UAL Strokes Union With Hiring of CEO

Be careful what you wish for -- you could still go bankrupt.

United Airlines employees, who own 55% of the country's second-largest carrier, got their wish: a new executive suite, including the appointment of a permanent chief executive and the removal of both the president and chief operating officer.

But the front-office moves don't change the fundamental problems at the carrier, which is hemorrhaging cash daily, falling deeper into debt and in desperate need of cost reductions to receive a federally backed loan to avoid bankruptcy.

Over the Labor Day weekend, UAL (UAL - Cramer's Take - Stockpickr), parent of United Airlines, announced that Glenn Tilton, interim chairman of Dynegy(DYN - Cramer's Take - Stockpickr), would replace UAL interim CEO Jack Creighton effective immediately and assume the roles of president and chairman. Former president Rono Dutta and COO Andy Studdert -- both reviled by United's unions for what they called a lack of leadership -- will step down to give the incoming Tilton more room to operate.

UAL's stock got a healthy midmorning pop on the shakeup, rising 15%, but James Higgins, airline analyst at Credit Suisse First Boston, told investors to sell their stock and reduced his rating to sell from hold. "We believe there is simply too much to arrange in too little time for UAL to avoid a Chapter 11 bankruptcy filing," he wrote to investors, telling them there was a "nearly 100% probability" that UAL will file for Chapter 11.

Difficult Commission

Tilton's appointment ends UAL's four-month search for a new chief executive. Few within the industry wanted the thankless task of helming a carrier on the verge of bankruptcy, and so the company was forced to settle on an industry outsider. With a permanent CEO in place, discussions between labor and management can resume in earnest after months of icy relations.

Unlike Higgins, some analysts believe United may be able to avoid bankruptcy if unions warm to Tilton. "Tilton wouldn't have taken the job if he thought bankruptcy was inevitable. But dodging bankruptcy is still going to be difficult," said Ray Neidl, airline analyst for Blaylock & Partners. "You have so many different labor interests, but if everyone starts pulling on the rope together, it's possible."

Tilton's first communication to employees reflected the unique tension of a company's whose unionized workers are also its owners. "Our highest priorities must be to restore employee trust and revive investor and consumer confidence," he said in a written statement on Monday. "That means working cooperatively with all of United's stakeholders on a plan to address near-term financial issues and develop a much-needed, long-term strategy for the company's renewed growth. We can only reach these goals through a genuine partnership with our employees and their unions."

Along with the rest of UAL's board, labor voted in favor of Tilton's appointment and voiced hope that he can lead the company back toward profitability. "This is an opportunity for United's new CEO to put in place a team capable of managing a multibillion-dollar, employee-owned company," said Tom Buffenbarger, international president of the International Association of Machinists and Aerospace Workers. "The last team forgot that our members own the airline and that the employees are United Airlines' most valuable asset."

Tilton at the Windmill?

But one of the main factors in CSFB's downgrade was labor's general refusal to grant concessions -- something Tilton's appointment may not change. "UAL's unions remain in deep denial about the dire circumstances in which their company finds itself, and we believe it's nearly impossible that UAL will gain labor cost savings that will pass muster with the Air Transportation Stabilization Board," wrote Higgins.

Others were similarly unimpressed by the Labor Day love-in. "It's great that the unions supported him, but they were initially supportive of Creighton as well. And they didn't want to deal with him when push came to shove," said Jonathan Schrader, airline analyst with Morningstar.com. "You're talking about big cuts to salary, which no one wants. Just because you have a change in leadership doesn't mean negotiations become all that smoother."

Time is running out. United has $1 billion in loan refinancing due in the next four months and needs to revise its application for a $1.8 billion loan guarantee from the ATSB to prove it can reduce its cost structure. While it has ample liquidity to keep going for the time being, it will need deep concessions from labor in order to continue as a going concern.

Late last week, United announced its plan to cut labor costs by $9 billion over the next six years, but all three unions balked at the deal because it required them to negotiate with interim management and sacrifice far more than the parent company. Unions were expected to shoulder $1.5 billion of the $2.5 billion in annual cost savings United hoped to achieve.

"United management wants its employees to invest $9 billion of our hard-earned money in an airline with no plan and no leader," said Greg Davidowitch, president of Association of Flight Attendants, on Friday afternoon, echoing statements from machinists and pilots.

The Bottom Line

Both unions and management have an interest in United avoiding bankruptcy, since the equity stakes each hold will be worth nothing if the company files Chapter 11. But the threat of bankruptcy alone hasn't been enough, thus far, to force unions to bend.

When former CEO Creighton announced that United would seek bankruptcy if labor refused to give concessions, only pilots tossed management a bone in the form of a conditional proposal offering far less than what management wanted.

"In the end, we've see some kind of deal from pilots. But the mechanics and flight attendants weren't going to concede," said Schrader. "They've been steadfast in saying they're not giving anything back and that they've already given their concessions. I'm not sure, all of a sudden, that Tilton will change their way of thinking."