A widely anticipated bankruptcy filing by United Airlines could provide the industry with the catalyst it needs to slash costs, renegotiate union contracts and eliminate unprofitable flights as part of an industrywide restructuring aimed at stemming record-setting losses.
When it's over, labor unions will have less influence and consumers will enjoy fewer perks as airlines start to look and behave more like their low-cost, no-frills competitors, analysts said yesterday.
A few airlines, such as Arlington, Va.-based US Airways, may not survive the shakeout, some added.
But it all depends on whether United successfully uses Chapter 11 bankruptcy proceedings to drastically cut costs and force the entire industry in a new direction that reverses years of excesses driven by the stock market boom of the late 1990s.
"The irony of the bankruptcy is that, through it, United stands the potential of defining the cost structure and efficiency level of the whole industry - if they do it right," said Henry H. Harteveldt, an industry analyst for Forrester Research Inc.
The Associated Press, quoting anonymous sources, said United was preparing to file for bankruptcy protection Sunday. The carrier was in negotiations with lenders on the terms of a $1.5 billion debtor-in-possession loan, AP's sources said. The loan would enable the airline to keep flying while in bankruptcy proceedings.
The lead lenders involved in the negotiations are J.P. Morgan, Citigroup, Bank One and GE Capital, a unit of General Electric Co., the sources said.
A day after losing its bid for government assistance, United executives also met with union leaders and consulted with a key airline ally overseas, the wire service reported.
Earlier yesterday, shares of beleaguered UAL Corp., the airline's parent, slid nearly 68 percent to close at $1 after trading was halted for four hours while the New York Stock Exchange reviewed UAL's qualifications to continue being listed.
Because of the stock plunge, Dow Jones & Co. removed UAL from the Dow Jones transportation average and replaced it with United Parcel Service Inc.
And Standard & Poor's further downgraded United's corporate credit ratings after the "disappearance of any realistic possibility" of paying off deferred debt and avoiding bankruptcy.
The battering came a day after the Bush administration rejected the airline's plea for a federal loan guarantee considered crucial to its plans to avoid bankruptcy.
A bankruptcy filing would make the company's shares all but worthless.
United, based in the Chicago suburb of Elk Grove Village, declined to say if it will file for Chapter 11 protection, but analysts said such a move seems inevitable unless the carrier comes up with nearly $2 billion in financing on its own.
The carrier still has the option of resubmitting its loan application to the federal Air Transportation Stabilization Board, which was set up after the Sept. 11 terrorist attacks to help struggling airlines.
Consumers aren't likely to feel any immediate impact if the company files. United would continue to fly in bankruptcy, just as US Airways has since it filed for bankruptcy in August.
Analysts said a bankruptcy filing would give United considerable leverage in negotiating with its banks, vendors and unions as it tries to squeeze more costs out of its system.
A smaller United Airlines also would be beneficial to competitors.
American Airlines, Northwest Airlines, Delta Air Lines Inc. and Continental Airlines Inc. could pick up market share as United shrinks and consumers flee to the competition. Those airlines could also have an easier time raising ticket prices as their market share grows.
"There's blood in the water; they can smell it," said Bill Oliver, an aviation analyst with the Boyd Group, an Evergreen, Colo., consulting firm. "They see this as an opportunity to enhance their own revenue by attracting passengers away from United."
Part of the problem is that United has some of the highest costs in the industry, spending about 11.3 cents to fly one airline seat a mile, a key industry measure.
That's almost 20 percent more than some of its main competitors and comes largely as a result of expensive labor contracts negotiated in the mid-1990s.
United's generosity emboldened unions at rival carriers, analysts said, contributing to spiraling labor costs throughout the industry.
"Many [airline executives] feel United caused this problem," said Ray Neidl, an airline analyst with Blaylock & Partners.
But a bankrupt United could help solve it. As it cuts costs as part of a restructuring, other carriers may soon find themselves playing catch-up again.
American, which passed United last year to become the world's largest carrier, would be the most vulnerable. It spends about 11.5 cents to fly one seat a mile.
By contrast, low-fare leader Southwest Airlines, the only airline to post a profit this year, spends between 7 cents and 8 cents. Southwest is Baltimore-Washington International Airport's dominant carrier.
"There's going to be a tremendous amount of pressure to pull down costs, and the biggest cost creep for the airlines has been salaries," said Robert Agnew, an airline consultant with Morten Beyer & Agnew Inc.
Unions will be under increasing pressure to accept new work rules that increase productivity. For example, pilots at United are contracted to fly about 75 hours per month, but the actual number comes in at around 60 because of work rule restrictions, Agnew said. By contrast, Southwest pilots fly about 80 hours per month.
Congested hubs are another source of high costs. Many analysts expect major carriers to reduce their hub operations and take steps to stagger flights throughout the day in an effort to reduce runway congestion. That means travelers will spend less time waiting to take off at major airports.
Analysts are divided over whether there will be more bankruptcies or mergers over the next five years as the industry restructures.
But most see major carriers getting leaner while low-cost carriers, such as Southwest, JetBlue and AirTran Airways, get bigger. Some see Southwest, currently the sixth-largest carrier, moving into the top five in the near future.
"We're going to continue to see the proliferation of the low-cost carriers who are now able to use smaller, efficient aircraft that have greater range," Agnew said.
That means the days of flying across country in a widebody jet are numbered, a trend that is already taking hold as Southwest and JetBlue increase their cross-country flying.
At the same time, expect major airlines to cut fuel and labor costs by using more small regional jets that carry 50 to 100 passengers over short distances.
Such changes have historically been resisted by airline unions.
And don't be surprised if fares creep higher as the industry stabilizes.
"We have to wake up and realize we'll all probably have to pay a little more whether it's to fly on Southwest or United," said Harteveldt, the Forrester analyst.
The Associated Press contributed to this article.