Daydreaming Scenario: What if United Went Out of Business?

It’s terribly ironic that the federal government’s (IMHO, correct) decision to deny United taxypayer backing for billion-dollar loan may have lead to the situation where the federal government is taking on an even larger liability for the airline’s pensions.

Of course it’s possible that providing the loan would still leave the government in the position of picking up the pensions also.

But United provides an interesting illustration of failed U.S. industrial policy. The airline has been operating under bankruptcy protection for two and a half years and continues to lose nine-figure sums each month. Despite cost-cutting and layoffs the airline has no path towards profitability, and labor relations are at a low point.

The airline has been kept afloat by the government, by the courts which have kept aircraft lessors at bay (though a recent ruling scales this back somewhat), and by the bankruptcy process itself which privileges obligations to repay new money for the carrier encouraging big bets with limited risk.

A piece in Sunday’s New York Times asks who would even notice if the carrier were finally allowed to fail?

Airline employees would be hurt, left without jobs and at the mercy of the market. Airlines picking up United assets would in some case pick up employees as well. Union contracts disadvantage union employees switching carriers, as in most cases employees are paid based on seniority which they lose when switching employers. Unions would lose power but union members might benefit from a market system where employees could make lateral or even career-advancing moves between airlines.

While profitable routes would likely be picked up quickly by other carriers, and in the long run few passengers would be inconvenienced, those holding United tickets for immediate travel would face disruption at best. And unmentioned in the Times are the customers with a vested interest in the continuance of the carrier — those with large frequent flyer balances. Airline elite members, with access to perks like international upgrades, can simply request a status match from most carriers they would choose to switch their business to. But large mileage balances could well be lost.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I’m surprised that you characterize United’s bankruptcy court experience as a failed industrial policy. Actually, it’s a libertarian dream come true — United gets to ignore its contracts, and the state does not employ its “monopoly of force” (that’s the libertarian term, right?) on behalf of United’s creditors. If you want to know what a genuine libertarian world would look like, it’s staring you in the face, right here. Not very pretty, is it?

  2. You seem to be making some sort of first principles argument (whose exactly? a straw man’s?).

    If anything, the first principle likely to be at play here is sanctity of contract.

    To me, though, the relevant issue is an empirical one regarding whether the current structure of bankruptcy laws are a growth-inhibiting institution likely to misdirect resources towards unproductive uses.

    But that’s just me…

  3. Gary, what do you think about United’s prospects? I currently have 80K miles in their program, and am about to transfer Marriott points into it to get to 160K in order to claim 2 business class tickets to Europe next summer. Do you think this is a good idea? The only other airline I have miles with is Continental and I would rather stay away from them.

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