United loan guarantee denied

By James F. Peltz
Los Angeles Times

A United Airlines bankruptcy filing became almost certain yesterday when a federal panel rejected a $1.8 billion U.S. loan guarantee that the carrier needed to avoid running out of cash.

Even with the loan backing, "United would face a high probability of another liquidity crisis within the next few years," the ATSB said. The board was created after the Sept. 11 attacks to judge which airlines could tap $10 billion in guarantees that were part of the industry's post-Sept. 11 aid package.

"We are disappointed," said Glenn Tilton, chief executive of United and its parent, UAL Corp. "We will consult with our union leaders and other stakeholders and quickly determine what step to take next."

United — the nation's second-largest airline behind American — has said it would file under Chapter 11 of the bankruptcy laws without the loan guarantee. If so, it would mean that two of the seven largest U.S. airlines would be operating under bankruptcy protection. US Airways filed under Chapter 11 in August.

"This is the final nail in the coffin — United will have to file for bankruptcy and probably very quickly," said analyst Philip Baggaley of the credit-rating agency Standard & Poor's.

As with US Airways, United's passengers would not see major changes immediately, because a company keeps operating under Chapter 11 while it attempts to reorganize. "Nobody over the Christmas season is going to be significantly impacted," said Ron Kuhlmann, vice president of Unisys R2A, an aviation consulting firm.

But he and other analysts said the longer-term impact of a United bankruptcy filing on the airline industry would be profound.

United, the dominant airline for both business and leisure travel only a few years ago, would probably make sharp cuts in its flight schedule as creditors demand that the carrier scale back to conserve cash. Passengers might start booking away from United, fearing that the airline is too unsettled. Many of United's 80,000 jobs would be in jeopardy, and their union contracts could be scrapped.

United has about 1,200 employees in Hawai'i and operates about two dozen flights a day to the state.

A bankruptcy filing is likely to leave UAL's stock practically worthless and put an end to United's controversial journey through employee stock ownership. The carrier is the nation's largest employee-owned company, with workers controlling 55 percent of the shares. Before the ATSB announcement, UAL's stock rose 7 cents a share, to $3.12, on the New York Stock Exchange.

"These are hard decisions, and I certainly feel for the affected employees," Edward Gramlich, one of the ATSB's three members, said in a statement. "At the same time, the loan board has a responsibility to taxpayers, and to fostering the longer-term health of the airline industry."

Gramlich, a Federal Reserve governor, joined Treasury Undersecretary Peter Fisher in rejecting the airline's request. The third member, Transportation Department General Counsel Kirk Van Tine, deferred his vote until Monday, but his vote is now moot. Daniel Montgomery, the ATSB's executive director, said United could reapply for a loan guarantee but as part of a Chapter 11 reorganization.

The airline might slash fares — at first to keep generating income — forcing other major airlines to take similar actions to stay competitive. But as it gets its costs under control, United and its rivals might push fares back up again, some analysts predict.

"Clearly, United will have to drastically downsize in a Chapter 11," said Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group that had urged the ATSB to approve the loan guarantee. "This decision will put at significant risk the interests of the consumer, United Airlines' employees and the economy."

Rusty Hammer, president of the Los Angeles Area Chamber of Commerce, said the decision is a blow to the region's economy and is tantamount to "letting the terrorists win, because their objective was to disrupt America and its economy."

But many others argued that United's management and unions, two sides that have been at odds for years, have only themselves to blame.

They contend that the Sept. 11 attacks — which involved two hijacked United jetliners — and the subsequent drop in air travel exacerbated structural problems that already were eroding United's position. They also maintain that United and its unions should have addressed the problems long before the ATSB was established.

Management missteps included spending a year pursuing a $4.3 billion merger with US Airways only to have it scuttled in the face of antitrust concerns. And the pilots' and mechanics' unions, which have UAL board seats, won new contracts that made United's labor costs among the highest in the industry just as travel — especially lucrative business travel — was slumping.

In rejecting United's bid, the ATSB said the airline's recovery plan — even with its proposed labor savings — wouldn't be enough "to achieve long-term financial stability" and that United's projections for future revenues were "unreasonably optimistic."