Fri, 29 Sep 2000, 12:05pm EDT

UAL Will Post 3rd-Qtr Loss--Flight Disruptions and 58% Fuel Cost Jump Blamed

By Lynne Marek

Chicago, Sept. 29 (Bloomberg) -- UAL Corp., the owner of United Airlines, will report a third-quarter loss, instead of the profit analysts forecast, after the world's biggest carrier canceled thousands of flights and fuel costs soared. UAL will probably lose money next quarter as well as it absorbs higher than anticipated costs from a proposed contract with pilots and future agreements with other workers, Chairman James Goodwin said. UAL was expected to earn 97 cents a share in the third quarter and 63 cents in the fourth, the average estimates of analysts surveyed by First Call/Thomson Financial.

United's troubles began in April when it missed a target for wrapping up a contract agreement with pilots, leading unhappy cockpit crews to start refusing overtime. Flight cancellations and lost revenue mounted. UAL shares, which fell 2.63 to 41.38 in midday trading, have declined 47 percent this year.

``Everybody knows this isn't a normal year for United, but we just don't know what normal is going to be,'' said Goldman Sachs analyst Glenn Engel.

United faced negotiations on new contracts this year with its two biggest and most powerful unions, the Air Line Pilots Association and the Machinists. Both contracts became amendable this year as UAL ended a program under which those union workers had taken pay cuts in exchange for company equity.

Just as those talks were beginning to become contentious, UAL startled its unions and other airlines by announcing the industry's biggest airline acquisition, offering to pay $11.6 billion for US Airways Group Inc. The proposed merger has led pilots and others workers to seek higher wages and more job security as concessions for their cooperation.

More Pay for Workers

United executives have admitted that the flight disruptions linked to the pilots created pressure to wrap up a contract. Now, the more than 20 percent raises offered to the pilots has driven up wage increase expectations among United's baggage handlers, ramp workers, mechanics and flight attendants.

The company's talks with the Machinists are ongoing and it said it would begin talks next week on a pay raise for flight attendants, who are seeking increases even though their contract runs through 2006.

United has little choice but to negotiate such favorable labor contracts to build needed union support for its $11.6 billion takeover bid for US Airways, said Michael Linenberg, a Merrill Lynch Global Securities analyst.

``If the objective here is to consummate a transaction with US Airways, you have to have labor on your side,'' he said.

``We think costs will be up over the next 12 to 18 months as a result of these various labor contracts that are being negotiated,'' said Linenberg, who lowered his rating on United to ``accumulate'' from ``buy'' prior to today's profit warning.

Airline Shares

The American Stock Exchange Airline Index fell 3.8 percent in late morning trading, with AMR Corp., Delta Air Lines Inc. and US Airways also declining 4 percent or more.

Goldman analyst Engel said he was surprised that UAL and other airline shares dropped as much as they did, given the relative cheapness of the industry's stocks. Most of the major airlines stocks are trading at less than 8 times their earnings per share.

``It keeps seeming like a cheap stock, and it's hard to believe it can get hammered any more,'' Engel said. Engel said he had no warning from the company that a loss was coming though he said it wasn't out of sync with United's recent problems, which mainly occurred from April through August. United canceled more than 25,000 flights between those months, largely because of its dispute with pilots.

United's agreement would make its pilots the best paid in the industry, with salaries at least 10 percent higher than their counterparts at other carriers. Results of the pilots' vote on the contract are expected late last month.

The carrier said Tuesday it would begin talks next week on a possible raise for its 25,000 flight attendants. The Association of Flight Attendants said it wants wages 5 percent higher than the best in the industry. Fuel Costs

United's third-quarter profit also was eroded by jet fuel prices that jumped about 58 percent from a year earlier, based on the average price of fuel for delivery in New York harbor.

United tried to hedge its losses tied to the higher fuel prices by buying securities that would rise in value with crude oil, which is used to make jet fuel. Still, the strategy wasn't as effective as hoped because jet-fuel prices rose at a faster rate than crude oil prices, the airline said.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOdS8WxUKVUFMIFdp

-- Carl Jenkins (Somewherepress@aol.com), September 29, 2000