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Sunday Edition March 2, 2003

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    __________________________________________ A Village United Sunday Edition __________________________________________ Greetings Villagers! Sunday, March
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      A Village United
      "Sunday Edition"
      Greetings Villagers! Sunday, March 2, 2003

      Thank you for subscribing to the Sunday Edition.

      United urges its union to concede on issues
      By Susan Carey and Scott McCartney

      It's crunch time for United Airlines, and much of the rest of the
      airline industry. United faces a crucial deadline in a couple of
      weeks: Unless its workers agree to huge cost cuts, the carrier
      intends to ask a federal bankruptcy judge to void the unions'
      labor contracts so United can impose new terms.

      Either way, United must slim down to survive in a devastated
      market. And if it succeeds, the industry's other cost-crippled
      dinosaurs will be forced to take knives to their own bloat.

      To see the scope of the radical restructuring the nation's
      airlines could face, look at United and an airline that has what
      United wants, thanks to two trips through Chapter 11.

      The most senior United flight attendants get 51 days of vacation
      annually. At Continental Airlines, flight attendants top out at
      37 days. At hub airports, United aircraft are waved in and pushed
      away from gates by its highly paid mechanics. Continental uses
      ramp workers and baggage handlers to do those jobs. In 2001,
      United pilots flew an average of only 36 hours a month -- the
      lowest in the industry -- while Continental pilots logged 49 that

      Such inefficiency at UAL Corp.'s United, the industry leader in
      staff costs, stands at the heart of the showdown between the
      airline and its workers. Last year, United, the world's No. 2
      carrier, spent almost 50 percent of its revenue on wages and
      benefits, and ended up with a net loss of $3.2 billion. AMR
      Corp., parent of American Airlines, spent nearly 49 percent of
      its revenue on labor and tallied an even-larger net loss of $3.5
      billion. Continental spent only 35 percent of its revenue on
      salaries and benefits last year and incurred a 2002 net loss of
      $451 million.

      No. 1 American has raised the possibility of bankruptcy
      proceedings and on Feb. 4 asked its workers for $1.8 billion in
      annual labor savings -- 21 percent of total labor costs last
      year. Delta Air Lines, Northwest Airlines and US Airways Group
      Inc., which filed for bankruptcy-court protection last summer,
      all spent more than 40 percent of their revenue on labor. Delta
      and Northwest also have given notice to their employees in recent
      days that changes must be made. Without fast and deep surgery,
      any one of these carriers could be extinct in a few years.

      The industry has suffered an unprecedented decline in revenue
      driven by the poor economy, terrorism jitters, the Internet --
      which makes it much easier to find cheap tickets -- and the
      specter of war. Making matters worse, the big airlines are being
      swamped by expanding competition from low-cost carriers such as
      Southwest Airlines, JetBlue Airways and AirTran Airways.

      Lowering costs

      Facing these travails, United is pushing for lower costs. "I am
      here to introduce United to the harsh, brutal realities of
      competition in the new marketplace," UAL Chief Executive Glenn
      Tilton said in response to a pilot angered by the prospect of
      making major givebacks. "Our labor costs are the highest in the
      industry. Unsustainable. Our productivity is not competitive with
      competitors. Unsustainable."

      Yet United's workers have already felt some pain. The pilots
      voluntarily agreed to a 29 percent pay cut Jan. 1, and the flight
      attendants gave up 9 percent of their pay. The bankruptcy judge
      granted United's request last month and ordered members of the
      machinists union to give back 13 percent of their pay. A senior
      United flight attendant earned about $45,000 last year, a senior
      mechanic more than $70,000, and a 10-year captain on a
      narrow-body jet about $186,000. Pilots have pointed out that
      while they make up 28 percent of payroll expenses, they are being
      asked to shoulder 44 percent of the total savings sought.

