The federal board that on Thursday denied the loan-guarantee application by the USA's No. 2 carrier cited just one reason: its belief that private credit markets have improved since the Sept. 11 attacks, when Congress established the airline loan-guarantee program.
The three-member Air Transportation Stabilization Board said United can get a loan on its own without the proposed $1.6 billion guarantee by the government.
But the credit market for airlines, and United in particular, is still fraught with risk, credit analysts say.
United's access to money will depend largely on factors outside its control, says Standard & Poor's airline analyst Philip Baggaley. "The big risks are fuel prices and terrorism," he says.
The federal loan guarantee would make $1.6 billion — or 80% of the total proposed loan — risk-free for the lender. The borrower qualifies for attractive terms because of the government's top-flight credit rating. S&P gives United a D credit rating, the lowest possible.
Interest rates, fees and other terms of a non-guaranteed loan would be more costly. But that wouldn't be the biggest risk of relying on private financing alone. If a crisis occurs, such as another terrorist act, a private lender might get nervous and call the loan, forcing United to liquidate. The government would be unlikely to do that.
Baggaley's caution was echoed by Moody's Investors Service analyst Richard Bittenbender. He thinks the credit markets are "more open" to the airline industry today than in the past couple of years. "Does United have access? I really don't know."
Analysts say exorbitant jet fuel prices, competition from low-cost carriers and United's heavy pension-plan costs are big risks for any lender. Jet fuel alone is expected to cost United as much as $750 million more than budgeted this year.
Even after 18 months in bankruptcy reorganization, United's losses are larger and its cash reserves smaller relative to its size than those of competing major airlines, S&P figures show.
United officials said after losing the ATSB vote that they will revise and resubmit their plan in a last effort to win a loan guarantee. United bankruptcy lawyer James Sprayregen told a bankruptcy judge Friday in Chicago that he expects the appeal to be resolved in "a matter of days, not weeks." United executives did not say what changes they would propose.
Unlike the business plan submitted to the ATSB, however, a revised plan could include a private equity investor that would provide the airline money in return for partial ownership. That could reduce the federal government role in United's emergence from bankruptcy. With fuel prices easing, it might be possible to attract a private investor willing to take a stake in the company if United can win more concessions from unions and aircraft leasing companies, says S&P's Baggaley. Employee unions already have given up an estimated $2.5 billion a year in pay and benefits.
The airline continues to hold out hope for a guarantee, because two of three ATSB board members said after the vote that they'd be willing to reconsider if United revises its business plan.
But no one from the ATSB said publicly what was lacking in United's business plan or what would make it acceptable. ATSB members declined interview requests.
For passengers, United goes on: Despite its sticky financial position and the loan guarantee denied last week, United continues operating normally as far as passengers are concerned. "We represent both nervous leisure and business travelers," David Stempler, president of the Air Travelers Association, tells the Rocky Mountain News in Denver. "I would advise them the status is quo." Aviation consultant Michael Boyd also pooh-poohed reports that United is considering route changes and flight cuts. "This is all about a big accounting deal. It has nothing to do with the veracity or the quality of the carrier," Boyd said. "I think you may see some tweaking but nothing major, certainly nothing catastrophic — at least for passengers." Posted at 8:00 a.m. ET
United, American set for Shanghai battle: With a new U.S.-China aviation deal liberalizing services, United plans to apply for daily, non-stop service between Chicago O'Hare and Shanghai as well as increasing code-share flights with Air China and Star Alliance members. United is the only U.S. airline with non-stop service to mainland China, running daily between Chicago and Beijing, San Francisco and Shanghai, and San Francisco and Beijing. Gerard Arpey, chairman and CEO of American (which also covets China), isn't standing by. The last time a new route was up for grabs, it went to an all-cargo airline. "This time, new route authorities will be available for combination (passenger and freight) carriers like American, and we will again make a strong case for operating the new route from our international gateway at Chicago's O'Hare to Shanghai." Posted at 7:30 a.m. ET
More on United's loan: Having struck out twice in attempts to get Uncle Sam to guarantee $1.6 billion in loans, Chief Financial Officer Frederic Brace told the Air Transportation Stabilization Board that United "will shortly submit information justifying the need for reconsideration as well as proposed modifications to the loan terms." What that means, according to the Wall Street Journal (subscription required), is that corporate parent UAL will reveal plans as soon as today to cut the amount sought and offer new concessions. The biggest sweetener will be a plan to scare up $500 million in new equity, thereby reducing the size of the federal guarantee, sources tell the WSJ, with funding probably coming from private equity investors and perhaps some subordinated debt. Even so, experts say there's little chance UAL will get approval. "I don't see how the board can come back and unring the bell of those (first) two findings," said one person involved in the case. About the only recent good news came when a Chicago bankruptcy judge granted a further month — until July 30 — in which United can try to reorganize without interference from creditors. Reuters says United trimmed the extension request from three