UAL Corporation

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UAL Corporation

1200 Algonquin Road
Elk Grove Township, Illinois 60007
P.O. Box 66919
Chicago, Illinois 60666
U.S.A.
Telephone: (847) 700-4000
Toll Free: (800) 241-6522
Fax: (847) 700-4081
Web site: http://www.ual.com

Public Company
Incorporated: 1934 as United Air Lines Transportation Company
Employees: 98,000
Sales: $18.03 billion (1999)
Stock Exchanges: New York Chicago Pacific
Ticker Symbol: UAL
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation

UAL Corporation is the holding company for United Airlines, Inc., the world’s largest airline, which flies 240,000 passengers a day to 26 countries. It is also the largest employee-owned company in the world. Revenues for 1999 surpassed $18 billion. UAL’s plans to acquire US Airways, the sixth largest airline, were the subject of much discussion and uncertainty during mid-2000.

Going Vertical in the 1930s

United Airlines was created in the early 1930s by Bill Boeing’s aeronautic conglomerate in order to exploit demand for air transport and to serve as an immediate market for Boeing aircraft. At first United was similar to a consortium, involving the participation of several independent airline companies. One of those companies was Varney Air Lines, credited with being America’s first commercial air transport company. Varney’s 460-mile network between Pasco, Washington, and Elko, Nevada, was linked with Boeing Air Transport, which operated an airmail service between Chicago and San Francisco. This route crossed Vernon Gorst’s Pacific Air Transport network, which ran mail between Seattle and Los Angeles. The National Air Transport Company, operated by New York financier Clement Keys, connected with Boeing in Chicago, flying mail south to Dallas. Stout Air Services, which had the financial backing of Henry and Edsel Ford, operated an air service between Chicago, Detroit, and Cleveland with Ford tri-motor airplanes. These airline companies cooperated with Boeing, which manufactured aircraft in Seattle, and Pratt & Whitney, an aircraft engine manufacturer in Connecticut operated by Frederick Rentschler. Together they formed a “vertical” aeronautic monopoly, restricting the delivery of new aircraft to its constituent partners and devoting its resources to eliminating competition on its air services. The airline group became known as United Air Lines in 1931.

Among other things, the group was responsible for introducing air-to-ground radio, which improved communication and safety, and stewardesses, all eight of whom were registered nurses hired to allay passengers’ fear of flying. A United executive at the time commented, “How is a man going to say he’s afraid to fly when a woman is working on the plane?”

In 1934 National, Varney, Pacific, and Boeing officially merged under the name United Air Lines Transportation Company. Pat Patterson, a banker and Boeing official, was placed in charge of the airline at the age of 34. That year, however, congressional legislation outlawed the type of monopoly United had formed with Boeing and Pratt & Whitney, and the airline was forced to divorce itself from the conglomerate. It subsequently became an independent company based at Chicago’s Old Orchard (now O’Hare) airport.

In 1936 after several airplane accidents, a series of syndicated newspaper stories sensationalized the horror of airplane crashes and incited a virtual state of panic which drove passengers back to railroads by the thousands. The airline industry was so deeply affected that many smaller companies were faced with bankruptcy. United responded by retaining a popular military test pilot named Major R.W. Schroeder to oversee the company’s implementation of new safety codes. With this action United helped to rebuild the public’s confidence in air travel.

As one of the nation’s larger airline companies United maintained a position of leadership in the industry, constantly demanding newer, more advanced aircraft. United funded many of the developmental costs of the Douglas DC-4, the first four-engine passenger plane. However, when the United States became involved in World War II, all DC-4s were devoted to the war effort before ever having carried a commercial passenger. The company’s name was shortened to United Air Lines in 1943 and new plans were made for the airline in anticipation of the end of the war. Two years later United redeployed its aircraft and resumed commercial flying.

Postwar Innovation

In 1954 United became the first airline to employ flight simulators as part of its training and pilot testing programs. The following year United placed an order with Douglas Aircraft for DC-8s, the airline’s first passenger jetliners. Although Boeing’s 707 jetliner actually became available a few months before the DC-8, United preferred the DC-8 because of its seating arrangement and other cost advantages.

In spite of United’s favorable position in the industry, its competitors were growing rapidly and in many cases outperforming United, which had entered a brief period of decline. However, when United acquired Capital Airlines in 1961 its network in the eastern United States was strengthened, helping the company to regain its position as the nation’s number one airline.

