United and Union Reach Agreement

CHICAGO —  United Airlines reached a tentative agreement Tuesday on a new cost-saving contract for its 19,500 ground workers, heading off a potentially devastating strike and vastly improving the airline’s chances to emerge from bankruptcy protection.

The proposed contract with the International Assn. of Machinists and Aerospace Workers -- which still must be ratified by the union’s members -- means United is poised to achieve its goal of saving about $725 million a year by forging new concessionary agreements with all four of its labor groups.

Earlier in the day, the union for United’s mechanics, the Aircraft Mechanics Fraternal Assn., said its members voted 59% to 41% to ratify a new five-year contract that included a 3.9% pay cut. United’s pilots and flight attendants earlier had reached their own new contracts.

“This is a very big deal,” said Michael Roach of Roach & Sbarra Airline Consulting in San Francisco. “What was avoided was potentially the shutdown of the airline and, if it had shut down, it might never have recovered.”

The last-minute agreement with the IAM, United’s biggest worker group, came as the sides were headed for a showdown here before U.S. Bankruptcy Court Judge Eugene Wedoff.

Wedoff was set to rule on United’s request to scrub the IAM’s old contract and impose lower wages and benefits itself. The union represents United’s ramp workers, reservation agents and airport counter workers, among others.

If Wedoff had sided with United, the IAM planned to immediately call a strike that analysts said could have grounded the nation’s second-largest airline and badly disrupted the U.S. air travel system.

After days of negotiating, the two sides reached an “agreement in principle” just in time. When their lawyers told Wedoff of the deal, they said it was so recent that they didn’t yet have contract documents for the court.

In a brief hearing devoid of fanfare or emotion, Wedoff gave both sides until June 17 to iron out the details of their new five-year contract, which would then be submitted to IAM members.

“I’m now confident we can successfully conclude the process and present our members with a tentative agreement worthy of their ratification,” said Randy Canale, president of the IAM’s United branch.

United, a unit of UAL Corp., has lost more than $10 billion in the last four years. It previously had gained concessions of $2.5 billion annually from workers but said it required more pay cuts to raise the $2 billion in new financing needed to end its 2 1/2 -year stay in Chapter 11 bankruptcy protection.

The new IAM contract, if passed, would “move us significantly forward in our restructuring and set the stage for our exit from bankruptcy,” which the airline hopes to accomplish this fall, United said in a statement.

United, based in the Chicago suburb of Elk Grove Township, won another major cost-saving battle last month when Wedoff allowed the airline to hand off its underfunded pension plans to the nation’s pension insurer, the Pension Benefit Guaranty Corp.

With the insurer agreeing to assume $6.6 billion of United’s liabilities, it was the largest corporate pension default in the agency’s 31-year history. The shift also will save United -- which has about 60,000 active workers and 61,500 retired employees -- from having to make $4.4 billion in pension contributions over the next six years.

The IAM said its tentative contract with United included a replacement pension plan for the defined-benefits plan that United terminated and shifted to the insurer. Canale said the new program would be part of the IAM’s National Pension Fund, but details of that proposal and the contract’s other terms weren’t immediately available.

Consultant Roach said that with all the cost savings in place, United should be able to raise the cash it needed from outside investors.

“United is viewed as a very attractive prospect, and there’s been a lot of money that’s been sitting on the sidelines waiting” for the pension and labor savings to be implemented, he said.

Noting that US Airways and America West were able to raise cash as part of their parent companies’ recently announced merger proposal, Roach said investors were even more interested in United because “it has the best route structure of any airline.” United has major operations in Chicago, Denver, Washington, San Francisco and Los Angeles, and also serves Tokyo and London.

The overhaul of United also could have ramifications for the rest of the battered airline industry, which has lost $32 billion in the last four years. Assuming United leaves Chapter 11, the airline would be flying with substantially lower costs compared with when it filed for bankruptcy protection in December 2002.

That would better equip United to profitably compete against discount carriers such as Southwest Airlines that have been gaining passengers at the expense of United and other old-line, higher-cost airlines.

United still faces hurdles. Like most other airlines, it’s losing money and remains burdened with high fuel prices.

It also has to cope with lingering worker unhappiness. The Assn. of Flight Attendants union, for instance, has appealed United’s pension agreement with the Pension Benefit Guaranty Corp. to a U.S. District Court in Chicago, and the flight attendants have threatened random, unannounced strikes if the dispute isn’t resolved.

But the labor problems haven’t dented operations at United, whose jets are flying nearly full and mostly on time, said Michael Boyd, president of Boyd Group, a consulting firm in Evergreen, Colo.

“It shows this airline has a tremendous asset in its employees,” Boyd said. “If there is a morale problem at United, the employees aren’t telling the customers about it.”

Travel analysts said last week that fliers didn’t appear to be booking away from the carrier despite the possibility of a strike.

At Los Angeles International Airport on Tuesday, travelers were mostly nonchalant about United labor problems.

Jennifer Chen, a 31-year-old management consultant from Chicago and self-described “loyal United customer,” said she was a bit concerned about getting home after visiting a friend in Los Angeles last weekend. But she didn’t switch airlines.

“I travel enough to kind of just take this in stride,” she said.

Beckham reported from Chicago and Peltz from Los Angeles. Times staff writer Erica Williams contributed to this report.