The Denver Post

Loan rejection could spur United
 

Saturday, June 19, 2004 -

The decision by the federal Air Transportation Stabilization Board to deny United Airlines' application for a $1.6 billion loan guarantee may prove to be a blessing in disguise.

The board, after all, didn't just deny the application and tell United to go away. Instead, it specifically invited the company to submit a modified bid within a few days.

The board even paid United a compliment of sorts in explaining its reasons for denying the application - saying that the combination of improved credit markets and the fact that United itself has become more competitive meant "the likelihood of United succeeding without a loan guarantee is sufficiently high so as to make a loan guarantee unnecessary."

There is a Catch-22 quality to that reasoning, which evokes the old joke about bankers only being willing to lend money to people who can prove they don't need it. The paradox stems from the somewhat contradictory charter the board was given when it was created in the wake of the Sept. 11, 2001, terrorist attacks. To be eligible for a loan guarantee, an airline must prove that its receiving such a guarantee is "a necessary part of maintaining a safe, efficient and viable commercial aviation system in the United States." More important, the airline must show it has no other reasonable credit options, a solid business plan and the ability to repay the loan, as well as showing that its financial problems resulted from the terrorist attacks.

Of course, if an airline really does have a sound business plan and the ability to repay a loan, then it's hard to demonstrate that it couldn't get a loan without a government guarantee - the paradox that led to this week's decision. Indeed, the contradictory formula may explain why the board - which is authorized to issue up to $10 billion in guarantees - has actually disbursed only $1.6 billion to six airlines, including a $63 million guarantee to Denver- based Frontier Airlines. Frontier repaid that loan last Dec. 23.

Still, the combination of Thursday's rejection of UAL's bid coupled with the board's willingness to consider an amended request may give the airline new motivation in its cost-cutting efforts - and leverage with its unions. During its 18-month sojourn in the Chapter 11 bankruptcy courts, United has reached agreement with its unions to cut pay and benefits by about $2.5 billion. A similar sum has been trimmed from such operating expenses as airport and aircraft costs. United even managed a modest operating profit in May, despite rising fuel costs. But the airline still has a higher overall cost structure than many of its rivals in the highly competitive airline industry, including top carrier American Airlines as well as the increasingly successful discount airlines.

United will need to achieve further cost reductions if it hopes to secure a loan guarantee, and whether or not such a guarantee is forthcoming, the lower cost structure will increase the airline's chances of survival.

When United does resubmit its application, we urge the board to review it with an open mind - the loan guarantee if properly presented is clearly within the intent of the law that created the board in the first place.. Certainly, United's size and history make it at least as necessary to "a safe, efficient and viable commercial aviation system in the United States" as the other six airlines that have received such help: Frontier, World Airways, US Airways, Aloha Airlines, American Trans Air and America West Airlines.

We can't help but note that the board turned down United's application the same day the House of Representatives passed a pork-laden $155 billion bill to cut many corporate taxes, pay $10 billion to tobacco farmers who give up their rights to price-support quotas and otherwise squander your money while adding $34 billion to the national debt.

If the government is going to hurl handouts to other businesses without even asking for repayment, it makes no sense to deny a loan guarantee to a company like United that has shown it can cut its costs, pay its bills, and keep providing the 63,000 jobs - 6,000 of them in Denver - that it contributes to the American economy.