To: UAL Pilots
Sent: Tuesday, October 19, 2004 5:58 PM
Subject: Letter from United MEC Chairman Captain Mark Bathurst
Dear Fellow United Pilot,
On Friday, October 15th, the Company informed the Bankruptcy Court that United cannot emerge from bankruptcy unless the Company terminates and replaces all pension plans and secures hundreds of millions of dollars in additional wage and benefit reductions from all labor contracts. United's attorneys reported that the Company will soon ask the judge to impose these results through proceedings under Section 1113 of the Bankruptcy Code to nullify its collective bargaining agreements. Section 1113 of the Bankruptcy Code permits a Chapter 11 debtor to obtain court-approved rejection of a labor agreement in the absence of negotiated contract modifications.
This is not where we want to be -- and not where we deserve to be -- at this point in the bankruptcy. United's employees, primarily its pilots, have made every conceivable sacrifice to return United to profitability and long-term prosperity. We have had our wages cut (by more than half for some of us), had our medical benefits slashed, had our lives uprooted, had our workload significantly increased and had our pensions significantly reduced. Thousands of our fellow pilots and employees have lost their careers as United has eliminated more than 25% of its total operations over the past three years.
Why does our situation just seem to get worse no matter how much we sacrifice or how hard we work? There are two primary reasons: rising fuel costs and decreasing domestic passenger revenues.
Rising Fuel Costs
The run-up in fuel cost has devastated United's cash reserves and profitability. United consumes about two billion gallons of jet fuel each year. Over the past 10 years, we have paid an average of less than $0.70 a gallon. Today, we pay about $1.45 a gallon, more than twice as much as before. The fuel spike has cost United an increased $1.3 billion on an annual basis. Fuel cost is going up, not down, as we move into the winter.
A few airlines, notably Southwest, protected themselves from increasing fuel costs through financial hedges at $0.50 to $0.70 per gallon. United did not hedge in 2002 or 2003.
Falling Domestic Revenues
To make matters worse, neither United nor any other airline can raise passenger fares in the domestic market. Every week, United attempts to raise ticket prices by $10, $5, $1 or any amount to make up for increasing fuel costs. With few exceptions, our large domestic competitors (American, Delta, Continental and Northwest) have forced the Company to abandon price increases and to reduce fares in order to maintain revenue. There simply is too much capacity in the domestic system from low-price carriers, the bankrupt or near-bankrupt airlines and even healthier airlines. There is too little demand for air travel.
We fly full airplanes, but passengers are not willing to pay the fares necessary to cover our costs.
Ticket prices have been falling throughout the domestic market virtually this entire year. The average domestic United fare in August and September of this year is more than 15% below the average fare in the same period last year. This steep (and unexpected) decline in domestic revenue will cost United hundreds of millions of dollars relative to its July financial forecast. The revenue environment will worsen if Delta, ATA, Independence Air and perhaps others file Chapter 11 in the near future.
In short, the market has assaulted the Company over the past few months from both sides of the business: fuel costs have skyrocketed, and revenue, at least domestic revenue, has fallen substantially. The results are troubling. United lost money in August and September, and the remainder of the year may be equally tough.
Responding to the Challenge
No airline can succeed in this environment without making substantial changes to preserve cash and ensure long-term viability. For the past several months, we have demanded that management do just that.
After being told for well over a year that there is nothing more the company could do in non-labor costs, I insisted in July that the Company re-examine the entire business to strip out inefficiencies and unnecessary costs. Our efforts caught the interest of United's creditors and, together, we have forced the Company to adopt a program that will reduce non-labor operating costs at United by more than $700 million a year.
The Company can do more concerning non-labor costs. We still pay too much for our aircraft leases. Our UAX partners have not done their share to contribute to a profitable United. Our Star Alliance Partners, including Lufthansa, have done nothing for United. The Company's creditors and suppliers have contributed little to the process. It is time for all of these parties to step up with meaningful financial sacrifices and for the Company to insist that they do so. To make matters even worse, United must pay obscene amounts for an army of lawyers and advisors for the Company, the Creditors Committee and the banks. This is a cash drain experienced by no other airline but US Airways.
United can also do a better job with system revenue. The recent shift from domestic to international flying will protect our revenue base over the next few years. Management must work harder and smarter to revitalize cargo operations, to improve UAX revenue, to extend marketing relationships with Star Alliance Partners and to capture more revenue from the United brand. This will take fresh talent, new ideas and financial strength.
These improvements will help, but they will take time to become fully effective. In the meantime, United faces a significant cash challenge over the next few months, and the Company needs a stronger cost structure to attract the financing necessary to exit from Chapter 11.
As a result, we are about to face a difficult and unhappy choice. Over the next few weeks, management will come to us and say they tried everything we suggested but they still have a problem. They will say they must terminate and replace our pensions and reduce wages and benefits under our labor contracts in order to get out of bankruptcy.
We are all incensed by these events. I read your e-mail, heard you in crew lounges and at council meetings and have received excellent feedback from your representatives. A consistent and recurring theme is:
We pilots didn't create this mess, so why do we always have to clean it up? It is true that better management over the past 15 years could have put us in a far different position today. Perhaps a different management team could have prevented the fact that American and Northwest, who have higher labor costs and less attractive network brands, consistently produce better results than United.
Over the next few years, one or two network carriers will emerge as strong and growing airlines, and the rest will either limp along from crisis to crisis or be absorbed by the competition. United can and should be the strongest surviving network carrier. We have the best asset base, the most attractive global network, the most dedicated employees and the strongest brand.
I have informed Glenn Tilton that it will take responsible leadership and a dedicated partnership with the pilot group to move United in the right direction. We cannot get there if his management team tries to overreach, to pursue a traditional labor relations agenda or tries to force the pilot group to bear a disproportionate share of further cost reductions. But, if the Company works with us on fair and reasonable solutions, we have the opportunity to act decisively, to put bankruptcy behind us and to position United Airlines as the dominant network carrier in the industry.
I understand the stress all of you are experiencing. Members of your MEC are line pilots as well, and share the same feelings as do you. I urge all of you to stay in close touch with your LEC representatives and closely read all MEC communications to stay informed as we proceed through the next few weeks. We will succeed only through unity, resolve and a full understanding of the issues.
Fraternally,
Captain Mark Bathurst
Chairman, UAL-MEC