United's Bid For Loan
Guarantee Rejected
Airline 'Perplexed,' Says It Will
Reapply
By Keith L. Alexander
and Sara Kehaulani Goo
Washington Post Staff Writers
Friday, June 18, 2004; Page E01
UAL Corp.'s United Airlines was turned down yesterday
for a $1.6 billion federal loan guarantee, throwing into doubt
whether it can emerge from bankruptcy reorganization by the end
of the year.
It was the second time the Air Transportation
Stabilization Board rejected United's loan guarantee
application. The board rejected United's application for $1.8
billion in December 2002. Days later, United became the nation's
largest airline to file for bankruptcy.
United executives said they were "perplexed" by the
decision and planned to reapply. "We have reason to believe we
are in the midst of a process with the ATSB to make our
application acceptable and that a decision was premature," said
United spokesman Rich Nelson. "We do not believe that the board
was made fully aware of the important modifications United was
willing to bring to the table."
Indeed, two of the three federal agencies represented
on the ATSB said they would be open to reconsidering United's
application with more information.
In a prepared statement, ATSB officials said they
believed that the airline had made "positive strides" in
reducing costs since entering bankruptcy proceedings and that it
could probably obtain the $2 billion in financing it needs to
emerge from protection without a federal loan guarantee.
During its stay in bankruptcy, United has cut about $5
billion in annual costs, including $2.5 billion from workers --
many of whom took 40 percent pay cuts. The Elk Grove Village,
Ill.-based airline, which has a hub at Washington's Dulles
International Airport, said it also made a small operating
profit in May.
"Given these circumstances, a majority of the Board
believes that the likelihood of United succeeding without a loan
guarantee is sufficiently high so as to make a loan guarantee
unnecessary," ATSB officials said.
The ATSB was created by Congress to oversee a $10
billion loan guarantee program, intended to stabilize the
airline industry following the Sept. 11, 2001, terrorist
attacks. Seven airlines have received loan guarantees totaling
$1.56 billion.
The board's statement that United probably did not need
a loan guarantee was a key argument made by some of United's
competitors, which also argued that even if United did need the
guarantees, its problems could no longer be blamed on the Sept.
11 attacks.
ATSB Chairman Edward M. Gramlich, a Federal Reserve
governor, and Brian C. Roseboro, Treasury undersecretary for
domestic finance, voted against United's application. Jeffrey N.
Shane, transportation undersecretary for policy, voted to defer
the decision for one week pending further board discussions with
United.
Industry analysts
said United now should not rush out of
bankruptcy, especially with traditional carriers
struggling with high fuel costs and competition
from expanding low-cost airlines.
To emerge from bankruptcy this year,
United may need additional concessions from its
workers and aircraft lease holders to persuade
private lenders to agree to $2 billion in loans,
said airline analyst Helane Becker of Benchmark
Co. Becker said United should be able to secure
financing but will probably have to pay much
higher interest rates than it would have paid
for the guaranteed loans.
United had secured $2 billion in
financing from J.P. Morgan Chase & Co. and
Citigroup Inc., but that was contingent on
getting the loan guarantees.
"I don't think there is any rush for
them to exit bankruptcy. Why not wait until oil
prices decline and revenue environment
improves," Becker said.
Becker said by staying in bankruptcy
longer, United could avoid the problems
encountered by its marketing partner,
Arlington-based US Airways, because it came out
of bankruptcy too quickly. After cutting nearly
$2 billion of its costs in reorganization last
year, US Airways recently said that without
another $1.5 billion in cuts, it might have to
file for bankruptcy again.
Henry H. Harteveldt, vice president for
travel research at Forrester Research, said he
was not surprised that United's bid was
rejected. "So much time has gone by, many of the
challenges United faces are no longer related to
the terrorist attacks," Harteveldt said.
"Instead they are related to broader business
issues."
Although Harteveldt gives United an 85
percent chance of survival without the loan
guarantee, he said it faces challenges such as
the higher interest rates on private-sector
loans and the uncertain prospects for its new
low-fare unit, Ted. "United has made substantial
progress in improving its business," he said,
adding that "there is an awful lot the airline
must do."
Some analysts speculated that the
rejection may lead to a top-level management
shake-up involving chief financial officer
Frederick Brace and possibly even Glenn F.
Tilton, United's chairman and chief executive.
In rejecting United's first loan
guarantee application, the ATSB had criticized
United management, and Brace by implication, for
presenting unrealistic revenue projections and
questioned the company's business plan.
Some members of the management team
will "get kicked out," including Tilton, because
its task was to obtain the loan guarantee, said
Darryl Jenkins, a visiting professor at
Embry-Riddle Aeronautical University in Florida.
Blaylock & Partners analyst Raymond
Neidl added, "United is going to have to go
after a Plan B and to get an investor.
Replacement of top management may have to be an
option."
United's bid had political and business
leaders lobbying on both sides. Speaker of the
House J. Dennis Hastert (R-Ill.), whose district
includes United's corporate headquarters and its
most valuable hub, said that he was disappointed
by the decision and that he hoped it was not
final.
"It is my understanding that ATSB
decision may be premature, and that United
Airlines may still be in the process of
enhancing its application, to make it more
acceptable to those who are making the
decision," Hastert said in a written statement.
"It is my hope that the ATSB reconsiders its
decision, based on those enhancements."
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