AIR, Inc.

United Airlines, a current member of the "Big Three" fraternity, throughout history remained a dominant carrier despite periods of financial turmoil, labor strife and its short association with the name "Allegis Corp."

Two very different men appear in United's genealogy. One is the same Walter Varney who founded Varney Speed Lines, a predecessor of Continental. The other is William Boeing, who founded Boeing Aircraft Co. in 1916.

Varney's Varney Air Lines won the fifth route ever offered to a commercial carrier by the U.S. Post Office Department: Salt Lake City-Pasco, Wash., mail service. Varney started four airlines: two of them he sold, two of them failed, and Varney went on to other things (flying as a test pilot, for example). Varney belongs to United's genealogy because United Aircraft and Transport Corp., an early version of the major airline, acquired his Varney Air Lines in 1929.

William Boeing is more meaningful in the history of United by far. Boeing put together the elements of United Air Lines in the mid-1920s. He first acquired an airmail route from Chicago to San Francisco after passage of the Kelley Airmail Act of 1925. Then he created a subsidiary, Boeing Air Transport, to fly the mail. Its first flight was July 1, 1927.

This was the Roaring Twenties when companies were made and unmade at the blink of an eye. Boeing went with the prevailing winds and changed directions in 1928. He formed a holding company, Boeing Airplane and Transport Corp., to handle the acquisitions he foresaw. In the space of only two years, Boeing acquired Pratt & Whitney, Vought Airplane Co., Hamilton Standard Propeller Co., Sikorsky Aircraft Co., Stout Air Services, Stearman Aircraft Co., National Air Transport, Varney Air Lines and Pacific Air Transport. He changed the name of his company to United Aircraft and Transport Corp. halfway through that round of acquisitions. He created a second holding company, United Air Lines, in 1931 to manage the diverse airline holdings separately from the manufacturing concerns. Philip G. Johnson, who became president of Boeing Air Transport in 1926, helped Boeing lead the company through this period of acquisitions and early growth.

The Airmail Act of 1934 prohibited companies receiving airmail contracts from holding any interest in another aviation industry. As a result, United Aircraft and Transport Corp. divested itself of United Air Lines which then became an independent operating company.

United benefited from a powerful stroke of fortune at this critical juncture in its life: William A. Patterson became its president. He remained in that position until 1966. Patterson, throughout his tenure, easily could adopt the motto later used by Hinson at Midway: "Good guys finish first."

Patterson began his career as a loan officer at the Wells Fargo Bank in San Francisco. One of his early challenges was arranging a line of credit for Vern Gorst's new Pacific Air Transport Co. Patterson later accepted Gorst's offer to become financial advisor to Pacific Air Transport. Patterson went to Seattle as an assistant to Johnson after Boeing acquired Pacific. He was a vice president by 1934 and was a natural choice for president after the breakup.

Patterson made United a service-oriented airline. Boeing already set a precedent by employing stewardesses (those first flight attendants were all trained nurses since their primary purpose was to reassure potential passengers who were afraid to fly). United also became the first airline to install two-way radios in all its aircraft and have inflight kitchens.

Patterson continued his efforts to make passengers feel safe and comfortable. He recognized that employees were the key to service and only welltreated employees render topnotch service. Accordingly, he worked hard at good labor-management relations. He was not an aloof boss. Tradition holds that Patterson visited each employee at least once a year to listen to complaints and solicit ideas on how to make the company better.

The record shows that Patterson created the industry's first internal medical department. The department provided screening physicals for job applicants along with day-to-day employee medical needs. Patterson also believed in promoting people from within and United for years had one of the lowest turnover rates among its top managers.

High employee morale and experienced management were two reasons for United's extraordinary success; Patterson's thorough belief in the future of commercial air transportation was another. He was instrumental in coordinating the efforts of major carriers of the day, including those of designer and builder Donald Douglas, to finance and construct a four-engine aircraft capable of traversing the conti- nental United States nonstop.

