United Airlines, Time to Fly “Together”
Analia Anderson, Derek Evers, Velislav Hristanov, Robert E. Hoskisson, Jake Johnson, Adam Kirst, Pauline Pham, Todd Robeson, Mathangi Shankar, Adam Schwartz, Richard Till, Craig Vom Lehn, Elena Wilkening, Gail Christian / Arizona State University
United Airlines, formerly the wholly owned prin- Strong demand for air travel followed during cipal subsidiary of UAL Corporation, has experi- the post World War II economic boom that swept enced a significant amount of turbulence in its more the United States. In response, United expanded its than 80-year history. From its inception in 1926 workforce, acquired new routes, and purchased it has weathered many storms including mergers, the company’s first jet aircraft.3 On June 1, 1961, acquisitions, war, the Depression, strikes by labor United merged with Capital Airlines, then the fifth- unions, buyout and takeover attempts, terrorist largest air transport company in the United States, attacks, and bankruptcy. The most recent major and formed the world’s largest commercial airline. challenge to United and the global air transporta- In 1968, United’s stockholders approved the for- tion industry has been the global economic reces- mation of UAL, Inc., as a holding company, with sion. Then in October 2010, United Airlines joined United as a wholly owned subsidiary. with Continental Airlines in a merger that created The next 20 years were turbulent times for the the world’s largest airline, with more than 80,000 company and tested not only United, but also the employees. UAL Corporation changed its name entire airline industry. The company had six differ- to United Continental Holdings, Inc., with corpo- ent presidents between 1970 and 1989. Management rate and operational headquarters in Chicago and changes resulted in new directions and new images its largest hub in Houston. Until a single operat- for United. The company acquired other nonairline ing certificate is received from the Federal Aviation businesses including rental car businesses and hotel Administration (FAA), United and Continental properties, which were later sold. UAL, Inc., also will continue to operate separately as subsidiaries changed its name to Allegis Corporation in 1986, of United Continental Holdings. The certificate is and then changed it back to UAL, Inc., in 1988. On anticipated to be received by the end of 2011.1 As February 11, 1986, United purchased Pan American global economies struggle to emerge from the reces- Airways’ Pacific Division and began service to 13 sion, airlines will face numerous challenges. In this Pacific cities, and in October 1990, it announced case, United Continental Holdings, its competitors, the purchase of Pan American’s routes between the and the airline industry are examined to determine United States and London. if United Airlines will have calmer skies ahead or if United sustained record losses in the early 1990s there are storms on the horizon. and worked to recoup them for several years. The company initiated a hiring freeze, grounded older air- UAL History craft, and sold its flight kitchens. However, the result- ing $400 million reduction in operating expenses In 1925, an act of Congress made the carrying of was not enough to enable United to avoid launch- mail by air a private operation under a system of ing intensive labor costs negotiations with employee competitive bidding.2 United was formed a year later unions. The UAL board approved a proposal for as Varney Airlines Airmail Service, an airmail ser- 54,000 employees to exchange portions of their sala- vice that carried mail between Pasco, Washington, ries and benefits for UAL stock, paving the way for and Elko, Nevada. This original venture evolved the creation of the largest majority employee-owned into a modern global airline. company in the world on July 12, 1994.4
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Exhibit 1 Labor Union Representation at United Air Lines
Number of Contract Open Employee Group Employees Uniona for Amendment Public Contact/Ramp & Stores/Food Service Employees/Security Offi cers/Maintenance Instructors/Fleet Technical Instructors 14,811 IAM January 1, 2010 Flight Attendants 12,892 AFA January 8, 2010 Pilots 5,632 ALPA January 1, 2010 Mechanics and Related 4,678 Teamsters January 1, 2010 Engineers 218 IFPTE January 1, 2010 Dispatchers 164 PAFCA January 1, 2010
aInternational Association of Machinists and Aerospace Workers, Association of Flight Attendants—Communication Workers of America, Air Line Pilots Association, International Brotherhood of Teamsters, International Federation of Professional and Technical Engineers and Professional Airline Flight Control Association. Source: United Airlines Annual Report 2009.
The newly created Employee Stock Option Plan removal of executive officers. Thus, the seats on (ESOP) environment conflicted with the company’s the board gave employees significant control over prior culture because formerly control was cen- major business decisions. By December 31, 2009, tered in the top-level executives. Subsequently, the 6 labor unions represented approximately 82 per- chairman, president, CEO, and other key officials cent of UAL’s workforce of approximately 47,000 stepped down from their positions. One of the new active employees8 (see Exhibit 1 for a list of the six management’s first steps was to begin to transform unions and their representation in United’s current the corporate culture from a “command-and-control” workforce). philosophy to one based on higher employee involve- In response to the globalization of the airline ment, with an emphasis on better communication. industry in the early 1990s, United directed its Workplace innovations were quickly adopted, strategy toward an international expansion through including telecommuting, elimination of the fur- strategic alliances. In 1992, United entered into an lough policy, and the introduction of casual dress alliance agreement with Air Canada, and in 1993 it codes in nonpublic areas of the company.5 announced a comprehensive marketing agreement Perhaps the most substantial change result- with Lufthansa. With careful attention to antitrust ing from the ESOP was the shift in the balance of regulations, United ensured that the company’s power within UAL. Over the two-year period after alliances received antitrust immunity from the its creation, the original 54,000 U.S. employees who U.S. Department of Transportation. On May 14, launched the ESOP in mid-1994 were joined in own- 1997, United Airlines, Lufthansa, Air Canada, SAS, ership by many of their coworkers in Europe, South and Thai Airways International launched the Star America, and Asia.6 By 2002, a significant portion Alliance network, which also included Austrian of the UAL workforce was represented by one of Airlines, Lauda Air, Varig Brazilian Airlines, five different unions: the International Association Singapore Airlines, and others, bringing the total of Machinists and Aerospace Workers (IAM), the to 14 airline companies. As a member of the Star Air Line Pilots Association (ALPA), the Association Alliance, United received such benefits as the diver- of Flight Attendants (AFA), the Transport Workers sification of risks and the sharing of resources Union (TWU), and the Professional Airline Flight necessary for global competition. Increasing the Control Association (PAFCA).7 With such a high number of destinations, creating a vast communica- level of union organization and enormous owner- tion network, and enhancing marketing and sales ship stake in the company, UAL labor was able to activities were the key factors that favorably influ- create 3 employee representative positions on the enced the company’s future growth and competitive- 11-member board. Over the next several years the ness. Its advertising slogan, “Rising,” seemed well labor force became very powerful in such decisions deserved (see Exhibit 2 for a listing of current airline as the approval of mergers and the selection and alliances and their members).
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Starting in 1995, United enjoyed three consecu- slowdowns during the 2000 labor negotiations that tive years of record-breaking profits. However, resulted in canceled flights, angry customers, and although United was named one of the ten best a $700 million revenue shortfall. In an attempt to stocks for long-term investment in August 1999 by regain employee confidence, an agreement was made Fortune, the company soon encountered turbulent with the pilots’ union that made United pilots the times again. The pilots and machinists staged work highest paid in the industry.9 United then planned
Exhibit 2 Global Airline Alliances
Global Alliances Alliance oneworld® SkyTeam Star Year Formed 1999 2000 1997 Countries Served 145 169 181 Destinations 901 898 1160 Daily Departures 9,381 13,000 21,000 Passengers (thousands) 335,712 384,000 603,800 Lounges 550 447 970+ Fleet (operated) 2,473 3140 4,023 Employees 311,830 316,445 402,208 Full Members airberlin (member elect) Aerofl ot Adria American Airlines Aerolineas Argentinas Aegean British Airways (member elect) Air Canada Cathay Pacifi c Airways Aeromexico Air China FinnAir Air Europa Air New Zealand Iberia Air France ANA Japan Airlines (JAL) Alitalia Asiana Airlines Kingfi sher Airlines (member China Airlines (member elect) Austrian elect) China Eastern (member elect) Blue1 LAN Airlines China Southern bmi Malev Hungarian Airlines Czech Airlines Brussels Airlines Mexicana Delta Airlines Continental Airlines Quantas Garuda Indonesia Croatia Airlines S7 (member elect) EGYPTAIR Kenya Airways LOT Polish Airlines KLM Lufthansa Korean Air Scandinavian Airlines Saudi Arabian Airlines Singapore Airlines (member elect) South African Airways Shanghai Airlines Spanair (member elect) SWISS TAROM TAM Vietnam Airlines TAP Portugal THAI Turkish Airlines United US Airways
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Exhibit 2 (Continued)
Alliance oneworld® SkyTeam Star A ffi liate Members AmericanConnection Air Nostrum American Eagle BA Cityfl yer Comair Dragonair Globus J-Air JAL Express Japan Transocean Air Jetconnect LAN Argentina LAN Ecuador LAN Express LAN Peru MexicanaClick MexicanaLink QuantasLink Sun-Air of Scandinavia
Sources: oneworld, SkyTeam, and Star Alliance websites; http://www.oneworld.com/, http://www.skyteam.com/, and http://www.staralliance.com/en/.
an all-cash acquisition of US Airways, hoping that downfall was caused by a combination of circum- its strong presence in the eastern United States would stances and events, including the terrorist attacks on complement United’s stronger nationwide and inter- September 11, 2001, that affected the entire airline national network. Because it sought the acquisition industry. without first obtaining union approval, employee United was losing money even before September confidence again waned. The deal was canceled in 11, 200111 and the terrorism attacks simply mag- 2001 when the Justice Department indicated that nified United’s failed acquisition of US Airways it would block the merger because it would reduce and its declining profits. The sudden combination competition. of demand reduction, high debt, and management/ Administrative expenses also increased sub- labor difficulties left United facing possible bank- stantially during this time, which, combined with ruptcy with few obvious solutions. United reduced 41 percent higher fuel expenses, resulted in fiscal capacity by eliminating flights, and laid off over year 2000 being one of United’s poorest in that 20 percent of its workforce.12 CEO Jim Goodwin decade. wrote a letter to the board in October 2001 stating In December 2002 United Airlines, the nation’s his concerns that the company was “literally hem- second-largest airline carrier, filed for Chapter orrhaging money” and that the airline might not 11 bankruptcy protection. The airline had posted have a future.13 Only four days after the letter was losses of nearly $3 billion in the prior 18 months received, Goodwin was replaced by UAL director and had been losing money from its operations at John Creighton on an interim basis, primarily due a rate of $7 million per day. At that time United’s to union pressures and lack of board confidence.14 bankruptcy was the largest airline failure and the Despite cost-cutting measures, UAL recorded a loss sixth-largest bankruptcy in U.S. history.10 United’s of $2.1 billion in 2001.15
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One of United’s most pressing concerns was cash for loan guarantees worth $1.6 and $1.1 billion, flow. Because of uncertain future revenues, manag- respectively. To continue Chapter 11 proceedings ing working capital became very unpredictable and without liquidation, United needed immediate assis- difficult. Negative cash flows caused current liabili- tance from its creditors as well as additional cost ties to balloon, forcing UAL into a cash crisis near reductions.24 the end of 2002. In an attempt to avoid possible In order to avoid default, United negotiated an bankruptcy, management sought major concessions agreement with Debtors-in-Possession (DIP) for an from all of the labor unions to secure $1.8 billion additional $500 million. (DIP financing allows com- in loan guarantees from the federal government. panies to continue operations while going through Overall, the unions agreed to support $5.8 billion in Chapter 11 proceedings and is considered attrac- concessions, usually in exchange for stock options.16 tive because it is done only under order from the Regardless of the concessions, the Air Transportation Bankruptcy Court.25) Much of the $500 million Stabilization Board (ATSB) rejected United’s appli- comes from firms such as GE Capital, which had cation for aid in early December. United Airlines loaned airlines $7 billion since the 2001 terrorist declared bankruptcy on December 9, 2002. attacks. GE was UAL Corp.’s largest creditor, hav- Even while filing for the federal loan, United was ing a $1.6 billion stake. having discussions with banks about bankruptcy In July 2004, United Airlines took a different financing. United knew that without the loan there tack to avoid liquidation: it chose to avoid a $72 would be no alternative to bankruptcy.17 Four banks million payment owed to three of its unions’ pen- agreed to finance Chapter 11 for United, and they sion plans and indicated that it planned to skip more set up loan covenants with very stringent require- than $500 million in payments due in September ments. United was required to operate profitably and October. In May 2005 United received court within three months, stay in the black for the rest permission to terminate its four employee pension of 2003, and finish with $575 million in before-tax plans that covered approximately 134,000 people. earnings.18 Many suggested that the unions would This was the largest pension default in the history of be the ones to suffer. The ESOP made them power- the federal Pension Benefit Guaranty Corporation ful stakeholders in the company and they used this (PBGC),26 a government-subsidized corporation that power to become the most expensive workforce in helps to fund pension funds of bankrupt compa- the industry.19 The company was not expected to nies. The PBGC assumed responsibility for United’s liquidate, however, because its most valuable assets, plans, in exchange for a stake in the company. As a the aircraft, were under financing by outside orga- result, employees also lost their controlling stake in nizations that would rather have the planes flying the company.27 than idle awaiting sale.20 On another positive note, On Friday, January 21, 2005, the bankruptcy Lufthansa, United’s main Star Alliance partner (who court gave United approval to extend its exclusiv- had remained profitable), was willing to help.21 ity period for another three months. Thus, United Glenn F. Tilton became the CEO of United in would have an additional three months to file its 2002, following several others that same year. Tilton reorganization plan without interference from other had recent experience trying to help the financially parties. Its most recent extension was due to expire distressed company Dynegy.22 Although his previous on January 31. In an interview with the Chicago experience was within the oil industry, he remained Tribune, Tilton said that he expected United to confident that a recovery was possible, and referred emerge from bankruptcy in the fall of 2005 a differ- to Chapter 11 as “Chapter One.”23 The challenges ent company. Although emergence from bankruptcy faced by Tilton and United were extreme, consider- would be no guarantee of success, Tilton optimisti- ing the difficulties of management/labor relations, cally believed that it would soon be “time to fly” a declining industry structure, and the strict loan for United.28 requirements. United Airlines and its parent company, UAL, Bankruptcy and Beyond had applied for ATSB loan guarantees worth $1.8 billion in December 2002. The rejection by the ATSB Under bankruptcy protection, the company had precipitated UAL’s decision to enter Chapter 11 restructured its labor contracts and defaulted bankruptcy proceedings. Subsequently, on June 17 on its employee pension plan. United took out a and June 28, 2003, the ATSB rejected two requests $3 billion loan from investment banks in order to
