UAL Corp., parent of United Airlines, filed for bankruptcy protection in Chicago yesterday, capping a year of record losses and setting the stage for the largest airline reorganization in history.
The downsizing of the world's second-largest airline is expected to accelerate an industrywide restructuring.
The outcome is likely to be more layoffs and fewer flights as the nation's biggest airlines adjust to the slumping economy, diminished business travel and increasing pressure from profitable low-cost competitors such as Southwest Airlines, JetBlue and AirTran Airways.
"This could be a defining moment in the industry," said Steven A. Morrison, professor of economics at Northeastern University. "I don't want to be dramatic, but this could be the date people point to when the network carriers started to make significant changes in labor and pay and operations."
The filing means United, which faced $875 million in debt payments this week, will be shielded from creditors as it tries to cut costs and return to profitability under the supervision of a bankruptcy judge. The company listed $22.7 billion in assets and $21.4 billion in debts, making it the seventh-largest corporate bankruptcy in history.
By comparison, US Airways, the only other major airline to seek bankruptcy protection after the Sept. 11, 2001, terrorist attacks, listed less than $8 billion in assets when it entered Chapter 11 in August.
"I am confident that we can restore profitability and re-establish United as the world's premier global carrier," said Glenn F. Tilton, United's chief executive officer. "Our best days are ahead of us."
Labor leaders pledged cooperation as the airline restructures. The company has 83,000 employees, most of them unionized.
"Any successful restructuring of United in bankruptcy must involve continued cooperation and collaboration among [the Air Line Pilots Association], United management and all of the company's labor unions," the airline's pilots union said. "We look forward to those discussions."
The airline said frequent-flyer programs will not be affected and it will continue to fly as usual. Tilton said the carrier hopes to emerge from Chapter 11 in 18 months. The company's shares closed unchanged yesterday at 93 cents.
At a Chapter 11 hearing yesterday, U.S. Bankruptcy Court Chief Judge Eugene R. Wedoff issued orders allowing United to keep operating.
James Sprayregen, an attorney for United, told Wedoff that the company was losing between $20 million and $22 million a day this month and desperately needed to cut costs. The company and a coalition of union leaders were scheduled to meet today to begin talks about reducing costs.
The reverberations of United's woes will be felt at Washington's Dulles International Airport, where the airline carries nearly 40 percent of the passengers, and at Baltimore-Washington International Airport, where the carrier has been growing and carries more than 100,000 passengers monthly. The airline's biggest hubs are in Chicago, Denver, San Francisco, Los Angeles and Dulles.
The Metropolitan Washington Airports Authority, which manages Dulles, said it has reduced its expansion program by $1.5 billion in response to United's difficulties. Officials at both BWI and Dulles are confident that competitors will fill in the gaps if United scales back service.
Analysts said bankruptcy for United was inevitable after the board set up to administer financial aid to the airline industry after the Sept. 11 attacks rejected the airline's bid for a $1.8 billion federal loan guarantee.
In rejecting United's application Wednesday, the federal Air Transportation Stabilization Board said the airline's revenue projections were overly optimistic and its cost-cutting proposals didn't go far enough. The airline, which has the option of reapplying for the loan guarantee, had secured $5.2 billion in pay concessions from its labor unions. Those agreements were voided by yesterday's filing.
In bankruptcy, the airline will have greater leverage to renegotiate labor contracts, aircraft leases and vendor agreements as it seeks to reduce costs.
The bankruptcy filing came after a weekend of meetings with bankers and lawyers aimed at securing financing that will allow the airline to continue to operate.
Citigroup, J.P. Morgan Chase, Bank One and the CIT Group have agreed to provide $1.5 billion in debtor-in-possession financing as the company reorganizes.
The lenders will get first claim on the airline's assets, which include 543 planes that fly nearly 1,800 flights a day. The airline has the most extensive route system in the industry.
"This is going to be long and it's going to be contentious," said Darryl Jenkins, director of the Aviation Institute at George Washington University. "This could easily last a couple of years."
Analysts said United's bankruptcy is made more complicated by the fact that it is 55 percent employee-owned. The company gave labor unions two seats on its board and a substantial stake in the company as part of a plan to avoid bankruptcy in 1994.
Many expect that ownership structure to be wiped out in bankruptcy, a move some analysts see as necessary if the airline is going to make difficult decisions that could hurt employees.
Ray Neidl, an airline analyst with Blaylock & Partners in New York, called the employee ownership plan "a hindrance to running the company." He said United must find a way to cut costs while keeping employees motivated.
If the airline succeeds in getting employees to take bigger cuts, other airlines will likely follow suit in an effort to be more competitive with lower-cost rivals.
American Airlines, which passed United to become the world's largest last year when it acquired Trans World Airways, asked employees Friday to forgo pay raises next year as part of an effort to trim its costs by $3 billion to $4 billion.
"On the one hand, [a United bankruptcy] is good for the rest of the industry in that it will no doubt over time result in a smaller United, and since the industry is suffering from excess capacity, that will benefit it," said Morrison, the economics professor.
The carrier's labor problems accelerated in 2000 when it moved to acquire US Airways Group Inc. of Arlington, Va., parent of US Airways. That deal, which was abandoned in 2001 after federal regulators raised antitrust concerns, contributed to tensions with its pilots union, which feared the $12.3 billion merger would affect pilot seniority. United later gave its pilots a contract that raised pay by more than 25 percent.
Analysts said that move set the stage for a financial crisis when the economy began to slump, followed by the Sept. 11 terrorist hijackings that involved two United planes.
The carrier lost a record $2.1 billion last year and $1.7 billion through the third quarter of this year. The industry as a whole is projected to lose more than $8 billion in 2002. That comes on top of $7 billion in losses last year.
The Associated Press contributed to this article.