The history of the airlines to a large extent boils down to a history of their aircraft. United took an early lead in fleet quality in the early 1930s, and was the undisputed industry leader when Patterson took the reins of United. Patterson bought the new 10-passenger Boeing 247D, the first all-passenger, allmetal plane used commercially, to improve United's already dominant market share. This move sent competitors scurrying for equipment to rival or surpass United's. C. R. Smith, E. L. Cord's right-hand man at American Airlines, emerged as Patterson's main competitor for best-fleet honors. American's engineers, led by Smith, worked with Douglas to design a new aircraft to compete with the Boeing 247D. The DCI was unveiled in 1933; then Douglas developed the DC-3 in 1936, a 21-passenger aircraft superior to anything then flying. The DC-3 turned the tide and American Airlines overtook United as the industry leader in market share by the end of 1937. The Boeings remained uncompetitive despite efforts to modify them.

Thus, United wasted no time in testing and placing an order for the DC-4 when Douglas introduced the new four-engine aircraft at the end of 1938. But World War 11 diverted the DC-4s to military deployment before delivery was complete.

United, like all the other airlines, sacrificed 50 percent of its fleet for military service. United also performed contract air transport for the Army's Air Transport Command. The company carried more than 20,000 tons of men and material a total distance of 21 million miles by war's end, mainly in the Pacific and Alaskan theaters.

United focused its energies on re-establishing its route system and resuming the rivalry with American as peace drew near. Patterson made a tactical error at this point. With the war over, Patterson cast about for a two-engine aircraft to replace the aging DC-3. He settled on Glenn Martin's model 303 and ordered 50 planes with deliveries scheduled between 1947 and 1948. United initiated DC-4 service in 1946 and DC-6 service in 1947 to improve service along its transcontinental routes. But, United began accumulating excessive losses and, at the end of 1947, Patterson decided canceling the $16-million Martin order was in United's best interests.

Meanwhile, Smith went on a shopping spree at American and ordered 75 of the new Convair 240s with an option for 25 more. These aircraft arrived in 1948 and Smith rapidly deployed them on American's short-haul routes. Smith gained an advantage over Patterson and United where the DC-3s still flew its short-haul routes. Smith maintained that advantage for the next decade.

Patterson had fortune on his side when he decided not to follow American's lead and begin transAtlantic service. He directed his staff to study the potential profitability of this new market, and United's studies indicated existing demand for transAtlantic service would not support additional carriers. Therefore, Patterson elected to stay out of the trans-Atlantic race and pursue routes from the mainland to Hawaii instead. United handled almost half of the total traffic between California and Hawaii by the end of 1950.

Patterson was no more pro-union than other top airline managers of the time and United did have occasional labor trouble, especially with its -pilots. An 11-day pilot strike hit the carrier in 1951. The pilots wanted their pay based on miles flown rather than hours flown since aircraft were getting faster. ALPA tried to lock in a contract to protect pay. Patterson refused and the pilots struck. The postWorld War 11 attitude toward "gold-plated" unions like ALPA resulted in public condemnation of the pilots, but Patterson issued a company-wide bulletin urging other employees not to demonstrate any antagonism toward the pilots. Instead, fellow employees should help the pilots salvage their dignity, he wrote.

United continued modernizing its fleet with the Boeing Stratocruiser, DC-6B, DC-7 and Convair CV-340. Patterson also worked with engineers on United's specifications for the new generation of jet aircraft then on the drawing boards. Patterson ordered the new Douglas DC-8 after Boeing refused to modify its B-707 to meet United's needs. Specifically, Patterson wanted a fuselage wide enough to seat six across, a 30-degree wing sweep for more stability than Boeing's 35-degree wing sweep and a special landing gear to allow the plane to turn more sharply on the runway. Boeing built a lightweight, medium-range B-707 look-alike and dubbed it the B-720. United bought several of them. United's first DC-8 arrived in September 1959. Also, United became the first airline to install weather radar on all its aircraft during the 1950s.

Patterson's last five years with United were not vintage ones. He led United's 1961 purchase of financially-troubled Capital Airlines. The acquisition expanded United's air service to 116 cities in 32 states, but it also expanded debt and brought a demand for aircraft. United introduced the B-727 to its fleet in 1962 to handle the greater short-haul traffic.