      Organized labor has had two seats on UAL's 12-member board since
      1994, when the pilots, machinists and some other workers bought
      55 percent of UAL in return for six years' worth of wage
      concessions. The experiment with employee ownership has been
      criticized as a disappointment by both labor and management since
      it never succeeded in changing the culture of the company or
      repairing decades of mistrust between the two sides. And although
      the two labor directors have special powers, they also face
      potential conflicts between their roles as elected union leaders
      and their roles as board members with fiduciary responsibilities
      to look after the good of the entire company.

      United, which filed for bankruptcy protection in December, wants
      its unions to agree to longer-term cost cuts voluntarily. But if
      they don't, the carrier can emulate Continental in using Chapter
      11 and the power of a federal bankruptcy judge to rewrite its
      labor contracts. United aims to pare its employee costs by nearly
      $2.6 billion a year -- or 36 percent from 2002 levels of $7.1
      billion -- with a combination of lower pay, reduced benefits,
      higher productivity, and more leeway on outsourcing. It also
      wants to form a separate subsidiary with even-lower costs to
      compete with low-fare carriers.

      The other big carriers don't yet have the cudgel of Chapter 11 to
      wield over their unions. But they may not need it. American's
      pilot union, the Allied Pilots Association, says it believes it
      is "absolutely necessary" that workers agree to contract changes.
      Capt. John Darrah, APA president, wrote to members last week: "We
      must become competitive in this new environment, or die."
      American has said Chapter 11 remains a possibility if it doesn't
      win the savings quickly.

      The temporary wage cuts United already has won, pending further
      negotiations, are valued at $840 million annually. The savings
      were needed to help UAL meet strict cash-flow targets required by
      the lenders providing interim financing to keep the company aloft
      in Chapter 11. United wants to lock in the temporary pay cuts and
      other belt-tightening steps by early May, when its interim
      financing targets get tougher.

      If the company gets there through a court process, the unions
      might be angry enough to strike -- although that's a remote
      possibility since a strike would push the company into
      liquidation. Even a slowdown or a sick-out would cause
      irreparable harm at a time when each passenger counts more than

      It wasn't just overly generous labor contracts that got the big
      carriers into this mess. Other mistakes range from too many types
      of planes, which boosts maintenance and training costs, to
      reckless expansion and inefficient schedules. Struggling carriers
      have since corrected many problems, but their plight has still
      worsened with the current squeeze of higher fuel prices and lower
      bookings as war jitters increase.

      Labor costs are their single largest expense, however, and
      represent the best opportunity for change. Simply cutting pay
      won't be enough. The key is stamping out archaic work rules.
      These limit the big airlines' flexibility to use cheaper
      subcontractors to do some jobs, build more-efficient flight
      schedules, and make employees perform multiple tasks. And the key
      for the industry's big carriers may be United.

      Playing dominos

      "It's a domino game" among the major network airlines, says Dan
      Kasper, an airline consultant for LECG in Cambridge, Mass. "The
      first little domino was US Airways," which has cut its labor
      costs by 27 percent while in Chapter 11. United, he adds, "is the
      big kahuna."

      Pilot contracts represent the biggest variance and the most
      opportunity for savings from improved productivity. Gary Chase, a
      Lehman Brothers analyst, estimates that if United got all that it
      wanted from its pilots alone, the new labor agreement could save
      the company nearly $1 billion a year.

      A senior United pilot who declines to be identified says he
      earned more than $260,000 last year -- that was before the pilots
      recently agreed to a 29 percent pay cut -- and flies fewer than
      40 hours a month. But he is paid, under contract terms, for 75
      hours. He legally parlayed five vacation days last month into 25
      days off with full pay because United's contract forces the
      company to release a pilot from any scheduled flight that
      overlaps with one of his vacation days.

      At Continental, a pilot of similar seniority flying a Boeing 767
      earns $216,000 annually and flies an average of 56 hours a month.
      He usually gets paid only for the hours he's scheduled to fly,
      and he can't game the system for more paid time off.

      Capt. Paul Whiteford, head of the Air Line Pilots Association at
      United, says pilot productivity has been hurt because the carrier
      in late 2001 retired two types of aircraft that were old,
      inefficient and not needed after United cut capacity. The move
      left as many as 1,000 pilots a month not working but getting paid
      while they awaited training on different models.