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gain approval to exit bankruptcy, which it did on the economy soured, United managed only minimal February 1, 2006.29 The timing was auspicious for profits in 2006 and 2007, which were considered the company as the U.S. economy was once again on good years for the U.S. airline industry. Prior to the rise and airlines, including United, earned profits that, the company spent three years in Chapter 11 in 2006 and 2007.30 The good times came to an end bankruptcy protection as a result of losses early in in 2008, however, as the U.S. economy slipped into the decade. In addition, United encountered chal- recession, and United posted its largest ever loss of lenges related to expanding service internationally, $5.2 billion.31 introducing subsidiaries in an effort to compete with In an unusual move for a bankrupt company, low-cost carriers (LCCs), and maintaining positive United also formed a new business line called Ted, relations with its employees and the unions that rep- which was a second attempt at creating a low-cost resent its employees. Thus, more than just waiting subsidiary.32 Ted failed to meet expectations and the for economic recovery, United explored tactics to company announced its closure in 2008.33 become profitable again and reclaim the image and Company executives have tried to reposition success it once experienced. In an effort to reduce the company since 2006. United bid to merge with the negative impact of the global recession, in 2009 Delta in 200734 and with both Continental35 and United implemented strategies aimed at capacity US Airways in 2008, but none of these negotia- reductions, fleet optimization, revenue generation, tions were successful.36 United was forced to make and airline alliances.38 However, despite its efforts, significant cuts once again, and by June 2008 the UAL recorded a net loss of $651 million for 200939 company had announced plans to ground 70 planes, (see Exhibit 3 for UAL’s financial information). eliminate 950 pilot positions, and cut up to 1,600 Prior to the merger, in 2008 United and salaried positions. Continental announced plans to enter a new alliance In early 2009, the U.S. economy was mired partnership. Although merger efforts failed in 2008, in its worst recession since the Great Depression. this partnership created new revenue opportunities, With airline industry business cycles closely mirror- cost savings, and other operating efficiencies that ing larger economic trends, United Airlines felt the benefited customers, employees and shareholders.40 effects of the downturn. United, the fourth-largest Continental joined the Star Alliance in 2009, making U.S. passenger airline, lost more than $5 billion in it possible for the two airlines to link networks and 2008 and reported further declines in both revenue services across the globe. The Star Alliance offers and traffic in the first quarter of 2009.37 Even before more than 21,200 daily flights to 181 countries
Exhibit 3 United Continental Holdings, Inc. (UAL) Financial Highlights
United Continental Holdings, Inc. (UAL) 10-Year Income Statement Revenue (from 2000 to 2009, $mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Revenue 19352 16138 14286 13724 16391 17379 19340 20143 20194 16335 18989 COGS 1038 6107 1240 1003 709 685 679 316 10465 5767 — Gross Profi t 18314 10031 13046 12721 15682 16694 18661 19827 9729 10568 18989 Operating Expenses ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM SG&A — 11348 — — — — — 4261 9540 8497 8774 R&D ————— — — ———— Other 17660 2454 15883 14081 16536 16913 18214 14529 4627 2232 9251 Operating Income 654 –3771 –2837 –1360 –854 –219 447 1037 –4438 –161 964
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Exhibit 3 (Continued)
Other Income and Expense ($mil) 2000 2001 2002 2003 2004 2005 2006* 2007 2008 2009 TTM Net Int Inc and Other –223 414 –368 –1448 –872 –20961 –492 –342 –941 –511 –601 Earnings Before Taxes 431 –3357 –3205 –2808 –1726 –21180 22889 695 –5379 –672 363 Income Taxes 160 –1226000 021297–25–1728 Earnings After Taxes 271 –2131 –3205 –2808 –1726 –21180 22868 398 –5354 –655 335 Acctg Changes –209 –8 0 0 — — — — — — — Disc Operations –6 — –7 0 — — — — — — — Ext Items –6 0 0 — — — — — — — — Net Income 50 –2145 –3212 –2808 –1721 –21176 22876 403 –5348 –651 338 Diluted EPS, Cont Ops $ — –40.04 –53.55 –27.36 –15.25 –182.29 131.94 2.79 –42.21 –4.32 1.6 Diluted EPS $ — –40.04 –53.55 –27.36 –15.25 –182.29 131.94 2.79 –42.21 –4.32 1.6 Shares — 54 60 103 113 116 173 144 127 151 215 United Continental Holdings, Inc. (UAL) 10-Year Balance Sheet Assets ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Cash and Equiv 1679 1688 886 1640 1223 1761 3832 1259 2039 3042 4938 Short-Term Investments 665 940 388 78 78 77 312 2295 0 — — Accts Rec 1326 1221 1114 929 951 839 820 888 714 743 1044 Inventory 424 329 310 264 234 193 218 242 237 197 286 Other Current Assets 685 908 681 1113 1428 1389 1091 1411 1871 1123 802 Total Current Assets 4779 5086 3379 4024 3914 4259 6273 6095 4861 5105 7070 Net PP&E 17623 16808 16361 16148 14174 13228 11463 11359 10312 9840 9490 Intangibles 671 984 412 406 399 388 5731 5151 2693 2455 2400 Other Long-Term Assets 1282 2319 3504 1401 2218 1467 1902 1615 1595 1284 1095 Total Assets 24355 25197 23656 21979 20705 19342 25369 24220 19461 18684 20055 Liabilities and Stockholders’ Equity ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Accts Payable 1188 1268 284 501 601 596 667 877 829 803 889 Short-Term Debt 170 1350 0 663 875 13 1687 678 782 545 1449 Taxes Payable — — — — — — — — — — — Accrued Liabilities 3700 3125 2686 3592 3596 2772 1036 1037 868 701 918 Other Short-Term Liabilities 1723 2323 1021 1356 1389 1853 4555 5387 4802 4424 5000 Total Current Liabilities 6781 8066 3991 6112 6461 5234 7945 7979 7281 6473 8256 Long-Term Debt 4688 6622 700 0 154 1298 7453 6415 6007 6378 6025
(Continued)
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Exhibit 3 (Continued)
latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Other Long-Term Liabilities 7696 7476 21448 21783 21770 38370 7823 7408 8638 8644 7980 Total Liabilities 19165 22164 26139 27895 28385 44902 23221 21802 21926 21495 22261 Total Equity 5190 3033 –2483 –5916 –7680 –25560 2148 2418 –2465 –2811 –2206 Total Liabilities & Equity 24355 25197 23656 21979 20705 19342 25369 24220 19461 18684 20055 United Continental Holdings, Inc. (UAL) 10-Year Cash Flows Cash Flows from Operating Activities ($mil) 2000 2001 2002 2003 2004 2005 2006* 2007 2008 2009 TTM Net Income 50 –2145 –3212 –2808 –1721 –21176 22876 403 –5348 –651 338 Depr and Amort 1058 1932 970 938 874 792 888 925 932 902 879 Deferred Taxes 317 — 665 0 0 — 21 310 –26 –16 — Other 1047 53 438 2871 946 21463 –22223 496 3203 731 672 Cash from Operations 2472 –160 –1139 1001 99 1079 1562 2134 –1239 966 1889 Cash Flows from Investing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cap Ex –2538 –1951 –157 –150 –267 –470 –362 –658 –415 –317 –299 Purchase of Business — –32 0 0 — — — — — — — Other 17 14 228 421 –55 179 112 –1902 3136 237 479 Cash from Investing –2521 –1969 71 271 –322 –291 –250 –2560 2721 –80 –180 Cash Flows from Financing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Issuance of Stock –81 0 0——— 102496220130 Net Issuance of Debt 1791 2020 –608 –564 –224 –379 837 –2253 –582 –77 629 Dividends –118 –88 –7000 0 0–253 0 0 Other –174 206 881 228 178 269 –65 82 37 –26 –55 Cash from Financing 1418 2138 266 –336 –46 –110 782 –2147 –702 117 704 Currency Adj —————— — ———— Change in Cash 1369 9 –802 754 –417 538 2071 –2573 780 1003 2413 Free Cash Flow ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cash from Operations 2472 –160 –1139 1001 99 1079 1562 2134 –1239 966 1889 Cap Ex –2538 –1951 –157 –150 –267 –470 –362 –658 –415 –317 –299 Free Cash Flow –66 –2111 –1296 851 –168 609 1200 1476 –1654 649 1590
*In accordance with the Plan of Reorganization, the Company discharged its obligations to unsecured creditors in exchange for the distribution of 115 million common shares of UAL and the issuance of certain other UAL securities. Accordingly, UAL and United recognized a non-cash reorganization gain of $24.6 billion and $24.4 billion, respectively. Source: Morningstar.com, www.morningstar.com.
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worldwide.41 United’s operations were primarily try of this resilience and this magnitude to weather focused in the western United States, with hubs in all that.”47 Denver and San Francisco. It also had a strong pres- The all-stock transaction was called a “merger of ence in Asia, including China and Japan. Continental equals” that created the largest airline in the world brought a strong eastern U.S. position with hubs in terms of traffic.48 Under the merger agreement, in Houston and Newark, and an international Continental shareholders would receive 1.05 shares presence in Latin America and Europe42 (see of United Continental Holding common stock for Exhibits 4 and 5 for United’s and Continental’s each share of Continental common stock previ- combined domestic and global networks). With lit- ously held. Continental shareholders would own tle overlap in route networks, customers benefited approximately 45 percent of the equity in the hold- from the codesharing opportunities of a coordi- ing company, and United shareholders would own nated process for reservations, ticketing, check-in, approximately 55 percent.49 United and Continental flight connections, and baggage transfer. United would operate separately under the holding com- and Continental also participated in a reciprocity pany United Continental Holdings, Inc., until a agreement for their frequent flyer programs (FFP). single operating certificate could be obtained from Customers who were members of Continental’s the FAA. This would allow them to operate under OnePass program and United’s Mileage Plus pro- one common set of manuals and procedures for air- gram could earn miles when flying on either airline craft, crews and maintenance. It was estimated that and could redeem awards on both as well.43 Thus, it would take at least one year to receive the cer- United and Continental were developing synergies tificate, and all union contracts would need to be prior to the actual merger. renegotiated prior to its issuance.50 The combined airline would operate under the The Merger name “United” and the new aircraft livery would use Continental’s livery, colors, and design, along On May 3, 2010, United and Continental announced with the blue–gold–white globe displayed on the the merger agreement, and on October 1, 2010, the tail, combined with the United name in all capitals agreement was finalized. During the five-month on the fuselage.51 The new look would begin to process, the Antitrust Division of the United States appear in spring 2011 (see Exhibit 6 for examples Department of Justice (DOJ) performed an investi- of the livery). As the largest airline in the world, gation into the merger to ensure that no antitrust United and Continental, along with United Express, laws would be violated. The investigation was Continental Express, and Continental Connection, closed in August, and United received approval for serve 144 million passengers annually through the merger.44 In addition, the company had to obtain 5,811 daily departures at 371 destination airports clearance from the European Commission, which (223 domestic and 148 international) in 59 coun- conducted an investigation to ensure that the merger tries throughout North and South America, Europe, would not cause competitive issues in Europe or on Asia, and Africa.52 The combined company has trans-Atlantic routes. Approval from the European hubs in Chicago, Cleveland, Denver, Houston, Los Commission was received in July.45 United and Angeles, Newark, San Francisco, Washington, D.C., Continental held special shareholder meetings on Guam, and Tokyo.53 Together they operate a fleet of September 17, and both groups voted to approve the more than 700 mainline aircraft and approximately merger. This time more than 98 percent of the votes 540 regional aircraft.54 The new slogan, “Let’s Fly by Continental shareholders approved UAL’s $3.17 Together,” appears to be well deserved. billion all-stock purchase of Continental.46 During A joint management team was formed of the UAL meeting, CEO Glenn Tilton said that with Continental and United executives that would be more cross-border airline partnerships the industry based at the United Continental Holdings head- would be better able to match available seats for quarters in Chicago, formerly the headquarters for sale with passenger demand. “From economic col- UAL Corp. Continental headquarters in Houston lapse to pandemic to 9/11 to volcanic ash, it’s an would be closed. A board of directors was selected, industry that is buffeted by forces beyond its con- comprised of 16 members including six independent trol. Because of that, it’s going to require an indus- directors from each of the previous boards, two
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A
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e Exhibit 4 United Continental Holdings Inc. Domestic Network s . i n d d
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Source: United Continental Holdings Fact Sheet, http://www.unitedcontinentalholdings.com/index.php?section=media 88/18/11 6:52PM / 1 8 / 1 1
6 : 5 2
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A i r l i n e s . i n d d
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Exhibit 5 United Continental Holdings Inc. Global Network
Source: United Continental Holdings Fact Sheet, http://www.unitedcontinentalholdings.com/index.php?section=media 88/18/11 6:52PM / 1 8 / 1 1
6 : 5 2
P M C-12 United Airlines, Time to Fly “Together”
Exhibit 6 United Continental Holdings, Inc. Livery
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Exhibit 7 United Continental Holdings, Inc. Board of Directors
Glenn F. Tilton Henry L. Meyer III Non-Executive Chairman of the Board Chairman of the Board and Chief Executive Offi cer Retired Chairman, President and Chief Executive Offi cer KeyCorp of UAL Corporation Wendy J. Morse Jeff ery A. Smisek United Airlines Pilots Master Executive Council Chairman President and Chief Executive Offi cer Air Line Pilots Association International United Continental Holdings, Inc. Oscar Munoz Kirbyjon H. Caldwell Executive Vice President and Chief Financial Offi cer Senior Pastor CSX Corporation The Windsor Village United Methodist Church James J. O’Connor Stephen R. Canale Retired Chairman and Chief Executive Offi cer Retired President and General Chairman Unicom Corporation and Commonwealth Edison District Lodge 141, IAM Company
Carolyn Corvi Laurence E. Simmons Retired Vice President and General Manager President Airplane Programs, Boeing SCF Partners
W. James Farrell David J. Vitale Retired Chairman and Chief Executive Offi cer Executive Chair Illinois Tool Works Inc. Urban Partnership Bank
Jane C. Garvey John H. Walker North America Chairman Chief Executive Offi cer Meridiam Global Brass and Copper, Inc.