George Keck replaced Patterson in 1966. Keck in his four-year tenure never came to grips with United's escalating problems. He did inaugurate routes to Hawaii from cities in the Northeast, Midwest and Great Lakes regions; ordered the B-747 and DC-10; and purchased Western International Hotels (1970) where his successor ran the show.

United faced serious financial difficulties by the end of the 1960s. The company undertook a reorganization and created a holding company, UAL Inc. United Airlines and the other businesses became wholly-owned subsidiaries of UAL, and Edward E. Carlson became United's new president. Carlson, who came to United as president of Western International Hotels, was what the doctor ordered. His disciplined management style forced lower-level managers to be more accountable for their decisions. And, he began an aggressive cost-cutting campaign that whipped United into a more streamlined, efficient company by the time deregulation became law in 1978. United seized the day and rapidly expanded its service and fleet, snaring record 1978 profits while other carriers struggled.

Percy Wood replaced Carlson in 1978 when Carlson retired, and Richard J. Ferris became chairman of the board. Ferris emerged the real power but lost most of the Carlson-era gains over the next nine years. The first blow came immediately, although it was not the fault of anyone in United's executive offices. An American Airlines DC-10 crash grounded the nation's entire DC-10 fleet (including United's). The Carter Administration recession deepened, further eroding revenue. A 58-day strike by United's pilots was the crowning blow. All told, these events served United a $99.6-million loss for 1979.

United fared better in 1980, earning a $21-million profit. But by this time, Wood's fate was sealed. He resigned in 1981, replaced by James J. Hartigan. Ferris remained chairman and became CEO as well. United lost $70.5 million in 1981 but generated profits in 1982, 1983 and 1984.

United became a true international carrier by adding routes between Seattle and Tokyo and Seattle and Hong Kong in 1983. The next year the airline earned the distinction as the first U.S. carrier to provide service in all 50 states. Nineteen eighty-five was a watershed year. It was the year when Ferris' plans for United became manifest. The company purchased Pan Am's Pacific routes; it bought Hertz Corp.; it started negotiations to purchase the Hilton Hotel chain. The handwriting was on the wall: Ferris wanted to mold UAL into a travel empire, not just a preeminent airline. A May 1985 pilot strike over the two-tier wage scale management wanted to implement foretold the internal warfare that soon tore United apart. The 29-day strike disrupted operations and United lost $48.7 million in 1985.

Ferris, in addition to the Hertz Corp. rental car agency, the Hilton International hotel chain and Pan Am's Pacific routes, accumulated the Westin Hotel chain and the Apollo Services computer reservations systems to complete his travel empire. Now he had to market it. Ferris planned to emphasize the company's new one-stop travel shopping concept, but he went one step too far in his marketing strategy. He changed the name of UAL Corp. to Allegis Corp. in 1987.

Rarely has a name attracted so much adverse reaction. The name "Allegis" symbolized to United employees the company's increasing divergence from the business of air transport. They pressured United continued modernizing its fleet with the Boeing Stratocruiser, DC-6B, DC-7 and Convair CV-340. Patterson also worked with engineers on United's specifications for the new generation of jet aircraft then on the drawing boards. Patterson ordered the new Douglas DC-8 after Boeing refused to modify its B-707 to meet United's needs. Specifically, Patterson wanted a fuselage wide enough to seat six across, a 30-degree wing sweep for more stability than Boeing's 35-degree wing sweep and a special landing gear to allow the plane to turn more sharply on the runway. Boeing built a lightweight, medium-range B-707 look-alike and dubbed it the B-720. United bought several of them. United's first DC-8 arrived in September 1959. Also, United became the first airline to install weather radar on all its aircraft during the 1950s.

Rarely has a name attracted so much adverse reaction. The name "Allegis" symbolized to United employees the company's increasing divergence from the business of air transport. They pressured the board of directors to redirect the company's resources to the airline business, convinced that their recent Pay concessions were squandered by purchasing Hertz Corp. and the Hilton hotels. Allegis Corp. felt the traveling public" resistance to Ferris' vision, aware of the derision excited by the name "Ailegis" itself. The directors, under pressure from all sides, decided in 1987 to sell all non-airline-related businesses. Hilton International, Hertz and Ferris were gone that year and Westin departed in early 1988.