United President Pat Patterson retired in 1966 and was replaced by George Keck, an engineer who rose to the top position from the company’s maintenance department. Keck was generally regarded as arrogant and secretive. According to some reports, his abrupt manner and authoritarian personality offended many people within the company and its unions as well as in the Civil Aeronautics Board, which severely limited his effectiveness and ability to manage the airline in many ways. In 1971 Keck was forcibly removed in what was described as a “corporate coup” instigated by two members of the company’s board, Gardner Cowles and Thomas Gleed.

In 1967, during Keek’s first year, United became the first airline to surpass $1 billion in annual revenue. On December 30, 1968 United created a subsidiary called UAL to operate its non-airline businesses, and the following year United Air Lines became a subsidiary of UAL.

Going Western in 1970

Western International Hotels was acquired by the UAL holding company in 1970. Western’s name was later changed to the Westin Hotel Company and linked to another UAL subsidiary which arranged travel packages. Westin’s operations later grew to represent about one-12th of UAL’s total business.

Eddie Carlson, who had a record of success while in charge of the Westin Hotel subsidiary, was named to succeed Keck as UAL’s new chief executive officer. Carlson’s warm and personable demeanor motivated individuals in every division and level at UAL. He flew 186,000 miles one year inspecting the facilities and terminating the employment of what he regarded as redundant company bureaucrats. Despite his lack of experience in the airline industry, Carlson was successful in reversing the company’s discouraging trends. Anticipating his own retirement, Carlson chose Richard Ferris, whom he had promoted from the Westin hotel subsidiary, to succeed him. When Carlson was named chairman of UAL and United, Ferris was made president of the airline; and in 1978 Ferris was promoted to chairman of United and president of UAL. Carlson remained as chairman of UAL until his retirement in 1983.

Notwithstanding efforts to improve the relationship the company had with its unions, which had deteriorated during the leadership of George Keck, United remained on cautious terms with its employee representatives. In 1976 the airline agreed to a million-dollar payback settlement with women and minority employees in an anti-discrimination suit. In 1979 United lost $72 million, largely as the result of a month-long labor strike.

Under the leadership of Richard Ferris the airline reached a compromise with its pilots’ union. The agreement guaranteed that layoffs would not be authorized in return for more flexible work rules. The lower operating costs that resulted from the agreement were passed on to the consumer with the formation of a discount air service called “Friendship Express.” The service was also intended to allow the company to more effectively compete with cut-rate airlines such as People Express and New York Air.

New Frontiers After Deregulation

In 1978 and 1979 UAL continued to diversify its operations when it acquired Mauna Kea Properties and the Olohana Corporation in Hawaii for $78 million. As resort developments, these acquisitions allowed UAL to take more advantage of the tourist business in the airline’s most popular destination.

Under the Airline Deregulation Act, airline companies were free to enter new passenger markets without prior government approval. United was the first major airline to support deregulation; however, when Congress passed the legislation in 1978 United was forced to scale down its operations in order to compete profitably. Richard Ferris later commented, “If we did make a mistake, it was in not recognizing the intensity of pricing competition that deregulation would bring, and getting structured to cope with it.” Executives with smaller airline companies expressed their fear that the larger airlines would concentrate their resources on contested markets with the goal of forcing the smaller companies out of business. One executive remarked, “What Ferris wants is to have us for lunch, and I don’t mean at McDonald’s.”

Company Perspectives:

Our United Commitment is a sincere promise to our customers that each day, in the air and on the ground, we will strive to provide them with the respect, courtesy, fairness and honesty that they both expect and deserve from United Airlines.

In 1985 United acquired Pan Am’s Asian traffic rights for $715.5 million. The agreement also included 18 jets, 2,700 Pan Am employees, and all of Pan Am’s facilities in Asia. The addition of 65,000 route miles and 30 destinations to United’s network made other acquisitions pale in comparison. Ferris said, “We could spend two or three lifetimes and never get all the traffic [rights] we’re buying from Pan Am.”

