United Airlines filed for federal bankruptcy court protection today, reeling from two years of heavy losses and unable to pay off nearly $1bn in debt that comes due this week.
The Chapter 11 filing in US bankruptcy court in Chicago is by far the largest airline bankruptcy ever. The suburban Chicago-based company has lost $4bn (£2.5bn) over the past two years due to a slumping economy, flawed business strategies and last year's terrorist attacks.
The airline has promised to keep flying while it sheds costs under the auspices of a bankruptcy court judge and overhauls its business plan in an attempt to become profitable again.
Chapter 11 bankruptcy frees a company from the threat of creditors' lawsuits while it reorganises its finances. The debtor usually retains control of the business and its assets.
As the second largest airline in the world, United operates about 1,700 flights a day and around 20% of all US flights. It has the most extensive worldwide route structure of any airline. While the bankruptcy will probably have no immediate effect on passengers, protection from creditors will come at a steep price for the 83,000 employees who own 55% of the company. A bankruptcy court judge is almost certain to order wage and job cuts and could dissolve the employee stock ownership plan.
The board of directors of United's parent company, UAL Corp, voted unanimously last night to authorise management to file for bankruptcy, a person familiar with the situation said. The move came as airline officials put final touches on $1.5bn in debtor-in-possession financing, to be obtained from several banks.
These loans would give United enough cash to keep flying in the short run, with the lenders getting first claim on the airlines' assets, ahead of other creditors, should the airline have to shut down and liquidate its assets.
A spokesman for United's pilots union yesterday urged passengers not to abandon the airline during a bankruptcy filing.
"We're going to be flying airplanes today, tomorrow, next week and next year," pilot Herb Hunter said. "This is going to be painful for the stockholders and the employees, but the airline's going to keep flying and we're going to come out of this stronger. The passengers shouldn't notice any difference."
On pace to lose an industry-record $2.5bn this year, United had pinned its last hopes of avoiding bankruptcy on obtaining federal backing for $1.8bn of a $2bn loan that banks would not otherwise provide. But the Air Transportation Stabilisation Board, created last year to help the airline industry recover after the September 11 terrorist attacks, rejected United's request on Wednesday.
The linchpin to United's proposal was $5.2bn in labour cutbacks by 2008, but the three-member federal panel said the airline's business plan was financially unsound and a loan guarantee would have risked US taxpayers picking up the tab.
The company has struggled even more than other airlines during the industry's worst-ever slump. United already had lost approximately $1bn since mid-2000 by the time of the attacks because of labour turmoil, the industry's highest costs and several failed strategies, including a costly and time-consuming bid to acquire US Airways - itself now in Chapter 11 bankruptcy. United cut services and laid off nearly 20,000 workers after the terrorist attacks, but it hasn't come close to making up for revenue lost from the drop-off in business travel. The filing is one of the ten largest bankruptcies in US history - a list topped by the recent failures WorldCom and Enron. It is the 11th time a major US airline has filed for bankruptcy since deregulation in 1978, including TWA three times.
A bankruptcy restructuring is likely to result in fewer flights, thousands of additional layoffs and extensive other cost-slashing under the supervision of a judge. Frequent-flier miles and basic fare levels are likely to be retained for the short term, although fare hikes are likely over the longer haul.