UAL Has its Wings Clipped

Germany's flagship airline, Lufthansa, is waiting to see what sort of an effect United Airlines' billion dollar insolvency could have on its business.

The world's second largest airline had been fighting to survive for months. But countless negotiations with trade unions over lower salaries and requests for government loans proved fruitless. The Bush administration last week rejected UAL's rescue package as unrealistic and said the $1.8 billion (1.78 billion euro) loan demand would place an undue burden on taxpayers.

Major losses

With UAL running up losses of between $7 million and $8 million a day and even higher losses expected during the slower months of December and January, the airline had little choice but to file for Chapter 11 bankruptcy protection. The airline is now guaranteed protection from creditors while it steps up its restructuring efforts. But the move does not guarantee survival. While other U.S. airlines such as Continental and America West managed to come through WHAT relatively unscathed, Pan Am and Midway collapsed.

UAL and Star Alliance passengers will not initially be affected by the filing. All tickets will remain valid and flights will go ahead as scheduled.

Lufthansa caught in turbulence

UAL's most important Star Alliance partner is Lufthansa and the German carrier could be affected by events.

"The alliance could be shaken up slightly in its foundation," said Hans Huff, an airline analyst with Bankgesellschaft Berlin. "Should UAL go bankrupt, Lufthansa and Star Alliance will have to find a new partner."

An insolvency would cost Lufthansa around $80 million dollars, Huff said. However, Lufthansa chairman Jürgen Weber said he was positive UAL would turn things around.

"We are convinced that our friends of UAL will succeed in their efforts to restructure themselves," he said. Lufthansa was also mulling forms of financial assistance, he said. "We are currently investigating how we can assist UAL financially without any risk to Lufthansa."

Still, even if UAL is rescued, it will have an effect for Lufthansa. As part of the restructuring process UAL would have to give up some of its connections.

Airlines face shake-up

Analysts say it is still too difficult to call whether UAL makes it or not. "Bush can't simply let the second-largest carrier go bankrupt, it would have serious economic repercussions," said Robert Halver of Vontobel Asset Management.

A possible bailout offer by Lufthansa with hedged loans in the region of $200 million could also be a possibility, said airline analyst Huff.

Whatever the outcome, it is indisputable that the airline industry as a whole is facing difficult times, not least since the Sept. 11 attacks. Analysts say only the strongest will survive and further bankruptcies are merely a matter of time.