Walter Isaacson Charles A. Yamarone Chief Executive Offi cer Director The Aspen Institute Houlihan Lokey
Source: United Continental Holdings, Inc. company website http://www.united.com/page/framedpage/0,6837,1379,00.html.
labor representatives from United’s previous board, In 2009 United and Continental had total net Glenn Tilton (former CEO of United who would revenue of $28 billion. The new company fore- serve as the nonexecutive chairman) and Jeff Smisek casted $1.2 billion in total new revenue and cost (formerly Continental’s CEO since January 2010; savings that would be derived from synergies by see Exhibit 7 for the board of directors’ member list). 2013.56 With signs of improvement in the economy, According to Glenn Tilton, “Drawing from both analysts have indicated that the timing is right for companies, we have an excellent board of directors airlines to take advantage of the anticipated increase and a strong management team, and we have the in business and leisure travel. The price of last- industry’s best people to deliver on the promise of minute business fares and airfares in general are great products and service for our customers, career expected to rise.57 In 2011 “pricing power will swing opportunities for our people and consistent returns back to air and hotel suppliers for the first time in for our shareholders.”55 two years,” according to the American Express
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Global Business Travel Forecast released in October notable exceptions such as Southwest Airlines and 2010.58 CEO Jeff Smisek, known for his swift JetBlue. The industry, even in the best of times, has turnaround of Continental Airlines, is optimistic been a low-margin, capital-intensive business, heav- that the company will succeed, stating, “If you are ily burdened with high fixed costs and overcapacity. an airline geek, it doesn’t get any better than this: Labor and fuel were the two major components of bringing these two carriers together. They are the the cost structure, while unions played a significant perfect marriage, the perfect fit. I think we’re creat- role in driving up the labor costs. ing a tremendous carrier here.”59 Price competition also became fierce. Although To gain a better understanding of United’s evo- business travelers were typically willing to pay much lution and its relationship with Continental and higher fares for unrestricted tickets when times were other airlines, it is important to also gain an under- good, they were not willing to do the same dur- standing of the airline industry. ing a downturn in the economy. Business travel- ers began to choose leisure fares with restrictions The Airline Industry or to travel coach, and many turned to the Internet As an airline, United operates in a unique environ- for discounted ticket prices. Business travelers also ment. Following the government deregulation of chose to save money by traveling on LCCs offer- the airline industry in 1978, the industry began to ing reduced prices for basic no-frills service such as evolve competitively into the model followed by Southwest Airlines. most airlines today. Hub-and-Spoke versus Point-to-Point Regulation Adopted first by American Airlines, the hub-and- The Airline Deregulation Act of 1978 phased out spoke business model has been used by major air- the federal government’s control over airfares and lines and alliances. Use of the hub-and-spoke model services, allowing the airlines instead to rely on would enable an airline to serve a large number of competitive market forces to determine the price, destinations and provide frequent flights by chan- quantity, and quality of domestic air service. The neling passengers through a hub airport on the way two most important consequences of deregulation to their destinations using only a fraction of the were lower fares and higher productivity. Higher aircraft that would be necessary if all flights were productivity was a result of increased flexibility direct. One drawback of the hub-and-spoke model in operations, introduction of the hub-and-spoke is the large upfront investment required to build the business model, and a more competitive industry hub, which could result in increased fares to cover environment. the investment and operation costs. Although deregulation allowed the airline com- In contrast, the point-to-point system would panies to set their own prices and choose their own provide customers with direct flights between two destinations, the industry was still regulated consid- locations without making the additional stopover erably in regard to taxation, air traffic control, and at a hub. Under this system, aircraft and crews typi- competitive behavior. The Airport Transportation cally worked harder and LCCs such as Southwest Association (ATA) claimed that the federal gov- and JetBlue relied on low fares to attract busi- ernment taxed flying more heavily than cigarettes. ness. According to Aviation Economics, a London Mergers, acquisitions, and alliances (global or consultancy, “low cost carriers using the point- domestic) were heavily scrutinized for monopolistic to-point system get 11 hours flying per day out of and anticompetitive behavior and were subject to each aircraft, compared with only about nine hours approval by concerned regulatory organizations such for a network carrier using the hub-and-spoke as the FAA. Many industry analysts in the United system.”60 However, traditional carriers such as States believed that regulations, such as those limiting American Airlines and United continued to use the the domestic competition of foreign airlines, stood in hub-and-spoke model because of its ability to service the way of much needed changes in the industry. wider markets. While United has suffered many trials since dereg- Cost and Price Structure ulation, it has managed to survive. Many airlines The airline industry as a whole has been spectacu- have not been so fortunate, as competition in the larly unprofitable over the last two decades, with airline industry continues to be intense.
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Competition legroom, premium seating including complimentary alcoholic beverages, overnight baggage delivery, pri- Within the last 30 years the airline industry has vate delivery of foreign currencies to home or office undergone significant contraction, as healthier car- locations, ability to purchase additional frequent riers acquired failing competitors or their assets. flier miles, and travel insurance. In addition, custom- Consolidation has been attractive as it means more ers could purchase membership in the Red Carpet routes, which can attract more passengers. It also Club, which allowed them to access all Continental results in considerable savings as executive ranks Presidents Club locations, all US Airways Club loca- 61 are reduced and reservation systems are combined. tions and all Star Alliance member airline lounges. By January 2011 there were only three remaining Such measures were effective for the airlines, and major international American carriers. Following in 2010 the global airline industry was expected to Delta’s purchase of Northwest in 2008 and the earn as much as $22 billion from à la carte fees and United Continental merger in fall 2010, only United other ancillary sources, according to Jay Sorensen, Continental, American, and Delta remained. US president of IdeaWorks, a company that tracks con- Airways operated mainly as a domestic airline, sumer trends.66 This practice is expected to continue which had competition from Southwest Airlines on in 2011. 62 80 percent of its routes. The airline industry had The similarities between United and its major survived the September 2001 terrorist attacks, the competitors are far greater than their differences. 2004 SARS epidemic, and the skyrocketing oil prices All operate a hub-and-spoke route network, seeking of 2008. In 2008, United witnessed a 59 percent to efficiently transfer passengers across the country increase in the cost of fuel, leading to a $3.1 bil- and internationally. They all run a mainline service lion increase in overall costs related to hedging or with large jets and extend their reach through net- direct fuel costs.63 These factors combined with the works of regional affiliates and global alliances. global economic recession resulted in reduced travel They all focus on the business traveler, offering ser- demand and increased costs. As the large network vice upgrades and frequent flyer loyalty programs carriers struggled, LCCs such as Southwest and to appeal to the business segment of the market. JetBlue developed more sophisticated networks and These companies differ, however, in their history, managed to attract more business travelers, which size, and hub locations (see Exhibits 8 and 9 for resulted in increased marketshare and more consis- information on domestic market share and a com- tent profits.64 parison of net profits between United and its major Competition became more intense among the competitors.) traditional carriers as the amount of business travel decreased. To save money, companies implemented the use of videoconferencing, e-mail, and other American Airlines (AMR Corporation) Internet-based interactive technologies that make it Founded in 1934 as the Robertson Aircraft easy to convey information without a face-to-face Corporation, American Airlines has grown from a meeting. Even more significant, perhaps, were cuts small airmail service to one of the largest passen- in corporate expenditures and increased governance, ger airlines. American Airlines, American Eagle, and which led to fewer approved trips and more price regional carriers operating as American Connection sensitivity among business travelers. are subsidiaries of AMR Corporation, with 88,500 As an additional means of generating revenue, employees and a fleet of nearly 900 aircraft.67 AMR’s many airlines began to charge fees for services that corporate headquarters are in Ft. Worth, and its “cor- had previously been included with the price of a nerstone” cities include Chicago, Dallas/Fort Worth, ticket, such as fees for checked baggage, reserving a Miami, New York, and Los Angeles.68 The company seat, priority boarding, and offering meals for pur- transports 275,000 passengers on 3,400 flights to chase. United offers nine additional service packages 240 domestic and international destinations in more designed to create value for customers and generate than 40 countries every day.69 Like most traditional additional revenues marketed as “Travel Options by carriers, American operates a mainline business United.”65 These services include options to enhance serving larger cities and a regional affiliate network both comfort and convenience for passengers, such (American Eagle) serving smaller airports. American as priority boarding and security line access, more Eagle accounts for 271 of American’s planes, flying
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Exhibit 8 Airline Domestic Market Share
Airline Domestic Market Share October 2010
Other, 17.8% Delta, 15.8%
SkyWest, 2.1% Alaska, 3.3% Southwest, 14.0% AirTran, 3.4%
JetBlue, 4.4%
Continental, 7.4% American, 13.7%
US Airways, 7.9% United, 10.2%
Source: 2010, Chart by authors, data from RITA, http://www.transtats.bts.gov.
Exhibit 9 Comparison of Net Profi ts between United and Top Competitors
Net Profits 2000
0
–2000
$ Million –4000 2007 2008 –6000 2009
–8000
–10000 United American Southwest Delta US Airways Continental 2007 360 504 645 1612 427 459 2008 –5396 –2071 178 –8922 –2210 –585 2009 –651 –1468 99 –1237 –205 –282
Source: 2010, Chart by authors using data from 2009 10-K reports of each company, currency in U.S. dollars.
