United's Labor Deals May Be in Jeopardy

Fri Nov 5, 2004
By Meredith Grossman Dubner

CHICAGO (Reuters) - United Airlines formally raised the possibility of throwing out union contracts on Friday, asking a bankruptcy judge for permission to discuss the matter at an upcoming court hearing.

The No. 2 U.S. airline, which has been trying to revamp its business after nearly two years in bankruptcy, also told its unions late on Thursday it must terminate their pension plans as part of a drive to cut costs by another $2 billion a year.

Glenn Tilton, chief executive of United parent UAL Corp. (UALAQ.OB: Quote, Profile, Research) , told employees that one-third of the savings would come from labor, one-third from replacing retirement plans with cheaper ones, and one-third from non-labor cost cuts.

United has said it needs the savings to secure financing to exit bankruptcy. The carrier said last month it would move toward voiding labor contracts in early November and that it needed the savings by mid-January to maintain a comfortable cash balance.

As part of the cost-cutting plan, Tilton said he and seven top executives will take 15 percent pay cuts as of Jan. 1, and salaried and management employees also will participate.

"We have faced difficult challenges and tough choices from the start of the bankruptcy, and we face them again today," Tilton said in a message to employees on Thursday night.

United asked the court to abrogate labor contracts early in its bankruptcy, but unions at the Elk Grove Village, Illinois-based airline agreed to $2.56 billion in concessions before the court ruled on the company's request.

United, which has been in Chapter 11 since December 2002, gave its unions proposals on Thursday that included changes to wages, benefits and work rules.

The pilots, machinists and flight attendants' unions said they were reviewing the company's proposals with legal and financial advisers and declined to comment on specifics.

The Air Line Pilots Association, in a message to members, called the proposed changes "dramatic," while the Association of Flight Attendants called the demands "disastrous."

Documents on the International Association of Machinists' Web site suggested United was seeking pay cuts of as much as 11 percent from the IAM starting in January and running until the airline's bankruptcy exit.

The process of abrogating labor pacts can take up to 51 days. United said it will keep working with unions to reach consensual deals but asked the judge to set a schedule that could allow it to have forced savings in place by mid-January.

United, like other carriers, has faced tremendous setbacks, including record-high fuel prices and a lack of pricing power due to competition from discounters and weak demand.

Tilton said United will have cut its costs by $7 billion a year when it has completed this restructuring.

Unions at other airlines have agreed to concessions to help their carriers survive the industry downturn. Pilots at US Airways Group (UAIRQ.OB: Quote, Profile, Research) , which filed its second bankruptcy in two years in September, had their pension plan canceled and replaced with a cheaper one during that carrier's previous bankruptcy.

US Airways also has threatened to throw out contracts of some unions if they do not agree to new cuts.

Pilots at Delta Air Lines (DAL.N: Quote, Profile, Research) are in the process of voting on concessions, a big part of that carrier's fight to avoid bankruptcy. Pilots at Northwest Airlines Corp. (NWAC.O: Quote, Profile, Research) on Friday approved $265 million in givebacks.

In separate papers filed on Friday, United asked the court to allow it to pay lenders up to $2.5 million to change the terms of its bankruptcy financing after warning last week that it could default on the agreement before the end of the year. The proposed changes, subject to the approval of its lenders, would allow United to miss certain profit thresholds in coming months without defaulting on the loan.

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