Running head: BANKRUPTCY QUESTIONS 1

Bankruptcy Questions

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Bankruptcy Questions

1. The Reason for UAL file Bankruptcy in 2002

The bankruptcy of UAL OF 2002 started in 2000. According to Bergstresser, Froot, &

Smart (2005, p. 2), UAL raised the employees’ wages in 2000. The wages would

significantly impact the labor costs that the airline company spends. Bergstresser et al. (2005)

identify that the labor costs rank the highest among the airline's expenses. Unfortunately, the

rise came when there were two harmful events to the operations of UAL. Firstly, airline

traffic had dropped significantly (Bergstresser et al., 2005). The higher the airline traffic, the

better the revenue. However, when the traffic declined, the revenue dropped consequently.

Again, the wage increment coincided with a rise in fuel prices (Bergstresser et al., 2005). The

increase in the cost of fuel meant that UAL would spend more on the expenses. For instance,

when the price of a unit of fuel rises, UAL would be forced to work with it that way or raise

the cost of travel to cover the money it would spend on fuel.

Come September 11, 2001, terrorists attacked two of the UAL’s aircraft. The two

passenger aircraft were hijacked and destroyed. Out of fear, the travelers hesitated to use this

airline. While UAL kept paying its employees, such as huge salaries and wages, the revenue

sources continued to suffer and are inconsistent. UAL, among other airlines, were forced to

avoid defaulting their loans. The federal government of the United States launched a program

that would provide a loan guarantee to the airline industry. However, the loan was selective

because the government needed proof of achieving a certain level of a competitive cost

structure (Bergstresser et al. (2005). Therefore, the demand for traveling reduced

significantly. All the plights led to the bankruptcy of UAL.

2. The Motivation to Restructure UAL

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Bergstresser et al. (2005, p. 5) there were three primary sources of motivation for all the

UAL parties. Firstly, the company drew its inspiration from the available leisure market.

UAL introduced Ted in 2003 (Bergstresser et al. (, 2005, p.5). Ted was a new brand that

targeted many markets. Its launch happened in November 2003 (Bergstresser et al., 2005).

Ted would be a low-fare airline with the intention of the growing leisure market. Also, Ted

was intended to improve competition of 70% of its routes (Bergstresser et al. (2005). These

routes had to accommodate law-fare aircraft because their competitors were providing the

same service at low costs. Therefore, it settled on two routes, the Denver-Orlando route,

Denver-Washington D.C., and Las Vegas (Bergstresser et al. (, 2005, p.5).

Ted adopted a low cost for competitive advantage purposes. However, it maintained

crucial links with the parent company. Ted offered the same wages and benefits to its

employees as the parent company (Bergstresser et al. 2005). As a strategy, Ted used the

A320 plane on the new routes to minimize costs. Within the plane, Ted offered the economic

class seating travel services only. Additionally, Ted reduced turnaround times. It ensured that

all the passengers boarding it would use both the front and the rear entry. This strategy

worked when cleaning because the cleaners would start their work immediately after the

passengers were alighting (Bergstresser et al., 2005). More importantly, Ted managed to

blend first-class passengers with the economic class strategically to ensure it reduced costs.

All these efforts ensured that the services were available to the customers without diluting the

brand's value. Ted restored the hope of both Tilton and UAL on its competition standards

(Bergstresser et al., 2005).

3. Reasons for Letting Companies to Reorganize the Debts and Operations under

Chapter 11 Bankruptcy Protection

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According to Bergstresser et al. (2005, p. 6), Chapter 11, Bankruptcy Protection serves

the following vital roles. It helps when an organization needs additional DIP financing. As

the lenders pushed for any provisions that would take care of any contributions in the coming

years, the protection would ensure that the employees and retirees remained in the benefit

pension plans. Therefore, an organization would quickly negotiate, reducing the pension

benefits with the employees (Bergstresser et al., 2005). The pension law had no such

provisions for changes in the pension plan. The law ensured that the beneficiaries' agreement

for any reduction had nothing to do with the benefits directly.

Chapter 11 ensured that an employer was free to complete a distress termination for their

pension plans under particular conditions. The chapter ensured that any employer completing

this distress termination met the standards set for it by passing the reorganization distress

test Bergstresser et al. (2005, p. 6). As such, any company under Chapter 11 obligations had

to prove that it was not in the position to settle its debts and manage to operate its business

activities without having to terminate its pension plan. However, when there is a need to

terminate the pension plan, another organization referred to as the Pension Benefit Guarantee

Corporation (PBGC) took over the assets' management and ensured benefit payments to the

participants that were not part of the ownership of the assets. Therefore, letting any company

reorganize under the law would prompt it to make all the necessary contributions it had to

make under the law (Bergstresser et al. 2005, p. 7). The company also had to seek a

termination of all the existing pension plans as soon as it intended. Lastly, the employees

would be set free to negotiate with the employees instead of making the necessary

contributions.
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References

Bergstresser, D. B., Froot, K. A., & Smart, D. R. (2005). UAL 2004: Pulling Out of

Bankruptcy (CW). https://www.hbs.edu/faculty/Pages/item.aspx?num=32072