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more than 1,500 daily flights to 160 destinations in for five years running during 2004–2009.74 While the United States and the Caribbean.70 American’s several competitors posted multi-billion dollar losses network is further extended by its participation in in 2008, Continental’s loss was modest by compari- the oneworld global airline alliance. son, $585 million.75 In 2009 Continental posted a American is the only large traditional domestic net loss of $282 billion. carrier that has not filed for bankruptcy, narrowly In 2007, Continental entered into merger talks avoiding this fate in 2003.71 In 2009, the company with United Airlines. The talks subsequently failed posted a net loss of $1.5 billion, compared with a to produce a merger as Continental’s board backed net loss in 2008 of $2.1 billion72 (see Exhibit 10 for away from the deal because of United’s poor finan- financial information on AMR Corporation). cial health and escalating fuel prices,76 but they Continental Airlines. Unlike American, Con- did result in an alliance that involved Continental tinental Airlines has filed for bankruptcy protection terminating its membership in the SkyTeam global twice—once in 1983 and again in 1990.73 Since the alliance (anchored by Delta and Air France KLM) second bankruptcy, the company’s fortunes have and becoming part of the Star Alliance dominated improved significantly, leading Fortune to name by United, Lufthansa, and US Airways on October Continental, “The World’s Most Admired Airline” 27, 2009.77
Exhibit 10 AMR Corporation Financial Highlights
AMR Corporation (AMR) 10-Year Income Statement Revenue (from 2000 to 2009, $mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Revenue 19703 18963 17299 17440 18645 20712 22563 22935 23766 19917 21646 COGS 9300 10552 9038 8531 9660 11773 12457 8261 10769 7320 — Gross Profi t 10403 8411 8261 8909 8985 8939 10106 14674 12997 12597 21646 Operating Expenses ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM SG&A 7820 8867 8392 7264 6719 6755 6813 9667 9442 9518 9771 R&D — —————————— Other 1202 2014 3199 2489 2410 2277 2233 4042 5444 4083 12025 Operating Income 1381 –2470 –3330 –844 –144 –93 1060 965 –1889 –1004 –150 Other Income and Expense ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Int Inc and Other –94 –286 –530 –464 –617 –768 –829 –461 –182 –748 –821 Earnings Before Taxes 1287 –2756 –3860 –1308 –761 –861 231 504 –2071 –1752 –971 Income Taxes 508 –994 –1337 –80 0 0 0 0 0 –284 –254 Earnings After Taxes 779 –1762 –2523 –1228 –761 –861 231 504 –2071 –1468 –717 Acctg Changes — — –988 0 0 — — — — — — Disc Operations 43 0 0 — — — — — — — — Ext Items –9 0 0 — — — — — — — — Net Income 813 –1762 –3511 –1228 –761 –861 231 504 –2071 –1468 –717 Diluted EPS, Cont Ops$ — –11.43 –16.22 –7.76 –4.74 –5.21 0.98 1.78 –7.98 –4.99 –2.2 Diluted EPS$ — –11.43 –22.57 –7.76 –4.74 –5.21 0.98 1.78 –7.98 –4.99 –2.2 Shares — 154 156 158 161 165 236 299 259 294 333
(Continued)
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Exhibit 10 (Continued)
AMR Corporation (AMR) 10-Year Balance Sheet Assets ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Cash and Equiv 89 120 104 120 120 138 121 148 191 153 202 Short-Term Investments 2144 2872 1846 2486 2809 3676 4594 4387 2916 4246 4355 Accts Rec 1303 1414 858 796 836 991 988 1027 811 768 889 Inventory 757 822 627 516 488 515 506 601 525 557 575 Other Current Assets 886 1312 1502 764 718 844 693 1066 1492 918 816 Total Current Assets 5179 6540 4937 4682 4971 6164 6902 7229 5935 6642 6837 Net PP&E 18636 19655 19694 19460 19137 18546 20133 17394 15735 15476 15296 Intangibles 1143 2717 1292 1253 1223 1194 1167 1156 1109 252 967 Other Long-Term Assets 1255 3929 4344 3935 3442 3591 943 2792 2396 3068 2257 Total Assets 26213 32841 30267 29330 28773 29495 29145 28571 25175 25438 25357 Liabilities and Stockholders’ Equity ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Accts Payable 1267 1785 1198 967 1003 1078 1073 1182 952 1064 1220 Short-Term Debt 569 556 713 603 659 1077 1246 902 5557 4455 1669 Taxes Payable ——————————— Accrued Liabilities 2231 2192 2560 1989 2026 2388 2301 2267 2042 2039 2042 Other Short-Term Liabilities 2923 2979 2769 3000 3330 3777 3885 4132 823 170 4008 Total Current Liabilities 6990 7512 7240 6559 7018 8320 8505 8483 9374 7728 8939 Long-Term Debt 4151 8310 10888 11901 12436 12530 11217 9413 8419 9984 9010 Other Long-Term Liabilities 7896 11646 11182 10824 9900 10123 10029 8018 10317 11215 11051 Total Liabilities 19037 27468 29310 29284 29354 30973 29751 25914 28110 28927 29000 Total Equity 7176 5373 957 46 –581 –1478 –606 2657 –2935 –3489 –3643 Total Liabilities & Equity 26213 32841 30267 29330 28773 29495 29145 28571 25175 25438 25357 AMR Corporation (AMR) 10-Year Cash Flows Cash Flows from Operating Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Income 813 –1762 –3511 –1228 –761 –861 231 504 –2071 –1468 –717 Depr & Amort 1202 1404 1366 1377 1292 1164 1157 1202 1207 1104 — Deferred Taxes 461 –731 –845 0 0——— ——— Other 666 1600 1879 452 186 721 551 229 –530 1294 377 Cash from Operations 3142 511 –1111 601 717 1024 1939 1935 –1394 930 1094
(Continued)
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Exhibit 10 (Continued)
Cash Flows from Investing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cap Ex –3678 –3640 –1881 –680 –1027 –681 –530 –714 –876 –1521 –1830 Purchase of Business –50 –742 0 0 — — — — — — — Other 453 –309 488 35 –21 –858 –835 480 1931 –1202 3986 Cash from Investing –3275 –4691 –1393 –645 –1048 –1539 –1365 –234 1055 –2723 –2156 Cash Flows from Financing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Issuance of Stock 67 37 3 1 7 223 630 497 294 412 30 Net Issuance of Debt 70 3822 2412 59 324 121 –1366 –2321 –267 574 –374 Dividends 0 0 0 0 0 0 0 0 0 0 0 Other 0 352 91 0 0 189 145 149 355 769 689 Cash from Financing 137 4211 2506 60 331 533 –591 –1675 382 1755 1093 Currency Adj — — — — — — — — — — — Change in Cash 4 31 2 16 0 18 –17 27 43 –38 31 Free Cash Flow ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cash from Operations 3142 511 –1111 601 717 1024 1939 1935 –1394 930 1094 Cap Ex –3678 –3640 –1881 –680 –1027 –681 –530 –714 –876 –1521 –1830 Free Cash Flow –536 –3129 –2992 –79 –310 343 1409 1221 –2270 –591 –736
Source: Morningstar.com, www.morningstar.com.
As of December 31, 2009, Continental and its tural and public service flights, with the majority of regional affiliates, Continental Express, Continental its domestic flights dedicated to mail handling, and Micronesia, and Continental Connection, flew more then for military purposes during World War II.81 than 2,000 flights per day to 118 domestic and 124 From the 1940s through the late 20th century, international destinations using a network based on Delta aggressively pursued a differentiation strategy, hubs located in Newark, Houston, Cleveland, and known for its innovation and contribution to the art Guam.78 Continental had approximately 41,300 and science of aviation. There were many “firsts” employees, representing 39,640 full-time equivalent for Delta, such as being the first airline to offer employees, 45 percent of whom were represented by night service, the first to employ interchange service labor unions and covered by collective bargaining among flight attendants, the first airline to transport agreements79 (see Exhibit 11 for a listing of labor living vegetables and plants, the first airline to use unions representing Continental employees). the Douglass DC-8 and DC-9 (which would become In the third quarter of 2010, Continental standard in the industry for decades), and the first reported a net income of $365 million. The fourth to offer passengers an in-flight telephone system quarter 2010 financial results would be combined (Airfone). In 1962, Delta had the quickest flight with those of United and reported under United time from coast to coast (Atlanta to Los Angeles); Continental Holdings80 (see Exhibit 12 for financial its record time of just less than three hours remains information on Continental). the fastest cross-country passenger flight to date. Delta Airlines. Founded in Georgia in 1924 The hub-and-spoke system was Delta’s innovation by a crop duster named Huff Daland, Delta’s first that improved passenger plane transfers with coor- decades of operation were dominated by agricul- dinated flight arrival and departure times.82
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Exhibit 11 Union Representation at Continental Airlines
Approximate Number of Full-time Contract Equivalent Amendable Employee Group Employees Representing Union Date Continental Flight Attendants 8,460 International Association of Machinists and Aerospace Workers (“IAM”) December 2009 Continental Pilots 4,270 Air Line Pilots Association International (“ALPA”) December 2008 Continental Mechanics 3,965 International Brotherhood of Teamsters (“Teamsters”) December 2008 CMI Fleet and Passenger Service Employees 420 Teamsters November 2011 CMI Flight Attendants 280 IAM December 2010 Continental Dispatchers 120 Transport Workers Union (“TWU”) December 2008 CMI Mechanics 125 Teamsters December 2009 Continental Flight Simulator Technicians 40 TWU December 2012
Source: Continental Airlines Inc. Annual Report 2009.
Exhibit 12 Continental Airlines, Inc. Financial Highlights
Continental Airlines, Inc. (CAL) 10-Year Income Statement Revenue (from 2000 to 2009, $mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Revenue 9899 8969 8402 8870 9744 11208 13128 14232 15241 12586 13376 COGS 5442 5266 4845 4919 6067 7554 9367 9992 8713 5779 — Gross Profi t 4457 3703 3557 3951 3677 3654 3761 4240 6528 6807 13376 Operating Expenses ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM SG&A 3371 3385 3171 3204 3371 588 650 682 4786 6314 6376 R&D ——————————— Other 402 174 698 544 535 3105 2643 2871 2056 639 6660 Operating Income 684 144 –312 203 –229 –39 468 687 –314 –146 340 Other Income and Expense ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Int Inc and Other –170 –258 –339 –2 –211 –29 –99 –121 –370 –293 –342 Earnings Before Taxes 571 –114 –615 201 –440 –68 369 566 –684 –439 –2 Income Taxes 222 –29 –202 114 –77 0 0 107 –99 –157 –156 Earnings After Taxes 349 –85 –413 87 –363 –68 369 459 –585 –282 154 Acctg Changes 0 0 — — — — –26 0 0 — — Disc Operations — — — — — — — — — — —
(Continued)
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Exhibit 12 (Continued)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Ext Items –6 0 — — — — — — — — — Net Income 342 –95 –451 38 –363 –68 343 459 –585 –282 154 Diluted EPS, Cont Ops$ 5.54 –1.72 –7.02 0.58 –5.55 –0.97 3.53 4.18 –5.54 –2.18 1.1 Diluted EPS$ 5.45 –1.72 –7.02 0.58 –5.55 –0.97 3.3 4.18 –5.54 –2.18 1.1 Shares 63 55 64 66 66 70 111 114 106 129 144 Continental Airlines, Inc. (CAL) 10-Year Balance Sheet Assets ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Cash and Equiv 1371 1132 1225 999 1055 1723 2123 2128 2165 2546 3047 Short-Term Investments 24 0 117 431 403 234 361 675 478 310 457 Accts Rec 775 404 377 470 553 533 582 606 453 494 610 Inventory 280 272 248 191 214 201 217 271 235 254 275 Other Current Assets 9 336 310 495 603 736 846 881 1016 769 825 Total Current Assets 2459 2144 2277 2586 2828 3427 4129 4561 4347 4373 5214 Net PP&E 5163 6153 6968 6488 6344 6086 6263 6558 7327 7420 7377 Intangibles — — 144 383 344 193 120 222 804 778 780 Other Long-Term Assets 1579 1494 1351 1192 1029 823 796 764 208 210 228 Total Assets 9201 9791 10740 10649 10545 10529 11308 12105 12686 12781 13599 Liabilities and Stockholders’ Equity ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Accts Payable 1016 1008 930 840 766 846 1076 1013 1021 924 988 Short-Term Debt 304 355 493 422 670 546 574 652 519 975 1142 Taxes Payable — — — — — — — ———— Accrued Liabilities 238 291 621 647 666 532 593 817 1053 635 695 Other Short-Term Liabilities 1422 1537 882 957 1157 1475 1712 1967 1881 1855 2607 Total Current Liabilities 2980 3191 2926 2866 3259 3399 3955 4449 4474 4389 5432 Long-Term Debt 3616 4198 5222 5558 5167 5057 4859 4366——— Other Long-Term Liabilities 1445 1241 1825 1433 1853 1847 2147 1740 8107 7802 7443 Total Liabilities 8041 8630 9973 9857 10279 10303 10961 10555 12581 12191 12875 Total Equity 1160 1161 767 792 266 226 347 1550 105 590 724 Total Liabilities & Equity 9201 9791 10740 10649 10545 10529 11308 12105 12686 12781 13599
(Continued)
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Exhibit 12 (Continued)
Continental Airlines, Inc. (CAL) 10-Year Cash Flows Cash Flows from Operating Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Income 342 –95 –451 38 –363 –68 343 459 –585 –282 154 Depr and Amort 402 467 444 444 414 389 391 413 438 494 521 Deferred Taxes 224 –35 –179 101 –77 0 0 101 –101 –158 — Other –64 230 108 –241 399 136 324 160 –76 308 329 Cash from Operations 904 567 –78 342 373 457 1058 1133 –324 362 1004 Cash Flows from Investing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cap Ex –511 –568 –539 –205 –162 –185 –300 –445 –504 –381 –382 Purchase of Business ——————————— Other 443 –86 –5 197 250 236 –66 –315 488 303 925 Cash from Investing –68 –654 –544 –8 88 51 –366 –760 –16 –78 –543 Cash Flows from Financing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Issuance of Stock –358 –210 23 5 5 227 82 35 376 169 184 Net Issuance of Debt –550 69 213 10 –380 –226 –374 –403 1 –72 –119 Dividends 0 0 0 00000000 Other 245 –11 447 –108 –30 36 0 0 0 0 –238 Cash from Financing –663 –152 683 –93 –405 37 –292 –368 377 97 65 Currency Adj ——————————— Change in Cash 173 –239 61 16 56 545 400 5 37 381 526 Free Cash Flow ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cash from Operations 904 567 –78 342 373 457 1058 1133 –324 362 1004 Cap Ex –511 –568 –539 –205 –162 –185 –300 –445 –504 –381 –382 Free Cash Flow 393 –1 –617 137 211 272 758 688 –828 –19 622
Source: Morningstar.com, www.morningstar.com.
