One week ago today, headlines read, ýAirline Industry in Crisis.ýý Northwest and Delta filed for bankruptcy within minutes of one another, and 50 percent of U.S. domestic airline capacity is now flying under Chapter 11 protection.

In 2002, when United filed for bankruptcy, we were losing some $3 billion per year.ý In contrast, at that time, Northwest had one of the lowest cost structures and Delta had one of the strongest balance sheets of the major network carriers ý and the headlines read ýKill United.ý

Regardless of such ill-informed opinions, we did not subscribe to the notion that we should liquidate in order to support the business plans of our competitors.ý We did subscribe to the belief that United was a company that could have a futureýwe simply had to step up to the plate and address our own unique set of challenges.

We are all familiar with the global events that have shaken the aviation industry, and particularly network carriers, in recent years ý 9/11ýSARSýwar in Iraq.

And, of course, jet fuel has doubled in price since 2002ýand has increased 50 percent since last year.

These challenges have had a significant impact on the airline industry, and the industry was, in part, ill-prepared for such challenges due to poorly executed de-regulation. Or, said more accurately, the ongoing involvement of the government into the business of running airlines.ýý

ýU.S. government policy has been very successful in providing deeply competitive pricing for consumers. It favors new carriers and the continuous introduction of additional capacity.

In contrast, European governments provided healthcare and in many cases assumed pension liabilities when they privatized and deregulated the industry. Network carriers in the U.S. shoulder these costs while competing with new entrants, which have no such legacy burdens.

In addition, real barriers were established ý unique to the airline industry ý that restrict normal business transactions, including meaningful consolidation.

However illogical and unsatisfactory this ýquasi deregulationý has been for legacy network carriers such as United, it has been the reality of the marketplace for many years.

The strong economy of the late 1990s masked the need for change and the network carriers continued to operate much as they always had...

• Failing to respond competitively to the growth of low-cost carriers.
• Holding on to outdated fare structures and ignoring the impact of the Internet and pricing transparency.ý
• Agreeing to higher wages and benefits, even while knowing these actions widened the competitive gap with the LCCs and were not sustainable.
• Failing to address the critical issue of costs in a market where airfares are 50 percent lower than they were 25 years ago, when adjusted for inflation.

It was not until the economy changed and we felt the impact of 9/11 that network carriers were no longer able to ignore the reality of the marketplace.

This combination of events that we could not control - and those we chose not to address - led to an outcome that was dramatic, but not surprising.

The U.S. airline industry has lost more than $32 billion since 9/11, with another $10 billion loss expected this year.

All U.S. network carriers lost money in 2004 and all of them are expected to lose money in 2005.

Unitedýs Restructuring

Three years ago we started on the path of confronting the issues that stood between United and success.

We made our decisions based on the facts before us.

Some of those facts were very difficult to confront and, as I mentioned a moment ago, our competitors built their business plans hoping we would fail, that we would decide it was simply too hard.ý

We did not.

On the day that United filed for bankruptcy, I said in an interview with The New York Times, ýThe most important thing at United right now is our customers, our customers, our customers.ý

We made the decision that our restructuring was not going to be our customersý problem.

We knew our customers had choices. We knew that we had to improve our operations and the service we were providing, at the same time that we restructured the business.

In 2002, United had the highest cost structure in the industry.ý

We had restrictive labor agreements and a lack of alignment between management and employees.

We had long-term obligations that we had to resolve ý and an impossible governance structure had led to a paralysis of leadership.

Today, we have confronted our challenges. Our task was to put United in a position where we could compete in the reality of the new market place.

• We overhauled our governance structure and leadership team.
• We lowered expenses excluding fuel by nearly 20 percent across the board ýthat translates to $7 billion annually in cost reductions and savings.
• Our productivity has increased by 27 percent ý and we continue to scrutinize everything we do ý eliminating duplication and waste and improving efficiency and effectiveness.
• We renegotiated fleet costs to achieve unprecedented savings and United now has some of the most favorable contracts in the industry.
• We worked closely with our labor groups to reach agreement on changes in wages and benefits in line with the reality of the market; and we have negotiated replacement retirement plans for our employees.
• Our new labor agreements also gave us the flexibility to launch new products that provide premium service to high-yield business passengers and profitably accommodate price-sensitive leisure travelers.
• The things we do best, such as engine maintenance and our cargo business, we have turned into revenue producers.ý Those functions that can be provided more competitively by others have been outsourced.
• Our employees maintained their focus on our customers, delivering reliable operational performance and improving customer service.
• While we know we still can do more for our customers, better meeting their needs has led to revenue performance that is outpacing the industry.

This morning, we announced our financial performance for August:

Operating profit for the month was $80 million ý which, excluding the $125 million increase in fuel expense, was $217 million better than last year.

