Air Transport World

United, where are you? (effect of airline deregulation on United Airlines)

United, where are you?

It's the height of irony, really. United Airlines led the industry into the promised land of competition. Now competition has knocked United from its customary role as the biggest airline company in the U.S. More importantly, the airline is only part of an expanding conglomerate designed to cushion it from the toll of competition. The once-proud airline is struggling.

United parent Allegis, formerly UAL Inc., began 1978 with almost $700 million in cash and temporary investments. It added another $354 million in operating profit by the end of the year. As the biggest airline in the world outside the Soviet Union United had a running start on the critical mass now worshipped by industry leaders. The airline's size meant it could dictate industry actions, such as the move to independent computer reservations systems. It had more than 230 Boeing 727s and 737s, the kinds of planes airlines covet today. It had non-airline managers who weren't tied to the old ways.

Things have not worked out as anticipated, however. The people who have been waiting since 1978 for United to reach its potential are still waiting. Meanwhile, Texas Air Corp. (TAC) is the biggest U.S. airline company. United ranks second in RPKs among U.S. majors, but only fourth in passengers carried.

Marketing initiatives often begin in Texas, sometimes at TAC headquarters in Houston, sometimes at Ft. Worth-based American Airlines. For United to lead again, as an airline or as the core of Allegis' expanding, $10 billion travel services network, will take an enormous management and marketing effort.

Sheer momentum born of size--and cash flow--seemed to ensure United's existence before its takeover problems this spring. Still, surviving and prospering are two different things. In 1986, the corporation had revenues of $9.2 billion and net earnings of $11.6 million. The airline reported revenues of $7.1 billion and a net loss of $80.6 million. Previous criticism of UAL once was subtle. Wall Street put up with Chairman Richard Ferris' snubbing them, which he did unless he needed them for debt and equity issues. This year criticism went public.

Helane Becker, VP of Drexel Burnham Lambert, says carefully, "The assets are undermanaged.' Another analyst, fairly charitable, says, "The company suffers from an embarrassment of riches.' Still another flatly calls management "inept.'

Allegis, on the other hand, thought it was doing fine, at least until breakup fever hit this April. Vice Chairman John Cowan, for lack of earnings, highlights positive cash flow "every year between 1976 and 1986' and revenues per share. This year Allegis will have $1 billion in combined cash flow. Explains Cowan, "It looks like money. It smells like money. And we can spend it like money.'

Counters First Boston airline analyst Michael Derchin, "The last guy who used cash flow as an evaluation technique was (former People Express Chairman) Don Burr . . .. All the money derives from depreciation of assets. Every cent, and more, is being used.'

In the spring investors were so grumpy they were assessing the corporation's breakup value, a la Trans World Corp. Expressions of interest by real estate developer Donald Trump and a purchase offer from United's rebellious pilots-- 11.6% of the work force and still seething from several years of warfare with Ferris-- finally brought things to a head.

A corporate breakup theoretically would wring maximum shareholder value out of the underlying assets in each major subsidiary, hotels particularly, in the shortest period possible. It also would destroy Ferris' strategy of making Allegis the leading international travel company with all the pieces under one roof. His acquisitions --Hertz ($588 million), Pan Am's Pacific division ($715. …

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