However, this airline giant has experienced the industry (most notably increased price sensitiv- financial trouble in more recent years. In September ity), and increased customer use of the Internet for 2005, Delta Airlines filed for Chapter 11 bank- travel information challenged Delta’s differentiation ruptcy.83 Goodwill and deferred tax asset write-offs, strategy that was framed around exceptional cus- significant declines in passenger miles, and high fuel tomer service and innovative aviation. costs led management to conclude that “… these To counter the increasing threats to its firm, results underscore the urgent need to make funda- Delta finalized its merger with Northwest Airlines in mental changes in the way we do business.”84 A more October 2008. Although the combined organization fundamental shift in industry strategy, however, lost $8.9 billion in 2008,85 Delta sought to obtain seemed to underlie the firm’s demise. The continued three major benefits from the merger: (1) larger growth of LCCs, intense competitive rivalry within market share by including Northwest’s mid- and
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northwest U.S. routes, along with its Asia routes; 350 destinations in approximately 70 countries and (2) improved financial capacity to sustain cyclical operates a mainline fleet of almost 700 aircraft.89 downturns in the economy and associated volatil- US Airways. Headquartered in Tempe, AZ, US ity in fuel costs; and (3) synergy of resources cre- Airways along with US Airways Shuttle and US ated by the combination of the Delta SkyMiles and Airways Express employs over 31,000 people and Northwest WorldPerks frequent flyer programs, has more than 3,000 departures a day using a fleet of facilitated by both airlines membership in the 349 mainline and 296 express aircraft serving more SkyTeam alliance (including over 20 other commer- than 190 communities in the Unitef States, Canada, cial carriers).86 As a result of the merger, Delta was Mexico, Europe, the Middle East, the Caribbean, able to offer the largest variety of domestic and inter- and Central and South America from its major hubs national commercial routes at that time. Delta was in Phoenix, Charlotte, and Philadelphia.90 the largest commercial airline in the world87 until As a result of its acquisition by America West United merged with Continental. Although Delta Airlines in September 2005, US Airways avoided fil- recorded a net loss again in 2009 of $1.2 billion, this ing a second bankruptcy in three years and inevi- was a significant improvement of the $8.9 billion table liquidation.91 The new US Airways (under loss in 200888 (see Exhibit 13 for financial informa- the America West leadership team and CEO Doug tion on Delta). Currently Delta serves more than Parker) was able to offer “more non-stop flights
Exhibit 13 Delta Air Lines Financial Highlights
Delta Air Lines, Inc. (DAL) 10-Year Income Statement Revenue (from 2000 to 2009, $mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Revenue 16741 13879 13305 13303 15002 16191 17171 19154 22697 28063 30771 COGS — — — — — — — — 13724 14874 — Gross Profi t 16741 13879 13305 13303 15002 16191 17171 19154 8973 13189 30771 Operating Expenses ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM SG&A 9057 2952 8863 8776 2580 1959 1948 5910 6978 10012 10194 R&D — — — — — — — — — — — Other 6047 12529 5751 5313 15730 16233 15165 12148 10309 3501 18700 Operating Income 1637 –1602 –1309 –786 –3308 –2001 58 1096 –8314 –324 1877 Other Income and Expense ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Int Inc and Other –88 –262 –693 –403 –684 –974 –820 –492 –727 –1257 –1644 Earnings Before Taxes 1549 –1864 –2002 –1189 –3992 –3859 –6968 1819 –9041 –1581 233 Income Taxes 621 –648 –730 –416 1206 –41 –765 207 –119 –344 –316 Earnings After Taxes 928 –1216 –1272 –773 –5198 –3818 –6203 1612 –8922 –1237 549 Acctg Changes –100 0 0 ————— ——— Disc Operations — — —————— ——— Ext Items — ——————— ——— Net Income 815 –1230 –1287 –790 –5217 –3836 –6205 1612 –8922 –1237 549 Diluted EPS, Cont Ops$ — –9.99 –10.44 –6.4 –41.07 –23.75 –31.58 5.42 –19.08 –1.5 0.7 Diluted EPS$ — –9.99 –10.44 –6.4 –41.07 –23.75 –31.58 5.42 –19.08 –1.5 0.7 Shares — 123 123 123 127 162 196 297 468 827 839
(Continued)
776812_United6812_United AAirlines.inddirlines.indd CC-23-23 88/18/11/18/11 6:526:52 PMPM C-24 United Airlines, Time to Fly “Together”
Exhibit 13 (Continued)
Delta Air Lines, Inc. (DAL) 10-Year Balance Sheet Assets ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Cash and Equiv 1364 2210 1969 2710 1463 2008 2034 2648 4255 4607 3436 Short-Term Investments 243 5 — — 336 0 614 138 212 71 439 Accts Rec 406 368 611 662 696 819 915 1066 2582 1360 1512 Inventory — 181 164 202 203 172 181 262 388 327 278 Other Current Assets 1192 803 1158 1393 908 1481 1641 1126 1467 1376 1656 Total Current Assets 3205 3567 3902 4967 3606 4480 5385 5240 8904 7741 7321 Net PP&E 14840 16097 16524 16752 16556 14280 12973 11701 20627 20433 20184 Intangibles 2251 2186 2194 2187 306 301 316 14910 14675 14616 14560 Other Long-Term Assets 1635 1755 2100 2450 1333 978 948 572 808 749 1088 Total Assets 21931 23605 24720 26356 21801 20039 19622 32423 45014 43539 43153 Liabilities and Stockholders’ Equity ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Accts Payable ——————9361045 1604 1249 1661 Short-Term Debt 62 1025 666 1002 — — — 295 4562 3213 2302 Taxes Payable — — 862 915 499 525 500 320 565 525 592 Accrued Liabilities 1170 1121 1365 1285 1151 435 670 849 1507 1663 1888 Other Short-Term Liabilities 4013 4257 3562 3422 4291 4305 3663 4096 2784 3147 5377 Total Current Liabilities 5245 6403 6455 6624 5941 5265 5769 6605 11022 9797 11820 Long-Term Debt 5797 8279 10074 11460 498 0 — — — — — Other Long-Term Liabilities 5086 5154 7298 8931 21158 24669 27446 15705 33118 33497 30618 Total Liabilities 16128 19836 23827 27015 27597 29934 33215 22310 44140 43294 42438 Total Equity 5803 3769 893 –659 –5796 –9895 –13593 10113 874 245 715 Total Liabilities & Equity 21931 23605 24720 26356 21801 20039 19622 32423 45014 43539 43153 Delta Air Lines, Inc. (DAL) 10-Year Cash Flows Cash Flows from Operating Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Income 815 –1230 –1287 –790 –5217 –3836 –6205 1612 –8922 –1237 549 Depr & Amort 1187 1283 1181 1230 1244 1273 1276 1164 1266 1536 — Deferred Taxes 396 –648 –411 –416 1206 –41 –765 207 –119 –329 — Other 500 831 802 429 1644 2779 6687 –1624 6068 1409 1892 Cash from Operations 2898 236 285 453 –1123 175 993 1359 –1707 1379 2441
(Continued)
776812_United6812_United AAirlines.inddirlines.indd CC-24-24 88/18/11/18/11 6:526:52 PMPM United Airlines, Time to Fly “Together” C-25
Exhibit 13 (Continued)
Cash Flows from Investing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cap Ex –4060 –2793 –1286 –744 –760 –814 –413 –1036 –1522 –1202 –1391 Purchase of Business –232 0 0 ———— ———— Other 896 97 177 484 540 354 52 411 3120 194 3107 Cash from Investing –3396 –2696 –1109 –260 –220 –460 –361 –625 1598 –1008 –1716 Cash Flows from Financing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Issuance of Stock –469 2 –42 — — — — — 192 0 — Net Issuance of Debt 748 2660 1820 1124 671 –1320 –600 525 836 75 –2664 Dividends –40 –40 –39 –19 0 0 0 0 0 0 0 Other 0 684 –1156 –557 –35 2150 –6 –645 688 –94 21 Cash from Financing 239 3306 583 548 636 830 –606 –120 1716 –19 –2685 Currency Adj — — — — — — — — — — — Change in Cash –259 846 –241 741 –707 545 26 614 1607 352 –1960 Free Cash Flow ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cash from Operations 2898 236 285 453 –1123 175 993 1359 –1707 1379 2441 Cap Ex –4060 –2793 –1286 –744 –760 –814 –413 –1036 –1522 –1202 –1391 Free Cash Flow –1162 –2557 –1001 –291 –1883 –639 580 323 –3229 177 1050
Source: Morningstar.com, www.morningstar.com.
and better connecting service than either the West- US Airways competes on price, flight availability, Coast-oriented America West or the old, East-Coast- and level of service provided with both LCCs such as centric US Airways had before,” and even “branded Southwest and AirTran, and full service traditional [itself] as ‘America’s largest low cost carrier.’”92 The airlines such as American, Delta, and United.97 The postmerger airline earned $427 million in profit on weakened state of the U.S. economy, a higher oper- reported $11.7 billion in revenue in 2007 and $304 ating cost structure than that of true LCCs, and fluc- million on $11.6 billion in revenue in 2006. The tuations in fuel prices make it extremely difficult for firm reported a net loss of $2.2 billion on increased the airline to earn profits on an annual basis. revenue of $12.1 billion in 200893 and another net Southwest Airlines. Founded in 1971, Southwest loss of $205 million on decreased revenue of $10.5 Airlines introduced a new business model in the billion in 200994 (see Exhibit 14 for financial infor- U.S. airline industry. It originally flew only intra- mation on US Airways). state routes in Texas, allowing it to operate outside As with many of its competitors, US Airways the price and route regulations inter-state carriers relies on its regional affiliate, US Airways Express, faced.98 Thus, it was able to focus on providing to provide jet service to passengers traveling in and low-cost no-frills travel to price-conscious consum- out of the smaller airports across the country, as ers. When the industry was deregulated in 1978, well as flying during off-peak hours when it becomes Southwest began to expand beyond the borders of inefficient to operate a larger jet.95 In addition, US Texas. By 2007, Southwest had carried nearly 102 Airways is a member of the Star Alliance, which million passengers, more than any other airline in provides customers with even more access to vari- the world.99 By the end of September, 2010, the ous destinations across the globe without additional company had a fleet of 547 Boeing 737 aircraft that costs for the airline.96 flew 3,100 flights to 72 U.S. cities daily.100
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Exhibit 14 US Airways Group, Inc., LCC Financial Highlights
US Airways Group, Inc. (LCC) 10-Year Income Statement Revenue (from 2000 to 2009, $mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Revenue 9269 8288 6977 6846 7117 5077 11557 11700 12118 10458 11627 COGS —————2736 7917 3956 4556 3914 — Gross Profi t 9269 8288 6977 6846 7117 2341 3640 7744 7562 6544 11627 Operating Expenses ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM SG&A 419 368 314 407 394 231 446 4538 4475 4259 4382 R&D — —————————— Other 8903 9603 7980 6690 7101 2327 2636 2673 4887 2167 6554 Operating Income –53 –1683 –1317 –251 –378 –217 558 533 –1800 118 691 Other Income and Expense ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Int Inc and Other –170 –169 –598 1723 –243 –118 –154 –99 –410 –361 –333 Earnings Before Taxes –223 –1852 –1915 1472 –621 –335 404 434 –2210 –243 358 Income Taxes –57 272 –252 11 –10 0 101 7 0 –38 –37 Earnings After Taxes –166 –2124 –1663 1461 –611 –335 303 427 –2210 –205 395 Acctg Changes –103 7 17 0 0 –202 1 0 0 — — Disc Operations — — — — — — — — — — — Ext Items — — — — — — — — — — — Net Income –269 –2117 –1646 1461 –611 –537 304 427 –2210 –205 395 Diluted EPS, Cont Ops$ — –31.59 –24.45 25.57 –11.19 –10.65 3.32 4.52 –22.06 –1.54 2.1 Diluted EPS$ — –31.48 –24.2 25.57 –11.19 –17.06 3.33 4.52 –22.06 –1.54 2.1 Shares — 67 68 53 55 31 94 96 100 133 191 US Airways Group, Inc. (LCC) 10-Year Balance Sheet Assets ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Cash and Equiv 543 593 585 929 738 1125 1116 1948 1034 1299 1885 Short-Term Investments 773 485 49 358 0 452 1249 226 20 0 55 Accts Rec 331 281 228 251 252 353 388 374 293 285 371 Inventory 249 209 192 196 177 229 223 249 201 227 223 Other Current Assets 696 207 254 321 246 400 378 550 870 520 538 Total Current Assets 2592 1775 1308 2055 1413 2559 3354 3347 2418 2331 3072 Net PP&E 4989 4693 3941 3028 3370 2064 2114 2488 3286 3696 3770 Intangibles 864 874 838 3047 3022 1315 1183 1175 545 503 483 Other Long-Term Assets 682 683 456 425 617 1026 925 1030 965 924 681 Total Assets 9127 8025 6543 8555 8422 6964 7576 8040 7214 7454 8006
(Continued)
776812_United6812_United AAirlines.inddirlines.indd CC-26-26 88/18/11/18/11 6:526:52 PMPM United Airlines, Time to Fly “Together” C-27
Exhibit 14 (Continued)
Liabilities and Stockholders’ Equity ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Accts Payable 538 625 238 376 353 530 454 366 797 337 372 Short-Term Debt 284 159 300 360 721 211 95 — 362 — — Taxes Payable — — — — — 171 181 152 142 141 154 Accrued Liabilities 1206 1425 927 982 489 750 873 1084 1045 1031 1046 Other Short-Term Liabilities 890 817 784 835 820 997 1109 949 698 1280 1477 Total Current Liabilities 2918 3026 2249 2553 2383 2659 2712 2551 3044 2789 3049 Long-Term Debt 2688 3515 18 2630 0 2749 2907 — 3634 — — Other Long-Term Liabilities 3879 4099 9197 3200 6473 1136 987 4050 1041 5020 4883 Total Liabilities 9485 10640 11464 8383 8856 6544 6606 6601 7719 7809 7932 Total Equity –358 –2615 –4921 172 –434 420 970 1439 –505 –355 74 Total Liabilities & Equity 9127 8025 6543 8555 8422 6964 7576 8040 7214 7454 8006 US Airways Group, Inc. (LCC) 10-Year Cash Flows Cash Flows from Operating Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Income –269 –2117 –1646 1461 –611 –537 304 427 –2210 –205 395 Depr and Amort 369 392 295 232 248 88 198 186 240 267 — Deferred Taxes — 487 0 0 — — — — — — — Other 597 1126 1049 –1860 274 495 116 –171 990 –3 323 Cash from Operations 697 –112 –302 –167 –89 46 618 442 –980 59 718 Cash Flows from Investing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cap Ex –1978 –1135 –146 –215 –181 –44 –232 –603 –1068 –683 –85 Purchase of Business — — — — — –258 — — — — — Other –23 268 168 –296 264 701 –671 872 153 188 285 Cash from Investing –2001 –867 22 –511 83 399 –903 269 –915 –495 200 Cash Flows from Financing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Issuance of Stock –18 2 0 34 0 732 44 3 179 203 0 Net Issuance of Debt 709 683 34 1048 –185 –86 232 118 802 498 –275 Dividends 0 0 0 0 0 0 0 0 0 0 0 Other 910 344 300 –60 0 –115 0 0 0 0 0 Cash from Financing 1601 1029 334 1022 –185 531 276 121 981 701 –275 Currency Adj — — — — — — — — — — — Change in Cash 297 50 –8 344 –191 976 –9 832 –914 265 643
(Continued)
776812_United6812_United AAirlines.inddirlines.indd CC-27-27 88/18/11/18/11 6:526:52 PMPM C-28 United Airlines, Time to Fly “Together”
Exhibit 14 (Continued)
Free Cash Flow ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cash from Operations 697 –112 –302 –167 –89 46 618 442 –980 59 718 Cap Ex –1978 –1135 –146 –215 –181 –44 –232 –603 –1068 –683 –85 Free Cash Flow –1281 –1247 –448 –382 –270 2 386 –161 –2048 –624 633
Source: Morningstar.com, www.morningstar.com.
