United Air urged to focus
more on non-labor savings

The bankrupt airline has cut $3.8 billion
in worker-related costs in the past two years

CHICAGO >> Pillows and blankets will stay. More corporate and administrative costs will go. Airport operations will be redesigned to become more cost-efficient.

Moving toward the exit sign in bankruptcy, United Airlines is looking for more non-labor savings after effectively completing work force-related cuts totaling a staggering $3.8 billion annually over the past two years.

"In every area of our work where we are not yet competitive, we'll continue to lower expenses and improve productivity," CEO Glenn Tilton told employees last week.

After 30 months in bank-ruptcy, the nation's second-largest airline says it hopes to emerge from Chapter 11 this fall. That target became more reachable Tuesday when United gained contract agreements with its last two holdout unions, representing a combined 27,000 mechanics, ramp workers and other ground workers.

But the carrier, a unit of Elk Grove Village, Ill.-based UAL Corp., still has important unfinished business before it nails down the needed $2 billion to $2.5 billion from banks in exit financing.

Heading the to-do list is resolving a costly standoff over airplane leases. United's initial goal of slicing $900 million a year off its plane rental costs was dealt a major blow last month when it lost a risky court bid to have the leasing companies declared an illegal cartel, giving them the upper hand in negotiations.

Unions and other critics of its bankruptcy strategy maintain that management has been unduly obsessed with labor cuts. They say some of United's fellow network carriers have done more to reduce non-labor costs, even without the advantages of bankruptcy.

Michael Riley, chief financial officer at United in 1985-86 and now assistant dean at the University of Maryland's University College, acknowledged the progress made in reworking labor contracts but said more should have been accomplished elsewhere.

"How much better it could have been if they had figured out at the start what they did really need," Riley said yesterday. "They've been focused on wage givebacks from labor as opposed to figuring out a strategy to make the place better."

United management denies it has overlooked other areas or that cutting labor costs has been, as the flight attendants' union puts it, its first and last choice.

"Our employees have made significant contributions to improving the structure of the company and we appreciate that," Chief Operating Officer Pete McDonald said. "But our focus has been just as intense on the non-labor side, to reduce costs."

Unlike some airlines, he said, United is trying to avoid cutbacks in areas that make a difference to its passengers -- such as pillows, blankets and Economy Plus, a seating section with extra legroom. That could be taken as a dig at rivals such as American Airlines, which removed pillows from most domestic flights in February to save money.

Labor has accounted for more than half the cuts in bankruptcy: $2.5 billion annually from contract changes made in 2003, $700 million from 2005 reductions and $645 million from unloading its four defined-benefit pension plans.

Non-labor cuts also have been substantial in bankruptcy, however, at an estimated $3.2 billion a year. Included among the cost cuts, some of which were detailed in a recent bankruptcy court filing:

>> A smaller, simpler fleet. By rejecting many leases, United has simplified its fleet to five aircraft types from 10 and reduced its size to 455 aircraft from 565. Capacity is down 18 percent since 2002.

>> Fuel conservation. Pilots and dispatchers have been trained in fuel efficiency techniques such as shutting down engines immediately on arrival at gates and flying more direct polar routes, saving a projected $50 million in 2005. Less backup fuel also is being carried, and the company is hedging more jet fuel -- 20 percent this year -- to soften the blow of sky-high prices.

>> United Express. Flying fewer and smaller planes at lower rates than it paid previously to its regional partners has cut annual costs by $300 million at United Express, whose flights are operated by small carriers under the United name.

>> Airport revamping. Recent changes in behind-the-scenes United operations at airports, such as lobby and ramp work, are expected to save $150 million annually.

>> Fewer real-estate obligations. Two of the three large maintenance bases from pre-bankruptcy, in Indianapolis and Oakland, have been shut down and the one at San Francisco has been reduced. Ticket offices away from airports also have been closed.

Ted, the low-fare service that United launched 16 months ago to compete better with discount carriers on certain routes, is one bankruptcy initiative that hasn't cut costs. Denver-based airline consultant Mike Boyd cites the experiment as a "giant expense" that typifies United's need to do more.

United is performing well operationally and has strong on-time record in bankruptcy, Boyd said.

But, he added: "The problem is, they've got to get their costs down further."