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United Airlines to Cut Fleet, Shut Low-Fare Unit

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06/04/2008 09:33 AM
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United Airlines to Cut Fleet, Shut Low-Fare Unit
United to Cut Fleet, Shut Low-Fare Unit, Person Says (Update3)

By Mary Schlangenstein and Mary Jane Credeur

June 4 (Bloomberg) -- UAL Corp.'s United Airlines, the world's second-largest carrier, will cut its fleet by about 70 planes and shut the low-fare Ted unit to counter record fuel expenses, a person familiar with the plan said.

The reductions will take effect later this year, adding to the 30 aircraft taken out of service and 1,100 job cuts that United announced in April, said the person, who didn't want to be identified because the matter is still private.

The second round of cutbacks in two months at Chicago-based United follows a 76 percent surge in jet fuel in the past year and a decision by American Airlines to reduce domestic capacity by 12 percent. The Ted unit, which started in 2004 as a low-fare competitor, will join more than a dozen carriers in the U.S., Asia and Europe that have collapsed in the past six months.

``Some of these capacity cuts are being done with the precision of a chainsaw,'' said Michael Boyd of Evergreen, Colorado-based consulting firm Boyd Group. ``You can't just park planes and cut routes. It has to be the right kinds of planes on the right routes.''

The airline will announce additional cuts among management and salaried workers, the person said, adding that the number of unionized, front-line workers who will lose their jobs hasn't been determined. United has about 52,500 employees.

Grounding Planes

United plans to ground about 64 Boeing Co. 737s and six Boeing 747s by the end of 2009, according to the person. Aircraft the company owns will be taken out of service and later sold, while leased aircraft will be returned to their owners, the person said. United had a fleet of 735 planes in operation as of the end of March.

The plan comes less than a week after the collapse of merger talks with US Airways Group Inc. Chicago-based UAL has posted four quarterly losses since exiting bankruptcy in February 2006.

Jean Medina, a United spokeswoman, declined to comment on the airline's fleet or capacity plans. The Wall Street Journal reported the planned reductions in the size of the fleet late yesterday.

Airlines' efforts to cover fuel costs with fare increases and new baggage-check fees have fallen short, leading JPMorgan Chase & Co. analyst Jamie Baker to estimate that the U.S. industry's losses will top $7.2 billion this year.

U.K.-based business-class operator Silverjet Plc, long-haul budget carrier Oasis Hong Kong Airlines Ltd., Columbus, Ohio- based Skybus Airlines Inc. and Frontier Airlines Holdings Inc. of Denver have all failed in recent weeks.

Stocks Pummeled

Forecasts of losses are weighing on airline shares, chopping UAL's market value this year by 76 percent to $1.07 billion and making the carrier the worst performer among 14 stocks in the Bloomberg U.S. Airlines Index. The index has tumbled 35 percent in 2008.

UAL gained 65 cents, or 8.3 percent, to $8.53 yesterday in Nasdaq Stock Market composite trading. The shares rose 2 cents at 8:01 a.m. New York time, before regular trading today.

Credit-default swaps on the company rose 57 basis points to 3,216 yesterday, according to New York prices from CMA Datavision. The price to protect $10 million of United debt for five years is equivalent to $3.2 million annually. Credit-default swaps increase as investor perceptions of credit quality deteriorate.

Baker's loss estimate would be a record for the U.S. airline industry. Globally, airlines may lose $6.1 billion this year, the International Air Transport Association, whose members account for 93 percent of international traffic, said this week.

Delta Reductions

Delta Air Lines Inc. President Edward Bastian said yesterday that the Atlanta-based carrier would further pare flying this year, expanding on domestic seating-capacity cutbacks announced earlier of as much as 11 percent. Delta is grounding 90 planes and eliminating 3,000 jobs through buyouts. That represents about 5.5 percent of Delta's workforce.

AMR Corp.'s American Airlines, the world's largest carrier, announced May 21 it plans to reduce capacity on domestic routes by 12 percent.

United's Ted was started to compete with discounters including Frontier Airlines Holdings Inc. and Southwest Airlines Co. Ted, which takes its name from the last three letters of United, flies from cities such as Denver and Chicago to leisure markets including Miami and Cancun, Mexico. The unit operates Airbus SAS jets in one class of service.

``Ted was never anything other than a different paint job,'' consultant Boyd said yesterday in an interview. The unit didn't have lower fares or costs, and ``it has lost tens and tens of millions of dollars.''

To contact the reporters on this story: Mary Schlangenstein in Dallas at [email protected]; Mary Jane Credeur in Atlanta at [email protected]

Last Updated: June 4, 2008 08:03 EDT

[link to www.bloomberg.com]
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06/04/2008 04:50 PM
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