United and Kenneth
2002-12-04 | 10:49 p.m.

This could affect my friend Ryan but I hope it doesn't:

United turned down by feds Request for loan guarantees rejected due to doubts about business plan; bankruptcy likely.

December 4, 2002: 8:17 PM EST

NEW YORK (CNN/Money) - United Airlines appeared to be flying towards certain bankruptcy Wednesday evening after a government panel voted two-to-one against an application for $1.8 billion in federal loan guarantees.

"The board believes that the business plan submitted by the company is not financially sound," said the Air Transportation Stabilization Board (ATSB) in a statement. "This plan does not support the conclusion that there is a reasonable assurance of repayment and would pose an unacceptably high risk to U.S. taxpayers."

The board added the plan was based on "unreasonably optimistic revenue projections.

"The board believes that with a more reasonable revenue forecast, United's revenues and costs still would not be aligned, even with the benefit of all proposed cost reduction initiatives," said the statement.

United said it would consult with union leaders and other stakeholders to determine its next move. It did not mention the possibility of filing for bankruptcy, though that's one move United could end up making.

"We are disappointed that the ATSB could not approve the proposal submitted by United," United CEO Glenn F. Tilton said in a statement. "Despite our disappointment, we believe that the work we've accomplished in developing our ATSB proposal will serve us well as we build our platform for the future, regardless of the path we take."

"Whatever course we chart, it should be emphatically clear that United will continue to fly and to deliver exceptional service to our customers worldwide," Tilton continued, possibly hinting that United flights would continue even after a bankruptcy filing.

Shares of United parent UAL Corp. (UAL: Research, Estimates) had been little changed in trading Wednesday before the after-market announcement by the board. But shares plunged $1.92, or about 62 percent, to $1.20, after closing down 7 cents in regular-hour trading.

One of the three members of the panel weighing the application, Kirk Van Tine, the Transportation Department's general counsel, voted to delay a vote until Dec. 9. The other two, representatives from the Treasury Department and Federal Reserve, voted for the rejection.

ATSB Executive Director Dan Montgomery said that the vote was not a final one, that United could revise its business plan and resubmit its application. But time is running out for United, which faces nearly $1 billion in loan payments next week. It had said it needed to win the loan guarantees in order to make those payments.

The Air Line Pilots Association issued a statement blasting the vote, and saying it had not yet given up hope that the airline could avoid bankruptcy.

"We are extremely disappointed by the decision by the ATSB and do not agree with the board's analysis of United's business plan nor the timing of its announcement," said the statement from Paul Whiteford, a United captain and the head of the ALPA unit at United. "We believe the purpose of the ATSB is to stabilize, not restructure, the airline industry. We will work very hard over the next few days with both the company and union coalition to evaluate the situation and respond as quickly as possible to achieve an out-of-court recovery for the company."

Employee concessions not enough

The decision comes on the eve of a scheduled vote by the airlines' mechanics on a 7 percent wage cut designed to save the airline $700 million over the next 5-1/2 years, part of a $5.2 billion labor cost reduction package put together by the carrier in an attempt to get the help.

Scotty Ford, president of the unit of the International Association of Machinists, which represents the United mechanics, said he intends to go ahead with the vote, but it's possible it could still be cancelled. Mechanics had already rejected a nearly identical wage package last week, and the vote had been seen as a last chance to win the loan guarantee.

"It might be pointless [to hold the vote]," Ford said. "With this devastating news, I don't know what the tone of the membership will be."

The ATSB's Montgomery said that the panel considered the application as if the mechanics had approved the concessions package and all the promised cost savings were in place.

Passengers could also be affected

Even if the airline is forced to file for bankruptcy protection, it may continue to operate. Many carriers, including US Airways Group, have continued to fly while operating under bankruptcy.

But it's possible that passengers could see higher fares if United is forced to take a lot of its jets out of service as part of a bankruptcy. The oversupply of airline capacity is one of the factors driving fares down and driving up losses through much of the industry.

"This decision will put at significant risk the interests of the consumer, United Airlines' employees and the economy," said a statement from Kevin Mitchell, chairman of the Business Travel Coalition, who predicted higher fares would result even if United is not forced to cease operations.

But John Heimlich, director of economic and market research for the Air Transport Association, the industry trade group, said that it's not clear that fares will rise, especially in the short term. He pointed out that the carriers gaining the most market share in recent years have been the low-cost, lower-fare carriers who could see further gains from a smaller United. And he said other carriers are also working to lower their costs, not raise fares, as the way to stem losses.

The bankruptcy filing could wipe out the Employee Stock Ownership Plan that controls a majority of the shares of the company. Pilots at United have about a 25 percent stake in the airline, while members of the IAM have about a 20 percent stake. The employees could also lose their labor contracts' protections under bankruptcy court.

"These are hard decisions, and I certainly feel for the affected employees," said a statement from ATSB chairman Edward Gramlich. "At the same time, the loan board has a responsibility to taxpayers, and to fostering the long-term health of the airline industry. Given our conclusion that the business plan submitted by the company is financially unsound, I believe it best not to approve the United proposal."

Suppliers and creditors also stand to lose. The world's No. 2 airline had said the loan guarantees were necessary for it to make payments on $920 million in debt it missed on Monday. The company said a grace period for $300 million of those payments ends on Monday, with most of the rest having a grace period that ends Dec. 12. The company's debt rating is already near the lowest level possible.

Political leaders, including U.S. House Speaker Dennis Hastert, who like United is from Illinois, had lobbied on behalf of the loan guarantees.

Competing airlines, including No. 1 carrier American Airlines (AMR: Research, Estimates) and No. 5 Continental Airlines (CAL: Research, Estimates) had lobbied against the loan guarantees, saying that United's problems were due to its cost structure, not the Sept. 11 terrorist attack, and that it should solve its problems without federal assistance.

"The U.S. government did the right thing for the taxpayers and for competition by letting the marketplace determine winners and losers," said a statement from Continental Wednesday.

Montgomery denied that lobbying by politicians and other carriers had an effect on the staff, saying they had looked only at the fundamentals of United's business plan.

Also, please pray for my brother. He bruised his rib and liver in some truck/oil field accident last week. We heard the story from his estranged wife and have not heard from him in months.

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