Unlike its traditional competitors, Southwest is available for an extra fee, but Southwest does does not rely on a hub-and-spoke network, using not charge additional fees for checked baggage. instead a point-to-point service between medium Southwest was also a pioneer in online bookings, and large metropolitan areas.101 Southwest mini- e-ticketing, and self-check kiosks, reducing the cost mizes costs by standardizing its fleet to reduce train- of the ticketing and check-in process.104 ing and maintenance expenses, by using secondary The company earned profits during every year airports that charge lower access fees, and by mini- from 1975 through 2009, including recessionary mizing downtime for both aircraft and employees.102 periods in the early 1990s and 2000s, and during the While traditional hub-and-spoke networks attempt more recent global economic recession of 2008 and to coordinate hub arrivals to facilitate shorter lay- 2009, when traditional carriers suffered losses.105 overs for passengers, Southwest makes regular, In 2008, while every major traditional U.S. carrier frequent flights throughout the day. The result is a posted a loss, Southwest turned a profit of $178 flatter demand for labor (less peaks and valleys) and million,106 followed in 2009 by a net profit of $99 higher aircraft utilization because of turnarounds million107 (see Exhibit 15 for financial information that take half as long as the industry average.103 on Southwest). The extent of the threat posed by The customer experience on Southwest is Southwest and its model is evident in the number of described as “no-frills” because the company uses LCCs that have been launched around the world and first-come, first-served seating and does not pro- the extent to which traditional carriers have tried vide complimentary meal service. Priority boarding to change their business models in direct response
Exhibit 15 Southwest Airlines Financial Highlights
Southwest Airlines Co. (LUV) 10-Year Income Statement Revenue (from 2000 to 2009, $mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Revenue 5650 5555 5522 5937 6530 7584 9086 9861 11023 10350 11702 COGS 2504 2647 2701 2798 3100 3593 4585 5302 4434 3763 — Gross Profi t 3145 2908 2821 3139 3430 3991 4501 4559 6589 6587 11702 Operating Expenses ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM SG&A 1684 1856 1993 2272 2445 2702 3052 3213 4156 4372 4577 R&D ——————————— Other 441 421 411 384 431 469 515 555 1984 1953 6186 Operating Income 1021 631 417 483 554 820 934 791 449 262 939
(Continued)
776812_United6812_United AAirlines.inddirlines.indd CC-28-28 88/18/11/18/11 6:526:52 PMPM United Airlines, Time to Fly “Together” C-29
Exhibit 15 (Continued)
Other Income and Expense ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Int Inc and Other –4 197 –25 –225 65 –54 144 –267 –171 –98 –223 Earnings Before Taxes 1017 828 393 708 489 874 790 1058 278 164 716 Income Taxes 392 317 152 266 176 326 291 413 100 65 273 Earnings After Taxes 625 511 241 442 313 548 499 645 178 99 443 Acctg Changes –22 0 0———————— Disc Operations — —————————— Ext Items — —————————— Net Income 603 511 241 442 313 548 499 645 178 99 443 Diluted EPS, Cont Ops$ — 0.63 0.30 0.54 0.38 0.67 0.61 0.84 0.24 0.13 0.60 Diluted EPS$ — 0.63 0.30 0.54 0.38 0.67 0.61 0.84 0.24 0.13 0.60 Shares — 811.00 803.00 819.00 824.00 818.00 818.00 768.00 742.00 741.00 745.00 Southwest Airlines Co. (LUV) 10-Year Balance Sheet Assets ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Cash and Equiv 523 2280 1815 1865 1305 2280 1390 2213 1368 1114 1031 Short-Term Investments ———— —2513695664351479 2348 Accts Rec 138 71 174 132 248 258 241 279 209 169 289 Inventory 81 71 86 93 137 150 181 259 203 221 231 Other Current Assets 90 99 156 223 482 681 420 1126 678 375 143 Total Current Assets 832 2520 2232 2313 2172 3620 2601 4443 2893 3358 4042 Net PP&E 5820 6446 6646 7443 8723 9427 10094 10874 11040 10634 10566 Intangibles ———— ——————— Other Long-Term Assets 18 31 76 122 442 1171 765 1455 375 277 535 Total Assets 6670 8997 8954 9878 11337 14218 13460 16772 14308 14269 15143 Liabilities and Stockholders’ Equity ($mil) latest 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Qtr Accts Payable 313 505 362 405 420 524 643 759 668 746 707 Short-Term Debt 109 515 131 206 146 601 122 41 163 190 113 Taxes Payable ———— ——————— Accrued Liabilities 500 548 529 650 1047 2074 1323 3107 1012 696 944 Other Short-Term Liabilities 377 672 412 462 529 649 799 931 963 1044 1423 Total Current Liabilities 1298 2239 1434 1723 2142 3848 2887 4838 2806 2676 3187 Long-Term Debt 761 1327 1553 1332 1700 1394 1567 2050 3498 3325 3350 Other Long-Term Liabilities 1159 1417 1546 1771 1971 2301 2557 2943 3051 2802 2656 Total Liabilities 3218 4983 4532 4826 5813 7543 7011 9831 9355 8803 9193 Total Equity 3451 4014 4422 5052 5524 6675 6449 6941 4953 5466 5950 Total Liabilities and Equity 6670 8997 8954 9878 11337 14218 13460 16772 14308 14269 15143
(Continued)
776812_United6812_United AAirlines.inddirlines.indd CC-29-29 88/18/11/18/11 6:526:52 PMPM C-30 United Airlines, Time to Fly “Together”
Exhibit 15 (Continued)
Southwest Airlines Co. (LUV) 10-Year Cash Flows Cash Flows from Operating Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Income 603 511 241 442 313 548 499 645 178 99 443 Depr and Amort 281 318 356 384 431 469 515 555 599 616 623 Deferred Taxes 154 208 170 183 184 257 277 328 56 72 165 Other 261 448 –247 327 229 955 115 1317 –2354 198 553 Cash from Operations 1298 1485 520 1336 1157 2229 1406 2845 –1521 985 1784 Cash Flows from Investing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cap Ex –1135 –998 –603 –1238 –1775 –1210 –1399 –1331 –923 –585 –512 Purchase of Business — — — — –34 –6 –20 — — — — Other 0 0 0 0 –41 6 –76 –198 –55 –984 2014 Cash from Investing –1135 –998 –603 –1238 –1850 –1210 –1495 –1529 –978 –1569 –1502 Cash Flows from Financing Activities ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Net Issuance of Stock –38 44 57 93 –158 77 –540 –862 –54 0 — Net Issuance of Debt –10 979 320 –130 313 151 –307 378 1036 52 –546 Dividends –11 –13 –14 –14 –14 –14 –14 –14 –13 –13 13 Other 0 261 –745 3 –8 –1 60 5 685 291 –406 Cash from Financing –60 1270 –382 –48 133 213 –801 –493 1654 330 –153 Currency Adj— —————————— Change in Cash 104 1757 –465 50 –560 1232 –890 823 –845 –254 129 Free Cash Flow ($mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Cash from Operations 1298 1485 520 1336 1157 2229 1406 2845 –1521 985 1784 Cap Ex –1135 –998 –603 –1238 –1775 –1210 –1399 –1331 –923 –585 –512 Free Cash Flow 164 487 –83 98 –618 1019 7 1514 –2444 400 1272
Source: Morningstar.com, www.morningstar.com.
to the growth of low-cost airlines. Primarily, tradi- ropolitan area and no service to Newark. The lease tional carriers have tried combating LCCs by creat- was created to resolve an issue raised by the U.S. ing “low-cost” subsidiaries of their own. American Justice Department in its investigation of the pro- Airlines is the only major competitor to avoid this posed merger. Approval of the Department of temptation. Justice was one of the final regulatory hurdles prior As the airline industry becomes increasingly glo- to closing the merger in October 2010.108 balized, traditional carriers and LLCs seek to expand To further expand into major East Coast cities their routes and destinations served through part- and internationally, in September 2010 Southwest nerships, alliances, mergers, and acquisitions. As a announced plans to purchase competitor AirTran result of the United Continental merger, Southwest for $1.42 billion.109 The acquisition would also give was able to lease 18 slot pairs at Newark Liberty Southwest access to 37 new cities, including Atlanta, International Airport from Continental. Previously and routes to Mexico and the Caribbean, where Southwest had limited service in the New York met- rival JetBlue already has established routes.110
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Analysts believed that further consolidation of 25 percent control.”116 Because other nations have the domestic airline industry would be necessary similar restrictions, international airline mergers are following the United Continental merger. Vaughn essentially impossible at this time. Cordle, chief analyst and managing partner at To circumvent the limitations related to interna- Airline Forecasts in Washington, D.C., said that tional routes and restrictions on ownership, airlines the remaining network carriers would have a dif- have formed global strategic alliances. ficult time surviving higher industry costs without 111 consolidating. He projected that fuel costs would Global Alliances increase $6.5 billion in 2010 over 2009, and would increase $2 billion more in 2011. “With the merger Alliances allow passengers to book end-to-end itin- of United and Continental, the odds of liquidation eraries to a much larger pool of international desti- and/or bankruptcy for US Airways and American nations through airlines code-sharing on their joint increase because it will be too difficult, if not impos- networks.117 In addition to extending a carrier’s net- sible, for them to remain viable as stand-alone busi- work, alliances allow airlines to expand the value nesses,” Cordle wrote in a white paper advocating of their FFPs) by providing passengers the oppor- industry consolidation.112 He also expressed his tunity to accumulate and redeem awards for other belief that the market could not support more than member airlines.118 These alliances have extended three network carriers. John Kasarda, an aviation beyond code-sharing and agreements on FFP pro- expert and director of the Kenan Institute of Private grams to include food service agreements and main- Entrepreneurship at UNC Chapel Hill’s Kenan- tenance contracts for each other’s aircraft. There are Flagler Business School, said that a potential merger three main airline alliances that compete against one between US Airways and American would not be another: oneworld, SkyTeam, and Star. Exhibit 2 a “far-fetched” idea, but that it would most likely shows the airlines participating in each alliance as of occur out of necessity. He believed that shareholders October 2010, along with key statistics for each alli- would push US Airways and American to make some ance. The three major U.S. airlines compete through type of response to the merger, whether it would membership in different alliances. American Airlines be a merger or close cooperative agreements.113 is a founding member of oneworld, Delta is a found- Kasarda also said that both airlines had previously ing member of SkyTeam, and United is a founding been “asleep at the switch” in regard to interna- member of Star Alliance. tional service.114 There are advantages and disadvantages of global airline alliances. Member airlines have been International Transport able to reduce costs and increase convenience for passengers through initiatives such as dedicated Generally speaking, an airline is permitted to carry terminals.119 Placing alliance member airlines in a passengers from a domestic airport to a foreign single terminal allows passengers to connect faster destination, drop them off, pick up passengers at with shorter walks between gates. It also allows that airport, and return to its country of origin.115 airlines to share lounges as well as personnel and Airlines are usually not permitted to carry passengers resources used in check-in and ground handling to other airports in other countries or within any activities.120 country other than their home nation. Obviously, However, critics of alliances claim that code- this situation presents problems for a traveler who sharing arrangements can lead to a reduction in com- wishes to go, for example, from a small airport in petition, as “all the flights on a route carry the codes the United States to a small airport in Russia. This of [all] the ‘competitors’ and are jointly marketed traveler would need to purchase separate tickets on by [all] the airlines.”121 Too many alliance members a U.S. and a Russian carrier, transfer his or her own flying the same routes can also adversely affect the baggage, and assume the risks of missed connections airlines involved, “as new airlines are added to the between the carriers. alliance, the importance of an existing airline may One obvious way around this dilemma is a be reduced.”122 merger of carriers with domestic rights in both Additionally, airlines face expenses when they countries. Unfortunately, “U.S. law limits the join an alliance. Service levels must be standardized, amount of foreign ownership in its domestic airlines information technology systems must be integrated, to a maximum of 49 percent, with a maximum of and costs are incurred for running the alliance