With a 43 percent increase in the cost of fuel this August over last year, we still managed a respectable operating profit.

Excluding our reorganization expenses, United earned a net profit of $52 million in August.

The effectiveness of our work and Unitedýs potential upside are understood by four of the most significant financial institutions in the world.ý They have each proposed exit financing packages for United, for up to $3 billion.

Unitedýs Customers are Our Future

We have come this far because the decisions we have made in restructuring our company were based on the facts and what our customers demand and are willing to pay for.

We knew that our domestic network and global connectivity were highly valued by our customers ý and today we serve more cities and fly more routes than we did in 2002.

We maintained our L.A. hub and the service we offer here, supported by 4,000 employees.ý

Connecting to the important economic growth in Asia and to global commerce worldwide is critical to Los Angeles and to your businesses.ý We have increased our service to Asia, adding new destinations.ý And, with our Star Alliance partners, we can fly you conveniently to almost any place in the world.

Business travelers have been at the heart of United, and we will continue to serve them.ý For example, we have introduced our p.s. transcontinental service to LA.ý United is the only carrier with lie-flat, first class seats between this city and the East Coast.

But that does not mean we cannot compete selectively on point-to-point flights for leisure travel customers, also.

When we introduced Ted, Unitedýs low-fare leisure brand, industry pundits immediately claimed it would be a failure.

They were wrong.ý Ted has been well-received by our customers and our employees . . . and has been a financial success for the company.ý

Ted is growing to 56 aircraft this year ý and will account for about 20 percent of Unitedýs total domestic capacity.ý Here in L.A., we have added new Ted service from LAX to Phoenix and to San Francisco from Ontario ý and we have proposed new service to Cancun.

Network carriers must compete effectively on many different levels to be successful in the changing industry environment.

United is preparing to exit from Chapter 11 in a few months.

ýýýýýýý We have proven that United is not only willing, but able to confront our problems and to deal with the facts.ý

ýýýýýýý We are now in a much stronger position to seize growth opportunities as we move forward.

ýýýýýýý We have done the work that some of our peers are just beginning.

ýýýýýýý So now what?

But the Industry is Still Broken

No matter how well United or any U.S. carrier transforms its business, none of us will be as strong as we should be, much less in a position to compete in the emerging global aviation industry, if there is no change to the regulatory environment in which we operate.

As I said earlier, since deregulation in 1978, U.S. government policy has encouraged the maximum number of domestic carriers and discouraged meaningful consolidation, preventing the emergence of strong national carriers.

The government taxes airline tickets at 26 percent, comparable to taxes levied on alcohol and tobacco.ý For an industry that provides the linkages necessary for economic growth, this is just bad policy.

Bilateral restrictions and a limit on foreign investment further inhibit international growth.

The Global Competitive Challenge

While U.S. carriers struggle for survival here at home, many of our global competitors have returned to profitability.ý They are consolidating across national boundaries, buying new aircraft and investing in vastly improved products.

For the first time in the history of aviation, U.S. carriers are no longer the largest, strongest carriers in the world.

In the Asia/Pacific region, Qantas, Singapore Airlines and Cathay Pacific are posting record profits. Singapore now owns 49 percent of Virgin Atlantic and has launched some of the longest nonstop routes in the world ý from Singapore to Los Angeles and New York.

In Europe, Air France has acquired KLM and is now the world's largest carrier by revenue.ý Lufthansa recently finalized the purchase of Swiss International Airlines ý and is the second largest carrier in the world.

Strong carriers are also emerging in Latin America and the Middle East.

With the support of their governments and regulatory policies that encourage growth, major airlines around the world are merging across borders to create "super-carriers." They are positioning themselves to compete in a truly global market, and they will have the financial strength to be "super-competitors" as well.

Without a coherent U.S. aviation policy that reverses the bias against airline size and removes the barriers that prevent us from constructive consolidation, U.S. carriers will be unable to compete on a global scale and we risk being marginalized.

The U.S. must encourage the development of larger international carriers with strong balance sheets and capital to investýnetwork carriers that can compete with the likes of Air France/KLM or Cathay Pacific and Air China.

Contrary to popular belief, consolidation in the U.S. airline industry will not disadvantage the customer.

• Price transparency is here to stay;
• Competition will continue to put downward pressure on domestic fares; and
• As the cost structures of the leading network carriers and LCCs converge, airlines that have done the work will compete vigorously, continuing to cut costs, innovate and serve your businesses better.ý

It is time to treat the airline industry like any other competitive business, without special rules and regulations.ý

It is time to complete the deregulation process.

Conclusion

At the end of the day, airlines are just like any other business, and must face new market realities and do the work that needs to be done to put our own financial houses in order.

At United, we will continue to do that work ý focusing on our customers and earning the right to serve you, your businesses and your families here in Los Angeles.ý

Thank you.ý

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