Ferris joined the board of directors at Procter & Gamble in 1979 with the intention of studying its successful marketing formulas and applying them at UAL. He restructured UAL to reduce costs and improve marketing. After 1982, costs were controlled, productivity rose, and profits were stabilized. Part of the new marketing strategy involved the establishment of additional passenger transfer points, or “hubs.” In addition to its main facility at Chicago’s O’Hare airport, United operated secondary hubs in Denver, San Francisco, and Dulles airport near Washington, D.C.

In 1986 United’s purchase of the bankrupt Frontier Airlines unit from People Express was canceled when the United pilots’ union failed to reach an agreement with management over the manner in which Frontier pilots were to be absorbed by United. The $146 million acquisition promised to ease competition at Denver’s Stapleton airport, where United, Frontier, and Continental were engaged in a costly battle for passengers. People Express closed Frontier in August 1986, declaring it bankrupt; however, less than a month later Frank Lorenzo’s Texas Air Corporation acquired People Express and liquidated Frontier. The following February People Express was absorbed into Continental Airlines. Still competing with United in Denver, Texas Air then controlled airlines with 20 percent of the domestic airline market, compared to United’s 16 percent share.

United started to replace its fleet of ?-727s with newer wide-body B-767s on more heavily traveled routes. Although United was the last major airline company to still operate the DC-8, federal regulations on noise pollution forced the company to replace the engines on its DC-8s with quieter models. In addition to these aircraft, United flew large numbers of B-737s, B-747S, and DC-10s.

A Change of “Allegis” in the Late 1980s

Early in 1987, UAL was renamed “Allegis,” a curious computer-generated choice which combined portions of the words “allegiance” and “aegis.” With an airline, a hotel chain, the Hertz rent-a-car company, and the Apollo computerized reservations system to coordinate them all, Allegis had become an integrated full-service travel company. Shortly afterward, Allegis encountered a number of problems with Ferris’s strategy to create a travel conglomerate. Several investor groups noted that Allegis’s subsidiaries would be worth more as separate companies than as divisions of Allegis. On May 26, Coniston Partners announced that it had acquired a 13 percent share of Allegis stock, and that it would be purchasing more in an attempt to gain control of the board and remove Richard Ferris. The Allegis board initialed an anti-takeover defense in which the Boeing Company was given a 16 percent stake ($700 million) in the company in return for a $2.1 billion aircraft order. The defense failed in June, forcing Ferris and several other board members to resign. The new board appointed Frank A. Olson chairman of Allegis.

The unfortunate Allegis name was retired in June 1988. After a brief transition period, the UAL board named Stephen M. Wolf, an airline veteran with executive experience at American, Pan Am, and Continental airlines, as CEO of United. Wolf inherited numerous business troubles, including a contract dispute over company ownership with United’s three major employee unions which went unresolved until 1990.

As the U.S. economy weakened going into the 1990s, United began to feel the effects of recession, which reduced the amount of passenger traffic, and fuel prices, which rose in the late 1980s and jumped sharply during the 1990-91 Persian Gulf War. These factors cut into the earnings of all carriers, and in 1991, UAL Corporation suffered a net loss of $331.9 million. United’s losses, as well as those of other major U.S. carriers, were exacerbated by recurrent “fare wars,” often launched by bankrupt airlines, such as TWA and Continental, whose Chapter 11 protection exempted them—unlike relatively well-off airlines—from paying interest on the debt that they incurred as a result of their sharp promotional price cuts. In 1992, United followed the lead of American Airlines in adopting a four-tiered fare-simplification program in an attempt to eliminate these restricted fares. However, both carriers scrapped this within a few months as budget carriers undercut them in droves.

Nonetheless, United treated the industry’s lean period as an opportune time to expand. Such financially troubled airlines as Pan Am and TWA began in the late 1980s to sell routes to raise funds, and governments became increasingly willing to allow foreign carriers air rights within their countries; these two factors prompted United to embark on a strategy of “globalization.” United’s 1985 purchase, for $750 million, of Pan Am’s routes to Asia left the airline well-poised to enter what many industry analysts have described as a transition toward a global free market in transportation. Even American Airlines’ Robert Crandall, who rejected the Pan Am Asian routes as too expensive, later conceded that the purchase was an excellent move. In 1990 United placed a record $22 billion order for new airplanes. In 1991 the company purchased six Pan Am routes to London for $400 million, and late that same year finalized a $135 million deal to take over a portion of Pan Am’s Latin American operations.

