United Airlines is exploring spinning off much of its maintenance division, including its massive repair base at San Francisco International Airport.

Chicago-based United earlier this year hired McKinsey and Co. to draw up strategic options for its maintenance, repair and overhaul operations, which employ about 5,500 mechanics and handle much of the airline's routine repair work as well as maintenance for about 150 other carriers.

"We are contemplating bringing in third parties who can invest in the maintenance, repair and overhaul business," said United spokeswoman Jean Medina. "This will enable us to continue to provide the highest quality maintenance to United and our customers. We are working cooperatively with our labor groups to ensure that any arrangement would be for the long term with a partner that creates value for our customers, investors and employees."

United executives are said to favor pursuing a joint venture that would allow the airline to retain a minority stake in the maintenance operations while handing over control to an outside investor such as a hedge fund, third-party contractor or even another airline.

Any such change in ownership structure would require union approval, sources said.

Entering into such a joint venture could help United raise hundreds of millions of dollars from outside investors and avoid costly infrastructure investments needed to keep its San Francisco operations current, sources say. The San Francisco maintenance facility dates to the 1950s.

Since emerging from bankruptcy in early 2006, United has continued to trim costs and explore new ways to wring more money out of its franchise. The moves are intended to strengthen United's finances as a slowing economy threatens the recovery of the airline industry, and to improve its standing with investors.

Off-loading the airline's largest maintenance base, where more than 3,000 mechanics work, could also potentially lessen the clout held by a labor group that has not shied from confrontation in the past.

United officials, including Chief Operating Officer Peter McDonald, notified the mechanics union of the strategic shift at a meeting Aug. 10. The two sides are discussing the details of the strategy and its implications in San Francisco this week.

While the mechanics contract is not due to be revisited until early 2010, the two sides are embroiled in a dispute over the degree to which United has shipped maintenance work to third-party vendors. The Aircraft Mechanics Fraternal Association said this year that the carrier had greatly exceeded its contractual limits on outsourcing, a charge the airline denied. An arbitrator is set to review the matter next month.

A spinoff would affect about 2,800 United employees, most of them based in the Bay Area, sources say. It would not affect workers in San Francisco, O'Hare or elsewhere who perform line maintenance, the term for overnight tweaks and repairs needed to keep jetliners airworthy.

However, some of United's approximately 700 mechanics at O'Hare International Airport could lose their jobs as a consequence. Union rules allow senior workers whose base is shuttered to assume jobs held by junior workers in other cities.

About 200 of the 1,200 United mechanics working in Indianapolis took jobs in other cities when the carrier closed that maintenance center in 2003.

United's maneuver apparently ends its recent strategy of trying to turn its maintenance unit, branded United Services, into a profit center. And it signals that United CEO Glenn Tilton will continue to pursue smaller deals while advocating for broader industry consolidation.

United Services generated $280 million in revenue last year, about 75 percent of which came through maintenance and repairs. Investment bank Bear Stearns & Co., in a July 17 research report, estimated that the division could have an equity value of anywhere from $60 million to $600 million and noted that recent deals in its sector pointed to a valuation of about $330 million.

The report estimated that United could generate billions of dollars, and nearly double its stock price, by unloading such assets as its frequent-flier program, real estate and some international routes.

Before its descent into bankruptcy in 2002, United boasted one of the largest and best-equipped maintenance forces in the business. The carrier built an $800 million, state-of-the-art maintenance center in Indianapolis in the 1990s and employed more than 15,000 mechanics at its turn-of-the-century peak. United jettisoned the Indianapolis facility in 2003.

Aug. 23, 2007

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