So UAL has finally reached agreement with its unions. What now? That is the million dollar question. Or more specifically the $1.8 BILLION dollar question, since the entire point of this bargaining was to get the ATSB to guarantee that amount in loans. First things first, lets give UAL credit for getting this far. To be quite honest, I was a subscriber to the Jimmy Goodwin school of thought that UAL would perish sooner rather than later. Not only have they managed to stick around for over a year longer than Jimmy G. did, but 2 CEOs later they actually have a fighting chance of making it into 2003 as a solvent entity. Obviously, the most pressing concern for UAL is the debt that is due in early December. In normal times, a piddling few hundred million would be something that UAL could refinance with a couple of phone calls and nothing more. But these aren't normal times. UAL has proven the old adage that "The bigger they are the harder they fall". When I look at this carrier in total disarray today, sometimes I find it hard to believe it was only a scant 3 years ago that this was the biggest, best and most profitable airline in history. When the magic words "Chapter 11" escape the lips of someone in senior management and he doesn't get fired for it, the lenders immediately begin to lock their safes and sit on the key. Someone at Lufthansa pulled some strings and got about half of it taken care of last week, but that still leaves $375m due that UAL simply doesn't have. Time to borrow from Peter to pay to Paul. Enter the ATSB. Like most government agencies, this started out as a good idea but quickly became a political tool. What was intended to be a lender of last resort to assist with 9/11's aftermath has degenerated into a benevolent charity. As much as UAL loves to blame it all on Osama Bin Laden's boys, their true bogeyman lives much closer to home and answers to the name Rick Dubinsky. And last I checked Rick wasn't on the CIA's list of known terrorists. But I digress. The maneuvering has reached the point where the reasons for UAL's problems are no longer relevant and its time to focus on the solutions. Even a 10th grade economics student can tell you that when your CASM is higher than your RASM and your RASM isn't going up enough, its time to bring the CASM down. That means addressing costs. In the airline business costs come in two big chunks labeled "labor" and "fuel" and lots of little chunks that comprise everything else from maintenance down to the toilet paper. There isn't much UAL can do about fuel unless they airdrop a bunch of flight attendants into the middle of Saudi Arabia with orders to keep digging until they find some. However, it says volumes about the fear that organized labor instills in management that UAL chose to attack the small chunks first before going after the big one. That meant cutting some of the very frills and amenities that gave UAL its brand identity in the first place. Its all very well to switch to single ply toilet paper, but if you skimp too much sometimes you wind up getting shit on your hands. So once they managed to cut out all the little stuff that they needed to (and a whole lot that they didn't need to as well), it was time to finally go after the big chunk. The big chunk consisted of two workgroups (IAM and ALPA) making "industry leading wages", and one workgroup (AFA) making (and serving) peanuts. "Industry leading wages" are wonderful when you are pulling in "industry leading revenue", but alas UAL's yield for Quarter 2 put them in 5th place out of the Big 6. These guys had to cut their wages to reflect the changed reality. I'm leaving the AFA out of the equation here because quite honestly they make so little that from a financial perspective it doesn't make a difference what they gave back or not. If each and every AFA member gave up 10% of their salary each and every day they went to work, UAL would maybe have enough money saved to run ONE 747 to Tokyo and back. Dealing with IAM or ALPA is like pulling teeth at the best of times, but trying to squeeze money out of them without having anything to give back is a task that is best left to the masochists. Nonetheless, after a bunch of threats, tantrums, denials and he-said-she-said these masochists had the last laugh and managed to extract water from stone. Is this enough water to satisfy the ATSB's thirst? I don't know. If I knew either way for sure, I'd either be buying or shorting UAL stock respectively. What I do know for sure is that this is a short term fix at best. All these agreements snap back to current scales in a few years meaning that we'll go through the same charade again (provided UAL is still around in its current avatar). In their haste to get things done by their deadline, they decided to take a pass on SUSTAINABLE savings in favor of more immediate results. Thus the notoriously inefficient IAM shop is still a notoriously inefficient IAM shop, except that its inefficient members now earn 6% less. That is a recipe for disaster. So lets cut to the chase. What's gonna happen to UAL? Well, I think that they will survive without having to file Chapter 11 for now. This may involve the ATSB loan, it may involve fellating the creditors into deferring the money or it may even involve a refinancing from other sources. Stranger things have happened. However, they are again just buying some more time before the inevitable restructuring must take place. This may happen through an overhaul of the operational model via voluntary renegotiation of labor workrules, or it may happen through a court-imposed overhaul during the bankruptcy process. And it better happen sooner rather than later, otherwise the only thing RISING at U N I T E D will be the number of employees on furlough.

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