Key Dates:

1934:: Three airlines merge with Boeing to form United Air Lines.
1954:: United becomes first to train pilots with flight simulators.
1967:: Annual revenues exceed $1 billion.
1970:: UAL acquires Westin International Hotels.
1987:: “Allegis” becomes short-lived name for UAL’s diverse travel interests.
1994:: Employees take 55 percent stake in UAL in exchange for pay cuts.
2000:: UAL announces its plan to acquire US Airways Group, Inc., a proposed $4.3 billion merger that faced several obstacles.

Empowered for the 1990s

Wolf resigned in July 1994 and was replaced by Gerald Greenwald. Later that month, United management and employees reached a historic agreement designed to stave off competition from low-cost, low-wage carriers. In exchange for pay cuts totaling $5 billion and more flexible work rules, employees received a 55 percent stake in UAL Corporation. This made UAL one of the world’s largest employee-owned companies. Significantly, the 20,000 flight attendants chose not to participate in the buyout.

In October, the company launched a “shuttle” service to compete in the California Corridor in particular. It mimicked the low-cost, low-fare ways of Southwest Airlines but kept traditional major airline amenities such as assigned seating, a first class section, and a frequent flier club with global travel rewards. However, the pilots’ union was skeptical of the lower paying “Shuttle by United” and contractually limited the operation’s scope.

After losing more than a billion dollars between 1991 and 1993, UAL posted a profit of $51 million in 1994. It had invested heavily in information technology, and was a pioneer in the use of paperless tickets. The company even sold its proprietary E-Ticket software to other international airlines.

United began flying dedicated cargo aircraft again in 1997 after a 13-year lapse. The DC-10 freighters operated exclusively on Pacific routes. Its charter membership in the Star Alliance with Lufthansa and SAS helped open hundreds of new markets. It upgraded in-flight amenities to recapture high-yield business travelers. It provided electrical outlets for laptop computers, in-flight entertainment systems, and, of course, bigger seats. These factors helped UAL outperform the industry.

The carrier controversially cut travel agency commissions in September 1997. Bookings from online brokers cost airlines an average $10, versus $50 each for traditional travel agents. With the proliferation of online travel sites such as Expedia, Travelocity, Cheap Tickets, and, later, Priceline, UAL began offering the chance to reserve seats on other airlines at its own web site. The strategy sought to appeal directly to the online bargain hunter.

In January 1999, UAL increased its flight frequencies to match moves by US Airways. It had previously boosted operations at its San Francisco, Denver, and Chicago hubs and created a new hub in Los Angeles. United added a daily nonstop flight from LAX to Paris’s Charles de Gaulle International Airport in April 2000, connecting the City of Angels directly “to all four corners of the globe.” To retain frequent flier and full-fare economy class patrons, United installed roomier Economy Plus seating for them.

James E. Goodwin followed Greenwald as chairman and CEO in July 1999. Both were known for their relatively good relationship with labor. Goodwin had already been with United for 32 years.

Later in the year, United launched an ad campaign in gay newspapers in order to woo gay and lesbian travelers back onto its planes. Proclivity to travel, especially overseas, made gays an attractive demographic target, and American Airlines, Delta, and US Airways also initiated domestic partner benefits. The carrier’s protest of a San Francisco ordinance mandating domestic partner health insurance benefits had resulted in a two-year boycott. American Airlines had created a “Rainbow TeAAM” to market to the gay community.

A major announcement came in May 2000, when UAL shared its plans to acquire competitor US Airways Group, Inc. Numerous questions about the proposed $4.3 billion merger remained, including antitrust and union objections, as well as whether US Airways might be the target of a separate offer from another industry heavyweight. If the merger did go through, further consolidation by other carriers, in the interests of staying competitive, could be expected.

Principal Subsidiaries

Air Wis Services, Inc.; Four Star Insurance Company, Ltd. (Bermuda); Four Star Leasing, Inc.; UAL Benefits Management, Inc.; United Airlines, Inc.

Principal Divisions

North America; Pacific; Atlantic; Latin America.

Principal Operating Units

United Shuttle; United Cargo; E-commerce.

Principal Competitors

AMR Corporation; British Airways plc; Delta Air Lines Inc.; US Airways Group Inc.; Northwest Airlines Corporation; Trans World Airlines, Inc.; Southwest Airlines Co.