Government Rejects $1.6 Billion Loan
Guarantee for United
By MICHELINE MAYNARD
federal loan board rejected United Airlines'
application for $1.6 billion in federal loan
guarantees yesterday, saying that it thought the
airline could survive on its own without
government help.
United, the nation's second-largest airline,
was the last to apply for a loan guarantee under
a $10 billion program established by Congress to
aid the airline industry after the September
2001 attacks. It has been operating normally
under bankruptcy protection, and the board's
decision was not expected to have any immediate
impact on travelers or the airline's employees.
But United's plans for emerging from
bankruptcy depended heavily on winning the loan
guarantees, and the board's decision was a major
setback. It now faces the daunting task of
winning more concessions from its 67,000 workers
and finding new financing on its own.
The rejection was the second in 18 months for
United, which is based outside Chicago. In
December 2002, the Air Transportation
Stabilization Board rejected United's first
request, for $1.8 billion in loan guarantees.
That action sent the airline into bankruptcy.
This time, United sought a smaller package,
hoping to use the loan guarantees as the
centerpiece of a restructuring plan. And it
enlisted a powerful ally — House Speaker J.
Dennis Hastert, Republican of Illinois — to
lobby on its behalf.
Still, the three-member loan board denied its
application on a 2-to-0 vote. The
representatives of the Treasury Department and
the Federal Reserve voted no; the Transportation
Department representative abstained and asked
that United be given an additional week to
improve its application, which has been before
the board for seven months.
Though the deadline for new applications is
long past, the loan board held out a ray of hope
for United, saying it could come back yet again
with a third application.
That aspect of the decision is bound to
ignite controversy among United's competitors;
most of them did not seek federal loan packages
after deeming the criteria for them too
restrictive.
To qualify, the board required each airline
to demonstrate that it had been harmed by the
Sept. 11 attacks, in which United lost two
aircraft. Each airline also had to show that it
had a realistic chance of paying back the
federally backed loans, and that it could not
find financing without guarantees. The original
deadline for applications was June 28, 2002.
United, a unit of UAL, has insisted that it
met all the main criteria. But in recent months,
its executives, including its chief executive,
Glenn F. Tilton, have said they believe that the
airline can emerge from bankruptcy with or
without federal help.
Those comments undoubtedly hurt the airline's
case. In a letter to United, the board's
executive director, Michael Kestenbaum, said
that the board believed that credit markets had
improved in recent years, allowing United to
find financing for its restructuring.
"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," Mr. Kestenbaum
wrote in the letter, which was addressed to
Frederic F. Brace III, United's chief financial
officer and the architect of both its
applications.
In a statement issued last night, United said
it believed that the board's decision was
"premature," and that if given more time, the
airline could have revised its application to
make it acceptable to the board. The airline
said it was "respectfully petitioning" the board
to reconsider its application.
Mr. Tilton abruptly canceled an appearance in
New York on Wednesday to fly to Washington to
meet with the board. At that meeting, Mr. Tilton
and Mr. Brace proposed a series of last-minute
revisions to United's application, but the board
members said they did not believe that the
revisions would be enough, Mr. Kestenbaum wrote.
Industry analysts were surprised at the
rejection. "This is pretty stunning," said Kevin
P. Mitchell, chairman of the Business Travel
Coalition, which represents corporate travel
departments and business travelers. "And the
fact that it happened in a political year is
even more remarkable."
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Mr. Mitchell said that it proved that United executives were
unrealistic in their approach, having now been turned down
twice. "This is bad news for all their employees and retirees,"
he said, adding that the airline, which has already cut its
annual labor costs by some $2.5 billion since it filed for
bankruptcy protection, would now have to seek even more
concessions.
Mark Bathurst, a senior leader of the pilots' union at
United, called the board's rejection "a slap in the face to each
United pilot and other employee who worked tirelessly and
sacrificed greatly over the past 18 months to secure the
company's financial survival."
The board left unclear just how much time United would have
to re-apply for aid. In a news release, the Treasury Department,
which oversees the board, said that the airline could return
with a revised application in coming days and the department
would consider it.
But the fact that two of the three members of the board —
Edward M. Gramlich, a governor of the Federal Reserve, and a
Treasury under secretary, Brian C. Roseboro — voted no signaled
that a revamped application from United might again face an
uphill battle for approval.
Complicating matters, a federal bankruptcy judge in Chicago
is scheduled to consider today a United request for three
additional months to prepare its restructuring plan. Without the
promise of federal assistance, United will have to search for
lenders to put up, without federal guarantees, at least the $1.6
billion it sought, and probably more.
Apparently expecting to need more money in any case, the
airline began the search even before the board's decision.
According to people involved in the discussions, United has been
trying to arrange several hundred million dollars in new
financing, taking it well above the total of $2 billion that it
originally thought it would need to emerge from bankruptcy.
As part of that effort, United was said to be willing to find
a partner to take an equity stake in the airline, a step it had
resisted. Those conversations were described yesterday as
preliminary, however.
The board's rejection is likely to mean more pain for
United's workers and retirees. Their wages and benefits have
already been cut by $2.5 billion a year, about half of United's
total of $5 billion in annual spending reductions. That includes
about $300 million that the airline expects to save by cutting
health care benefits for 27,000 retirees under a deal reached
with unions last week.
Along with those steps, United had created a low-fare
carrier, nicknamed Ted; brought in a new slate of top managers;
and hired Robert Redford to narrate a series of animated TV
commercials with the slogan "United. It's time to fly."
United tried to bring all its political influence to bear on
the board to win approval. Upset by the rejection of United's
first application in 2002, Mr. Hastert lobbied tirelessly for
approval this time around. Earlier this week, he pleaded the
airline's case with Treasury Secretary John W. Snow, department
officials said, and the speaker was said to have had another
conversation yesterday morning with Mr. Snow, who is in
California.
United's application was the last pending before the board,
and if approved, it would have been the largest loan guarantee
package the board granted, equaling the value of all the others
combined.
Most of United's major rivals, including American, Delta,
Continental, Northwest and Southwest, decided not to apply for
federal help. The exception was US Airways, which filed for
Chapter 11 protection in 2002 and obtained a $900 million
package of loan guarantees.
Riva D. Atlas contributed reporting for this article.
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