      Although three-quarters of United's pilots are scheduled to fly
      75 to 81 hours a month, the average comes down when nonflying
      activities -- vacation, sick leave, training and special
      assignments -- are added in.

      United also is fighting the tradition of "rigs," contractual
      formulas that pay pilots and flight attendants for the time they
      spend sitting at airports or in hotel rooms. At United, ALPA and
      the Association of Flight Attendants contend that the rigs
      protect workers and help the carrier build more efficiency into
      its scheduling. Continental essentially did away with them in its
      1983 bankruptcy.

      Continental also did away with monthly caps on hours flown by
      pilots. At many airlines, a pilot's paid hours, including hours
      paid under rigs, was limited, restricting the flying a pilot can
      do to well under the federal limit and forcing the company to
      hire more aviators. United wants to raise its monthly cap to 92
      hours from the current 81 or 85 hours. It also wants to cut the
      monthly guaranteed minimum pay to 60 hours a month from the
      current 75.

      All told, United is seeking more than $600 million a year in
      productivity enhancements and work-rule changes from its entire
      work force. Privately, people familiar with union rules concede
      there is plenty of fat that can be cut. "There are lots of ways
      to achieve $150 million to $175 million in permanent productivity
      savings in the pilot contract," says an individual on the labor
      side who is familiar with that document. Adds another labor-side
      individual who knows the ins and outs of the flight-attendant
      agreement: "There is so much money slopping around in the
      vacation area. This contract is 30 years old."

      While Continental outsources much of its heavy maintenance, at
      considerable savings, United does most of its in-house. It is
      limited by its contract with the machinists union to spend no
      more than 20 percent of its maintenance budget on outside

      Continental has another lesson for United: how hard it is to
      become lean and productive in bankruptcy court. After Continental
      filed for Chapter 11 in 1983, then-Chief Executive Frank Lorenzo
      dissolved the carrier's labor contracts and laid off 65 percent
      of its workers. Many of the remaining employees, shorn of union
      representation, struck. Although the airline quickly got back
      into the sky with a skeleton staff, that break with labor led to
      years of abysmal service, a second trip through bankruptcy court
      in 1990 and a near brush with a third in 1994.

      Years of cost-cutting ravaged Continental's service. In the
      decade between its first bankruptcy filing and its emergence from
      bankruptcy the second time in 1993, Continental recorded annual
      profits only three times. In the 1980s, it tallied cumulative
      losses of $1.6 billion, then piled on a further $173.3 million in
      losses between 1990 and 1994.

      But with lower pay and flexible work practices, the payoff for
      Continental, now the world's seventh-largest carrier, finally
      came in the mid-1990s under Chief Executive Gordon Bethune.
      Bethune repaired notoriously poor labor relations and
      reinvigorated the work force without layering on a lot of extra
      pay and perks. Today, despite continuing losses and a heavy debt
      load, Continental is one of the best performers among the major
      airlines and is expected to be one of the first to return to

      The unions have been critical of the breadth of the changes
      United is seeking, set out in "term sheets" in December. Capt.
      Whiteford, United's ALPA chief and a UAL director, calls the one
      directed at his 8,600 members a wish list. "It goes from areas
      that probably should be addressed to those that are silly," he

      Much of the union ire is focused on United's plans to reduce
      pension benefits and start the low-fare subsidiary, something
      Continental tried unsuccessfully in the early 1990s. Unions also
      are concerned that the higher productivity the company seeks
      would lead to fewer jobs.


      Big airlines have higher labor costs than many of the smaller,
      low-fare operators. Labor costs as a percentage of revenues in

      United 49.7 percent

      American 48.5

      US Airways 46.7

      Delta 46.3

      Northwest 40.5

      Southwest 36.1

      Continental 35.2

      Alaska 31.7

      America West 29.1

      ATA 27.8

      AirTran 27.7

      JetBlue 25.5

      Source: the companies



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