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itself.123 Still, there is general agreement that the ben- barrel in October, making it difficult for airlines to efits of alliances outweigh their drawbacks. forecast expenses.129 To smooth the variance, air- Of the six largest U.S. airlines, Southwest is the lines routinely participate in fuel hedging, but this is only one that is not a member of a global alliance. not a foolproof practice. United lost $519 million in LCCs have traditionally avoided global alliances just the third quarter of 2008 when price decreases because of the service level requirements that mem- lowered the value of its hedges.130 American, Delta, bership places on them, although they do have some Continental, and even Southwest also posted losses domestic code-sharing agreements (Southwest had due to fuel hedges.131 By the end of fiscal year 2010, a code sharing agreement with ATA Airlines, e.g., oil prices were rising again. until ATA ceased service in 2008). Airport Slots. The relationships between airlines In addition to extending its network glob- and airports are quite complex. While airports gen- ally through the Star Alliance, United extends its erally have significant latitude with regard to the network to smaller domestic airports through its fees they charge airlines to use their facilities, the regional affiliate, United Express. resulting agreements give airlines significant power United Express. The goal of this air carrier ser- over gates, terminals, ticket counters, and slots for vice is to transport passengers from smaller airports takeoffs and landings.132 to United hubs for convenient connections to other Of particular interest is something called an “air- United and Star Alliance flights.124 United maintains port slot.” Essentially, airport slots grant the holder agreements with regional carriers such as Atlantic “the right to land or take off from an airport at a Southeast Airlines, Colgan Airlines, ExpressJet, given time.”133 Once these slots are granted, they Go Jet Airlines, Mesa Airlines, Shuttle America, exist in perpetuity as long as the owner uses the slot SkyWest Airlines, and Trans States Airlines, all of at least 80 percent of the time.134 This provides a which fly planes bearing the United Express insig- significant incentive to slot owners to continue fly- nia; as such, passengers are generally unaware of the ing in every slot they own to keep those slots from relationship and consider these flights to be United becoming available to other carriers.135 Airlines flights.125 United Express conducts more Labor. Labor relations can be challenging for than 2,000 flights daily to more than 150 destina- any company, but for the airline industry, where a tions across the United States and Canada,126 and all large percentage of airline workers are represented of the same elements apply, such as acquiring points by labor unions, it is a very critical component of the for the United frequent flier program. business. Unfortunately for United, the firm’s his- Not only are alliances and networks important tory of problems with the labor unions representing considerations for airline companies, but factors of its workers continues to plague the company today. production may be even more crucial. After years of strikes and bitter negotiations, 1994 was something of a watershed moment for Factors of Production United’s labor relations. As part of contract negotia- tions, it became the largest company in the world to Aircraft Manufacturers. The most visible tangible be majority owned by its employees. Pilots bought asset of any airline is its fleet of aircraft. For large 25 percent of the company, machinists, 20 percent, jet aircraft (more than 100 seats), Boeing and Airbus and salaried and management workers, about are currently the two major suppliers in the world. 10 percent, and several seats on the board of directors The two companies are relatively evenly matched in were granted to union representatives.136 It seemed terms of capabilities, and “since both manufactur- that United and its unions were finally working ers price their aircraft almost identically, competi- together; however, that perception ended quickly. tion occurs in the area of additional services, such While the company’s ESOP provided job security for as financing agreements or agreed buy-back of older the so-called new “owners,” there was little change aircraft.”127 Most airlines, including United, tend to in employee relations, airline efficiency, or customer maintain a relationship with both manufacturers to satisfaction as workers still had little control over avoid becoming overly dependent on either supplier. the critical decisions the company made. In retro- Fuel. With recent increases in the cost of oil, fuel spect, it seems that there was no intention to cre- has become the largest and most volatile expense ate an “ownership culture” by either side. Instead, for airlines.128 In 2008 oil prices escalated to a high union leaders “wanted to use ownership to prevent of $145 per barrel in July, then dropped to $70 a United from breaking up into regional carriers … and
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outsourcing work performed by union members,” United and Continental to speed up negotiations while the company’s management saw ESOP “pri- with the union, and to show the airlines that the two marily as a way to get wage concessions.”137 groups would not be “pitted against one another.”147 United’s pilots, along with the ALPA, criticized Captain Jay Pierce, head of the Continental unit of CEO Glenn Tilton based on the fact that his com- the ALPA, said, “If you can combine two megacar- pensation package was the highest in the industry riers between May 1 and October 1, you should be by a considerable margin, even while his airline able to negotiate labor contracts with your employ- was reporting negative earnings, its employees were ees. They need to put a stronger emphasis on their being laid off, and customers were being charged labor groups getting taken care of.”148 Mr. Smisek extra service fees.138 Further, United’s decision in said that the goal is contracts that are fair to work- June 2008 to eliminate 950 pilot jobs, lay off 1,600 ers and fair to the company.149 A unified plan for salaried positions, and ground 70 aircraft was not assigning work to regional partners has not been received well by the ALPA community.139 In fact, determined but is essential for the new contract. the union’s pilots went on strike; in response, United To further complicate matters, flight atten- sued the ALPA claiming it organized an illegal and dants were from different unions. United flight disruptive “sick-out” that caused hundreds of flight attendants were represented by the AFA, and the cancellations costing the airline millions of dollars Continental flight attendants were represented by in potential revenue and “damaging its reputation the International Association of Machinists and with the flying public and disrupting travel plans of Aerospace Workers (IAM).150 On January 18, 2011, about 36,000 passengers.”140 In November 2008, the AFA asked a federal labor board to prepare for the federal court ruled against United’s pilots, stating a vote on which union would represent the 24,300 that their actions were illegal.141 United faced further flight attendants (15,000 at United and 9,300 at challenges from the labor unions that related to the Continental) at United Continental Holdings. This merger. Union contracts were required to be rene- is the first request from unions representing workers gotiated within one year of the merger for the FAA at United and Continental.151 In 2010, the AFA said to issue a single operating certificate.142 Although that the Machinists (IAM) had refused their requests United and Continental pilots were members of the to work together on contract talks to obtain better same union, the ALPA, there were different aircraft benefits. Sara Nelson, AFA international vice presi- size limitations for regional carriers. A major issue dent, said, “Flight attendants have not been able to for the union was the “outsourcing” of flights and capitalize on the incredible opportunities that are pilot jobs to regional airline partners. This practice available in this merger. What’s standing in the way was common in the airline industry. The contracts is resolving this representation issue, so we don’t in existence at the time of the merger limited the want to wait another day.”152 Continental pilots to using regional jets of 50 seats or The IAM also represented approximately 16,000 less in commuter operations, while the more lenient workers at United, including ramp, stores, public con- United contract allowed commuter partners to fly tact, fleet technical instructor, maintenance instruc- planes up to 70 seats in size.143 Mr. Smisek said that tor, security guard, and food service employees. It Continental had been “hampered and competitively had expressed concern about the merger in June disadvantaged” by the contract, but did not say how 2010. General Vice President Robert Roach, Jr., tes- the issue might be resolved.144 Pilots at both airlines tified before three Congressional committees about viewed outsourcing as a method of “chipping away” the proposed merger, and said, “The IAM is con- at their jobs, and on November 22, 2010, United cerned that the new entity may be too big to succeed. and Continental pilots picketed in Newark.145 The Failure of such a large entity could be disastrous to ALPA said that operating 70-seat service out of employees, the industry and the national economy. Continental hubs violated the Continental contract Our concern is for the entire industry, and we do not provision. United spokeswoman Megan McCarthy believe mergers alone provide the answers.”153 said, “We are re-deploying 70-seaters in some of our United Continental Holdings will face many chal- hub markets to better meet demand and improve lenges as it works to integrate United and Continental profitability.”146 workforces. One of the significant challenges is to On January 7, 2011, approximately 100 pilots integrate work forces from two different airlines that and other airline employees picketed at Cleveland have different contractual arrangements with various Hopkins International Airport in an attempt to force unions. The negotiations can be difficult and takes
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years to workout successfully. Stalled negotiations it cut operating costs such as salaries, repairs, and would also have a negative impact on its financial maintenance by eight percent (approximately $800 position. million) annually since December 2007.162 Analysts believed that the cost cuts would be permanent and Financial Results projected that United Continental would be able to maintain approximately $600 million in annual sav- During fiscal year 2008 and again in fiscal year ings per year for the next several years.163 2009, five out of six major domestic carriers sus- The global economy was also showing signs of tained losses on their income statements. Low-cost recovery. Major U.S. airlines reported significant carrier Southwest Airlines was the only exception to third-quarter 2010 profits, led by United with a this outcome in both years. third quarter net income of $387 million or $1.75 Competition from LCCs, emergence from bank- per share. Continental earned $354 million or $2.16 ruptcy, and intense competitive rivalry (because of per share.164 In addition, Southwest reported a net high fixed costs and the need for high turnover) profit of $205 million, or 27 cents per share.165 among carriers has forced United and other airlines Delta, U.S. Airways and AMR Corp. also recorded to reduce capacity. In 2008, the firm permanently profits, which further indicated that the recession removed 100 aircraft from its fleet, reduced capital was receding and high-profit business traffic was spending by $200 million, and cut 6,000 employees returning.166 from its workforce.154 By the end of 2009, United United Continental Holdings’ CEO Jeff Smisek had reduced capacity by seven percent from 2008, said that the airline industry was still seeing good and had retired its entire fleet of 94 B737 aircraft and demand, but economic trends were uncertain and six B747 aircraft.155 To match the size of its work- fuel prices had increased in recent months. “We will force to the size of its reduced capacity, approxi- not grow for growth’s sake. We want to derisk the mately 3,000 more employees were removed from business.”167 At the time of the merger in October its workforce, to bring the total workforce reduction 2010, United Continental Holdings had approxi- in 2008–2009 to approximately 9,000 positions. mately $9 billion in unrestricted cash and expected Approximately 45 percent of the reduction was that the merger would provide $1.0–1.2 billion in accomplished through voluntary furloughs.156 Net net annual synergies by 2013, including between sales of short-term investments accounted for the $800 and $900 million of incremental annual rev- majority of United’s liquidity in 2008 ($2.2 million enue.168 This would come from expanded customer of $2.7 million).157 In 2009 United’s liquidity ini- options that would result from the greater scope tiatives generated unrestricted cash of more than and scale of the network, fleet optimization, and $1.5 billion. This was accomplished mostly from the expanded service that the larger combined net- issuance of UAL common stock, proceeds from work would make available. Based on the financial new debt issuances and aircraft asset sale–leaseback results of the 12 months ending June 30, United transactions.158 Additional revenue was provided Continental Holdings anticipated having annual by United’s cargo service. In 2009, cargo (United revenues of $31.4 billion.169 Cargo) generated $536 million in freight and mail Although the future appeared promising, there revenue, accounting for approximately three percent were numerous challenges that would need to be over- of the company’s operating revenue. This was a 37 come for the company to survive and be profitable. percent decrease versus 2008.159 While United and most of its competitors derive some revenue from Strategic Challenges the freight market, “competition in the freight mar- ket has grown steadily, and it is becoming less and All mergers present challenges, but the United less likely that airlines treating freight purely as a Continental merger created the world’s largest air- by-product will be successful.”160 The bulk of the line from two former competitors with significantly market (which was expected to grow more rapidly different corporate cultures. Some loyal Continental than passenger service) was expected to fall to dedi- customers are concerned that Continental’s high cated air freight companies.161 standard of customer service will begin to slip as By fall 2010 United had reduced systemwide Continental’s culture could move closer to that of capacity by approximately 15 percent, which helped United.170 Will United Continental Holdings be able
