Nov. 2002) (explaining that United’s pilots are the least productive of all major carriers, and only 54 % as productive as Southwes t’s) (Tab 66). 199 Ray Heidl & G. Sethi, Tracking Airline Costs (Blaylock & Partners, L.P., Dec. 2, 2002) (Tab 37). 200 Agreement between Southwest Airlines and Southwest Airlines Pilots’ Association (Tab 67). 201 2000 Agreement between United Air Lines Inc. and the Air Line Pilots in the service of United Air Lines Inc. (Tab 68). 202 Kain Aff. ¶ 8. 203 Id. These smaller planes are owned by independent regional airlines, such as Atlantic Coast Airlines. Though an RJ arrangement, United determines where the a irplanes fly, how frequently they fly, the time they depart, and what prices are charged. Most importantly, United keeps all the revenue from the seats sold on the jet. 204 Id. ¶ 9. 205 Id. 206 Id. 207 Id. ¶ 11; see also Lowenstein, Into Thin Air (explaining that the union-negotiated “scope clauses” prevent United and consumers from reaping many benefits of regional jet service) (Tab 39). 208 Kain Aff. ¶ 11. 209 Id. 210 Id. ¶ 13. 211 Id. ¶ 12. 212 Id. ¶ 13. 213 PR Newswire -FirstCall, “U.S. Airways to Furlough Approximately 2,500 Employees, Seeks Work Rule/Benefit Changes to Complete Restructuring” (Nov. 26, 2002) (Tab 74). 214 AMR Corporation 10-Q for 3Q 2001 at 6-7 (filed Oct. 24, 2001). 215 Delta Air Lines, Inc. 10-Q for 3Q 2001 at 23-24 (filed Nov. 13, 2001). 216 See Fraces Fiorino, Carty to Analysts: AA Aims to Survive, Aviation Week & Space Technology, Sept. 30, 2002, available at WL 26533555; American Airlines Cutting 7,000 Jobs, Dallas Business Journal, August 13, 2002, at http://www.bizjournals.com/dallas/stories/2002/08/12/daily 10.html?t=printable 2002 daily 10.html?t=printable (Tab 77). 217 W. Zellner & M. Arndt, American’s Latest Test Flight, Business Week, Dec. 2, 2002, at 47 (Tab 57).

76

218 AMR Corp. Press Release (November 25, 2002) (Tab 78). 219 Id. 220 American Airlines to Trim 1,100 Attendants, Associated Press, December 4, 2002 (Tab 79). 221 Brian D. Harris, Airlines: Standing in the On-Deck Circle – Labor, Salomon Smith Barney, Oct. 28, 2002, at 2 (Tab 75). 222 Nicoletta Ratti, American Airlines Asks All Employees to Forego 2003 Pay Increases, Dow Jones Newswires (Dec. 6, 2002) (Tab 86). 223 Press Release, Continental Airlines, Continental Airlines, Responding to Market Changes, Implements Measures to Increase Revenue, Reduce Costs (August 20, 2002) (Tab 80). 224 Id. 225 Id. 226 Id. 227 Press Release, Delta Air Lines Reports Third Quarter Results (Oct. 15, 2002) (Tab 81); Mark Niesse, Delta Leads Drop In Airline Stocks: Delta’s $350 Million Loss Affecting Stocks, Jobs, The Sun Herald, September 28, 2002, available at 2002 WL 24348604 (Tab 82). 228 Id. 229 Id. 230 Russell Granham, Delta to Overhaul Pension Plan Costs Savings $500 Million Over 5 Years, The Atlanta Journal and Constitution, Nov. 19, 2002, available at 2002 WL 3747098 (Tab 83). 231 Press Release, Northwest Airlines, Northwest Airlines Outlines Revenue Enhancing Initiatives, CostReduction Plans (March 20, 2001) (Tab 84). 232 Id.; Press Release, Northwest Airlines, Northwest Airlines Will Reduce Flying, Close Facilities To Realize

Cost Savings (July 19, 2001) (Tab 85).
233 See Liz Fedor, Northwest To Start Round Five Of Budget Cuts, Star Tribune, Nov. 16, 2002 (Tab 87). 234 Id. 235 Affidavit and Statement of David N. Siegel in Support of Chapter 11 Petitions and First Day Orders, ¶ 9 filed in In re US Airways Group, No. 02-83984-91 (E.D. Va. 2002) (Tab 88). 236 Id. 237 Affidavit and Statement of Neal S. Cohen in Support of Chapter 11 Petition and First Day Orders ¶ 4 filed in In re US Airways Group, No. 02-83984-91 (E.D. Va. 2002) (Tab 89). 238 See Kasper Aff. at ¶ 60 (citing US Airways press releases). Even though these measures reduced U.S. Airway’s costs by $1.3 billion annually, the airline recently announced its up to $300 million in additional cuts as a

77

result of rising fuel costs and continued weakness in the airline industry. US Airways Seeks More Cuts, Washington Post, Oct. 23, 2002, at E02 (Tab 90); US Airways Says It Needs to Cut More Costs, The New York Times, October 26, 2002, at C4 (Tab 92).
239 Conditional Application Pursuant to 11 U.S.C. § 1113(c) for Relief from Collective Bargaining Agreements if Consensual Agreements Cannot Be Reached ¶¶ 24, 26, 28, In re US Airways Group, No. 02-8398491 (E.D. Va. 2002) (Tab 91). 240 Id. at ¶ 26. 241 Id. at ¶¶ 26, 28. 242 Id. 243 US Airways Says It Needs to Cut More Costs, The New York Times, October 26, 2002, at C4 (Tab 92). 244 Ted Reed & Stan Choe, US Airways Cuts More Jobs, Charlotte Observer, Nov. 27, 2002 (Tab 94). 245 Id. 246 Micheline Maynard, US Air’s Chief Lender Threatens the Ultimate, New York Times, Dec. 7, 2002 (Tab

96).

78

Sponsor Documents

Recommended


View All
Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close