Stephen M . Wolf, of airline turnaround fame, was the new chairman, president and CEO who entirely erased the footprints of Ferris. Wolf was the only cohort of Frank Lorenzo to have notable success running airlines. Wolf's track record included service as senior vice president for marketing at Pan Am (1981-82), president of continental Airlines (1982-83), president and CEO of Republic Airlines (1984-86), president and CEO of Flying Tiger Line (1986-87) and president and CEO of Tiger International (1987).

Wolf's reputation as a turnaround artist came with the revivals of Republic and the Tiger lines. He applied his skills to United by junking the name " Allegis" in favor of "UAL Corp. " (May 26, 1988) and strengthening the company's finances by reducing total debt and increasing the cash balance. His work fostered a $1.124-billion profit in 1988, an enormous improvement over the $335.1-million net profit of 1987.

Wolf's handiwork did not go unnoticed by the financial community. Several investors made overtures to Purchase UAL Corp. in 1989 as the leveraged buyout (LBO) frenzy once again heated up with regard to airlines. Investor Marvin Davis made the first substantial Offer of $5.4 billion in August 1989. Later, a group led by wolf and backed by United's pilots offered $300 a share. When this deal col lapsed, the pilot, flight attendant and mechanics' unions teamed up with Coniston Partners to offer $201 a share or $4.38 billion in April 1990. This group, United Employee Acquisition Corp. (UEAC), hired former Chrysler vice chairman Gerald Greenwald to lead its buyout offer. Many banks backed out of this deal during the crisis in the Persian Gulf, and UEAC canceled the agreement with Coniston Partners. UE AC failed to have an offer ready for United by the Oct. 9 deadline and business returned to normal.

United faced its future with an adept managerial team, a strong financial Position, a solid (and expanding) route structure and half ownership in a superior computer reservations system (CRS). it was coming off a year (1990) in which it earned a profit of $94.5 million on sales of $11.04 billion while other airlines lost money hand over fist. It entered 1991 dueling with American to become the world's dominant global airline.

United stuck to its aggressive five-year expansion plan which called for $18.7 billion in capital outlays on behalf of business growth in every sector of the globe. United scored a raft of points in the final months of 1990 and early months of 1991 in its contest to assume overall industry leadership in global growth. It got U.S. and Japanese authority for a new Chicago-Tokyo route after competing headon against American. It ordered up to 128 Boeing aircraft, including firm orders for 30 B-747-400s and 34 of the new B-777s. It paid $54 million for Eastern gates and departure slots in Chicago. It made a $400-million deal to take over Pan Am's London routes to New York, San Francisco, Washington, Los Angeles, Seattle-Tacoma and Newark. With new authority in London, United laid plans to begin service between London and the European cities of Paris, Amsterdam, Brussels, Munich, Frankfurt, Berlin and Hamburg. It increased service from all four of its U.S. hubs (Chicago O'Hare, Denver Stapleton, San Francisco International and Washington Dulles). It accepted delivery of 54 new aircraft scheduled to join its fleet in 1991.

That's not to say that United and its parent company, UAL Corp., were without problems. United, like virtually all airlines, was hit hard financially by the increase in fuel costs and the steep drop in traffic resulting from the Persian Gulf crisis and the nation's economic recession. United also was in the throes of negotiating new labor contracts with its pilot, flight attendant and machinists' unions. Also, Wolf increasingly was under fire for his hefty annual compensation package-$18 million in 1990, the same year UAL profits fell 71 percent.

Resentment lingered among pilots over the failed attempts by the pilots' union to take over the airline. Relations with management improved when Wolf & Co. agreed to a generous contract that guaranteed senior pilots raises of more than 15 percent by 1993 and pay hikes of 30 percent to 70 percent for lowerpaid junior pilots. The three and a half-year pact also contained substantial improvements in job security provisions including a guarantee the contract would remain in effect if United was bought. United's flight attendants, after some conflict and informational picketing, also reached agreement with the carrier on a new contract. Negotiations with the Machinists' union remained in federal mediation until Machinists approved a new five-year labor contract on Dec. 23, 1992.