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to maintain Continental’s customer service stan- 25. http://www.gacfo.com/products/debtor-in-possession.html. 26. M. Maynard, 2005, United Air wins right to default on its employee pension dards? As complex reservation and distribution plans, The New York Times, May 11. http://www.nytimes.com/2005/05/11/ systems are combined, will the combined company business/11air.html. be able to avoid costly computer problems and out- 27. 2011, Hoover’s Company Reports, United Continental Holdings, Inc. 28. M. Skertic, 2005, Blue skies ahead, United chief says, Chicago Tribune, ages? Will United and Continental employees be able January 25, http://www.chicagotribune.com. to work together as one team, and will labor con- 29. Ibid . tracts be successfully re-negotiated? How will the 30. 2009, UAL Corporation 2008 Annual Report, http://www.united .com. 31. Ibid . fleets be integrated? Continental has a young fleet 32. Ibid . composed mostly of Boeing planes. United has a 33. M. Maynard, 2008, More cuts as United grounds its low-cost carrier, The New mix of Boeing and Airbus planes, which could make York Times, http://www.nytimes.com, June 5. 171 34. 2007, Delta, United deny being in merger discussions, MSNBC, http://www. maintenance and training more difficult. Will it be msnbc.msn.com, November 14. able to compete with low cost carriers? Jeff Smisek, 35. M. Maynard, 2008, United and Continental form alliance, The New York Times, Glenn Tilton, and the new executive team must find http://www.nytimes.com, June 20. 36. United, CBS News; M. Maynard, United and Continental form alliance. the most viable answers as the pathway for United 37. 2009, UAL Corporation reports first quarter 2009 results, United Press Release, Continental Holdings to operate in ways that will http://www.united.com, April 21; 2009, UAL Corporation 2008 Annual Report, satisfy all stakeholders, certainly including share- http://www.united.com. 38. 2009 United Air Lines Corporation Annual Report. holders, before United and Continental can truly 39. Ibid . “fly together.” 40. 2008 United Air Lines Corporation Annual Report. 41. 2011, United Continental Holdings web site, January, http://www. unitedcontinentalholdings.com. NOTES 42. J. Mouawad & A. R. Sorkin, 2010, Continental and United resume talks to merge, The New York Times, April 15. 1. 2011, About United Continental Holdings, http://www.unitedcontinental 43. 2009 United Air Lines Corporation Annual Report. holdings.com/index.php?section=about. 44. 2010, U.S. Department of Justice informs United and Continental 2. Era 2: 1926–1933, United Airlines, October 16, 2002, http://www.ual.com/page/ that it has completed antitrust review, PRNewswire, August 27, http:// middlepage/0,1454,2287,00.html. ir.unitedcontinentalholdings.com. 3. Era 5: 1946–1958, United Airlines, October 16, 2002, http://www.ual.com/page/ 45. Ibid . middlepage/0,1454,2290,00.html. 46. K. Peterson, 2010, Shareholders of United Airlines parent UAL Corp 4. Era 8: 1990–1993, United Airlines, October 16, 2002, http://www.ual.com/page/ UAUA.O and Continental Airlines Inc CAL.N approved the merger of the middlepage/0,1454,2293,00.html. two companies on Friday to form the world’s largest air carrier, Reuters, 5. Era 9: 1994–1999, United Airlines, October 16, 2002, http://www.ual.com/page/ September 17, http://www.reuters.com/article/idUSTRE68G3VM20100917. middlepage/0,1454,2294,00.html. 47. Ibid . 6. Ibid. 48. 2011, United Fact Sheet, January, http://www.unitedcontinentalholdings.com. 7. A. Abromitis, E-mail to Derek Evers, October 18, 2002. 49. Ibid . 8. 2011, UAL Corporation 2009 Annual Report, http://www.united .com. 50. Ibid . 9. C. Woodyard, M. Adams, & J. O’Donnell, United Airlines chief steps down, 51. 2010, Anonymous, New visual brand identity for the new United Airlines, USA Today, October 29, 2001, http://www.informare. it/news/review/2001/ PRNewswire via COMTEX/, August 11. usatodat0005.asp. 52. 2010, United employees begin move in to new home at Willis Tower, 10. A. Kahn, Airline deregulation, The Library of Economics and Liberty, October 20, Transportation Business Journal, October 31, www.VerticalNews.com. 2002, http://www.econlib.org/library/Enc/Airline Deregulation.html. 53. 2011, United Fact Sheet, January, http://www.unitedcontinentalholdings.com. 11. Gone . . ., Economist.com, December 14, 2002. 54. Ibid . 12. 2011, Hoover’s Company Reports, United Continental Holdings, Inc. 55. Anonymous, 2010, United and Continental close merger; Company names 13. C. Isidore, Union wants UAL CEO out, CNN Money, October 24, 2001, board members…, PR Newswire, New York, October 1. http://money.cnn.com. 56. L. Sun, 2010, The World’s largest airline, United Continental (UAL), takes off, 14. UAL boss seeks sacrifices, CNN Money, October 29, 2001, http://money.cnn. October 5, http://www.investorguide.com/article/6824/the-worlds-largest- com. airline-united-continental-ual-takes-off/. 15. 2011, Hoover’s Company Reports, United Continental Holdings, Inc. 57. Ibid . 16. A. Bernstein, Stock options: Fuel of United’s revival?, Business Week, 58. J. Sharkey, 2010, As penny-pinchers hover, business trips rebound, The November 8, 2002. New York Times, November 29, http://www.nytimes.com/2010/11/30/ 17. D. Bond, United’s DIP loans require profit in 2003, Aviation Week & Space business/30road.html. Technology, December 16, 2002. 59. L. Sun, 2010, The World’s largest airline, United Continental (UAL), takes off, 18. Ibid. October 5, http://www.investorguide.com/article/6824/the-worlds-largest- 19. S. Tully, Friendly skies aren’t out of the picture, Fortune, December 30, 2002, p. 42; airline-united-continental-ual-takes-off/. M. Amdt, How to keep United flying, Business Week, December 23, 2002, p. 34. 60. So many planes, so few passengers, Economist, September 19, 2002, http:// 20. Cruel phoenix: United Airlines, The Economist, December 14, 2002, p. 56. www.economist.com. 21. Ibid. 61. J. Mouawad, 2010, Airline Merger Talks Renew Skepticism of Tie-Ups, The New 22. UAL Corp. announces appointment of Glenn F. Tilton as chairman, United York Times, April 16, http://www.nytimes.com/2010/04/17/business/17airlines. Airlines, October 19, 2002, http://www.united.com. html?_r=&dbk=&pagewanted=p 23. The night of the killer zombies: Bankruptcy in America, The Economist, 62. J. Mouawad & A. R. Sorkin, 2010, Continental and United resume talks to December 14, 2002, p. 55. merge, The New York Times, April 15, http://www.nytimes.com/2010/04/16/ 24. S. Carey, H. Sender, & A. Schatz, 2004, UAL again fails to get loan aids, hurting business/16air.html?fta=y&pagewanted=print. airline’s Chapter 11 plan, The Wall Street Journal, June 29, A3. 63. United Airlines 2008 Annual Report.
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64. J. Mouawad, 2010, Airline merger talks renew skepticism of tie-ups, 110. Ibid . The New York Times, April 16, http://www.nytimes.com/2010/04/17/ 111. Anonymous, 2010, Weighing United-Continental merger’s impact on US business/17airlines.html?_r=&dbk=&pagewanted=print. Airways, Charlotte Business Journal, May 4, http://www.buzjournals.com/ 65. 2011, United Airlines Company Website, January, https://store.united.com/ charlotte/stories/2010/05/03/daily12.html. traveloptions/control/main. 112. Ibid . 66. R. Lovitt, 2011, What’s next? More airline fees possible in 2011, January 7, 113. Ibid . http://today.msnbc.msn.com/id/40954784/ns/travel-news/. 114. Ibid . 67. 2011, AMR Corporation—Get to know who we are, http://www.aa.com/ 115. B. Vasigh, K. Fleming, & T. Tacker, Introduction to Air Transport Economics. i18n/aboutUs/corporateResponsibility/profile/amr-corporation-at-a-glance. 116. Ibid ., p. 138. jsp. 117. S. Shaw, Airline Marketing and Management, 112. 68. Ibid. 118. Ibid ., p. 255. 69. Ibid. 119. Ibid. , p. 3. 70. 2010, American Eagle Airlines: At a glance, http://www.aa.com, November. 120. 2009, SkyTeam airline member benefits, http://www.skyteam.com, April. 71. 2003, American Airlines avoids bankruptcy, BBC News, http://news.bbc.co.uk, 121. S. Shaw, Airline Marketing and Management, 112. April 1. 122. B. Vasigh, K. Fleming, & T. Tacker, Introduction to Air Transport Economics, 173. 72. 2009, AMR Corporation Annual Report. 123. Ibid . 73. A. Salpukas, 1990, Continental files for bankruptcy, The New York Times, 124. 2009, United Express, http://www.united.com, April. http://www.nytimes.com, December 4. 125. 2011, United Airlines 2009 Annual Report, http://www.united.com, January. 74. 2011, Continental Airlines Company Website, http://www.continental.com/ 126. 2011, United Express, http://www.united.com/page/middlepage/0,6823, web/en-US/content/company/globalcitizenship/awards.aspx. 1315,00.html. 75. 2009, Continental Airlines 2008 8-K, http://www.continental.com, April, 24. 127. B. Vasigh, K. Fleming, & T. Tacker, Introduction to Air Transport Economics, 212. 76. J. Mouawad & A. R. Sorkin, 2010, Continental and United resume talks to 128. J. Lowy, 2008, Pilots: To cut costs, airlines forcing us to fly low on fuel, The merge, The New York Times, April 15, www.nytimes.com/2010/04/16/business. Huffington Post, http://www.huffingtonpost.com, August 8. 77. 2009, Continental to join Star Alliance, Continental Airlines News Release, 129. M. Maynard, 2008, United, citing fuel hedging, loses $779 million in quarter, http://www.continental.com, April 16. The New York Times http://www.nytimes.com, October 21. 78. 2011, Continental Airlines 2009 Annual Report, http://www.continental.com 130. Ibid . 79. Ibid. 131. Ibid . 80. 2010, United Continental Holdings, Inc. announces third quarter results, 132. B. Vasigh, K. Fleming, & T. Tacker, Introduction to Air Transport Economics, October 21. p. 190. 81. 2009, Delta through the decades, http://www.delta.com, April. 133. Ibid ., p. 191. 82. Ibid. 134. Ibid . 83. Ibid. 135. Ibid . 84. 2009, Delta Air Lines 2005 Annual Report, http://www.delta.com, April. 136. Era 9: 1994–1999 Timeline; 2003, United Airlines likely to lose employee 85. 2009, Delta Air Lines 2008 Annual Report, http://www.delta.com, April. ownership, USA Today, http://www.usatoday.com, January 16. 86. Ibid. 137. C. Rosen, 2002. United Airlines, ESOPs, and employee ownership, The National 87. Ibid. Center for Employee Ownership, http://www.nceo.org, November. 88. 2011, Hoover’s Company Reports, Delta Air Lines, Inc. 138. Ibid . 89. Ibid. 139. 2008, United Airlines to lay off 950 pilots—cuts in addition to those 90. 2011, US Airways Annual Report 2009. announced earlier, domain-b.com, http://www.domain-b.com/_aero/ 91. 2009, US Airways chronology, http://www.usairways.com, April. unitedairlines/20080624_united_airlines.html, June 24. 92. D. Reed, 2008, US Airways highlights drawbacks of consolidation, USA Today, 140. 2008, United Airlines sues pilots’ union, says it caused hundreds of http://www.usatoday.com, May 3; 2009, US Airways & America West Airlines flight cancellations, domain-b.com, http://www.domain-b.com/aero/ combined route network map, http://www.airlineroutemaps.com, April; unitedairlines/20080731_united_airlines.html, July 31. 2008, Is US Airways a low-cost carrier?, http://www.associatedcontent.com, 141. 2008, Injunction halts United Airlines’ pilot strike, RoutesOnline, http://www. February 14. routesonline.com, November 19. 93. 2009, US Airways 2008 Annual Report, http://www.usairways.com, April. 142. L. Sun, 2010, The World’s largest airline, United Continental (UAL), takes off, 94. 2011, US Airways 2009 Annual Report, http://www.usairways.com. October 5, http://www.investorguide.com/article/6824/the-worlds-largest- 95. 2009, US Airways 2008 Annual Report, http://www.usairways.com, April. airline-united-continental-takes-off/. 96. Ibid. 143. S. Carey, 2010, United-Continental merger closes, The Wall Street Journal, New 97. Ibid. York, N.Y.: October 1. 98. We weren’t just airborne yesterday, http://www.southwest.com. 144. Ibid . 99. 2008, Scheduled passengers carried, World Air Transport Statistics, http://www. 145. A. Grant, 2010, Continental, United pilots picketing against outsourced iata.org. flying, November 22, http://www.cleveland.com/business/index.ssf/2010/11/ 100. 2011, Southwest Airlines Company Website, http://www.southwest.com/ continental_united_pilots_pick.html. html/about-southwest/history/fact-sheet.html. 146. Ibid . 101. 2009, Southwest Airlines Fact Sheet, http://www.southwest.com, April 27; 147. A. Grant, 2011, Continental, United pilots picket at Cleveland Hopkins 2009, Southwest Airlines Investor Relations, http://www.southwest.com. International Airport, January 7, http://www.cleveland.com/business/index. 102. B. Vasigh, K. Fleming, & T. Tacker, Introduction to Air Transport Economics, ssf/2011/01/continental)united_airlines_pi_1.html. 309–318. 148. Ibid . 103. S. Shaw, 2007, Airline Marketing and Management, 96. 149. Ibid . 104. We weren’t just airborne yesterday. 150. M. Schlangenstein, 2011, United Airlines Attendants Union seeks step toward 105. S. Shaw, Airline Marketing and Management, 90. representation election, Bloomberg, January 18, http://www.bloomberg.com/ 106. 2009, Southwest Airlines 2008 Annual Report, http://www_.southwest.com, news/2011-01-18/. April. 151. Ibid . 107. 2010, Southwest Airlines 2009 Annual Report, http://www_.southwest.com. 152. Ibid . 108. D. Shannon, 2010, DOJ finds little to worry about from United/Continental 153. Anonymous, 2010, Machinists Union questions United/Continental merger merger, Aviation Daily, August 31, Pg. 1 Vol. 381 No. 43. fallout, June 16, Business Wire, New York: June 16. 109. S. Bomkamp, 2010, Southwest to buy AirTran for $1.4 billion, September 27, 154. United Airlines 2009 Annual Report. http://www.msnbc.msn.com/id/39377662/ns/business-us_business/. 155. Ibid .
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156. Ibid . 164. S. Carey & D. Cameron, 2010, More airline earnings fly high, The Wall Street 157. D. Koenig, 2008, Major airlines ready to cut more flights in 2009, Associated Press, Journal Online, New York, N.Y.: October 21. http://www.news.yahoo.com, December 2; 2009, United Airways 2008 Annual 165. Ibid . Report, http://www.united_.com; L. Stark, M. Hosford, & K. Barrett, 2008, Layoffs 166. Ibid . continue for airlines in crisis, ABC News, http://www.abcnews.go.com, June 5. 167. Ibid . 158. United Airlines 2009 Annual Report. 168. Anonymous, 2010, United and Continental close merger, PR Newswire, New 159. United Airlines 2009 Annual Report. York: October 1, www.unitedcontinentalholdings.com. 160. S. Shaw, Airline Marketing and Management, p. 40. 169. Ibid . 161. Ibid . 170. J. Johnsson, 2010, Shareholder vote imminent for United, Continental 162. B. Alukos, 2010, United Continental Holdings Analyst Report, October, merger, Chicago Tribune, September 15. http://www.morningstar.com. 171. J. R. Perone, 2010, Unions, shareholders can make bumpy road for United 163. Ibid . Continental Holding, Chicago Tribune, October 1.
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