United flew one-third of its capacity on international routes by Aug. 1991, cementing its position as a major world player. Its inaugural flights to London's Heathrow Airport marked a significant expansion of United's reach into the European market, and the next logical step in United's international growth strategy was expansion to South America. United accomplished this by edging out American and Delta to buy Pan Am's Latin American operation for $135 million at an auction in December 1991.

United's earnings continued their trend downward and the company's third-quarter 1991 net earnings of $25 million were substantially lower than anticipated. The results, Wolf said, were especially disappointing "in that the third quarter traditionally is the strongest operating period for United and for the U.S. airline industry in general." Wolf blamed United's ills on its substantial Midwest presence and thus its heavy exposure to the discount pricing practices of Chapter 11 carriers Midway, Continental and America West.

United, after reporting its worst year-end loss ever-$331.9 million in 1991-announced a $3.6 billion cut in capital expenditures. The carrier revamped its fleet-growth plan to take delivery of 122 fewer planes during the 1992-1995 period, cutting spending by about 22 percent. Wolf, in a letter dated Feb. 18, 1992, warned employees that large-scale layoffs and fleet cutbacks were inevitable unless financial performance improved significantly. "We cannot continue to incur the magnitude of losses we are experiencing and not do anything," he wrote. Wolf reiterated his message to employees in July 1992 after the airline reported second-quarter losses of $95.1 million.

Financial woes, however, did not stop United from continuing its battle with American for dominance at Chicago O'Hare, the world's busiest airport, where the two airlines operate hubs and compete extensively. United bid $66,000 a month and beat out American for 16 TWA takeoff and landing. slots in Chicago in March. United already increased its lead over American in Chicago a year earlier by purchasing Express partner Air Wisconsin and gaining additional jet slots. United, however, lost its bid for 40 takeoff and landing slots and three gates when TWA agreed to sell its Chicago assets to rival American for $221 million in June.

United flew 92.7 billion RPMs in 1992, a 13 percent increase from 1991, and its load factor increased to 67.4 percent from 66.3 percent. United ran a dose second to American's 97.4 billion RPMs and its traffic was up 20.6 percent in January 1993 compared to January 1992. Much of United's growth in the international sector came from operations in South America where it added more new flights there than to Europe in 1992. United in May reshaped its organizational structure to reflect the carrier's increasing global presence and created an international division. Additionally, Jack Pope, formerly the carrier's executive vice president and chief financial officer, was promoted to president and chief operating officer to help manage the rapid growth. Pope became second-in-command to Wolf who continued in his dual roles of chairman and chief executive officer of United and UAL Inc.

"United lost $957 million in 1992, including a $540-million, one-time, non-cash charge for accounting changes. United's pre-FAS 106 loss was $417.2 million. Wolf referred to the environment as "chaotic" and cited competitors operating indefinitely under bankruptcy law protection as one of the industry's "fundamental flaws." Wolf announced United would lay off 2,200 workers by mid-February 1993, eliminate 10 executive positions, cancel plans to hire 1,900 workers and retire 40 older aircraft in 1993 to stem the red ink.

As expected, United then turned to its unions for relief. Wolf set the example and took a 15-percent pay cut. He also imposed 5-percent and 10-percent salary cuts on company officers and directors. United's unions, however, balked at Wolf s request for similar sacrifices from contract workers; labor groups fought bitterly in 1991 for wage and benefit improvements that many felt were long overdue. Additionally, union representatives believed the massive layoffs and requests for wage and benefit reductions were unjustified. ALPA requested the carrier turn over its financial records and business plan to the union for review before the pilots would consider wage reductions. Wolf threatened that without concessions, United would have to sell its 17 U.S. flight kitchens, eliminating 5,600 jobs.

The carrier continued to post losses in the first quarter of 1993. The company reported a loss before charges of $138 million, a 28-percent increase from the year-earlier loss before charges of $108 million.

The officers responsible for the operations, maintenance and decision-making at United Airlines at the time of publication are Stephen M. Wolf, chairman and chief executive officer; John C. Pope, president and chief operating officer; Joseph R. O'Gorman Jr., executive vice president of operations; Hart A. Langer, senior vice president of flight operations; and Rono J. Dutta, senior vice president of maintenance operations.