United Airlines Denied $1.6 Bln U.S. Loan Guarantee (Update3)
June 17 (Bloomberg) -- UAL Corp.'s United Airlines failed to win a $1.6 billion U.S. government loan guarantee to finance an exit from bankruptcy, which may force the world's second-largest carrier to seek other financing or more cost reductions.
United failed to meet requirements of an airline aid law and can succeed without a guarantee as credit markets have improved, the board of three U.S. agencies said in a statement. Two of the agencies said they would reconsider the application, and the Chicago-based airline requested a review.
UAL is seeking to reduce annual expenses by $5 billion, about half through worker pay and benefit concessions, to stem losses, and requested U.S. backing for a $2 billion loan from J.P. Morgan Chase & Co. and Citigroup Inc. UAL has had $8.6 billion in net losses since 2000, it's last profitable year. The company has said it had an operating profit in March and May.
``It's a substantial setback but it's not the end of the story for them,'' said Standard & Poor's analyst Philip Baggaley. ``They have been at least thinking about alternatives and now they'll have to pursue those, probably seeking some form of equity investment, a secured credit facility and possibly some other forms of long-term capital.''
The Air Transportation Stabilization Board rejected United's request for a $1.8 billion guarantee in December 2002, and the airline filed the industry's largest bankruptcy five days later. The board has rejected applications from nine carriers and awarded six loan guarantees. A law enacted after the Sept. 11 attacks made $10 billion in guarantees available to help carriers recover from a drop in air travel.
United `Perplexed'
United said in a statement it was ``perplexed'' about a ``premature'' decision, saying the carrier was in the midst of a process to make its application acceptable.
``We do not believe that the board was made fully aware of the important modifications United was willing to bring to the table,'' United said. ``We are respectfully petitioning the ATSB for reconsideration.''
Treasury Undersecretary Brian Roseboro and Federal Reserve Governor Edward Gramlich opposed the request, and Transportation Department Undersecretary Jeff Shane voted to defer a decision one week, the board's statement said.
``Should United submit an improved application in the coming days, Treasury is open to reconsidering it,'' the Treasury Department said in a statement. The Transportation Department is willing to consider the application ``in the event that United submits a request for reconsideration,'' the agency's statement said.
Loan `Unnecessary'
``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,'' Executive Director Michael Kestenbaum said in a letter to United's Chief Financial Officer Frederic Brace.
U.S. House Speaker Dennis Hastert, a Republican from Illinois, the home state of United, said he ``hoped'' the board would reconsider the decision.
The decision won't result in United's liquidation, said Dorothy Robyn, a Brattle Group consultant in Washington and a former adviser on aviation issues during the Clinton administration.
``This will force United Airlines to go back to labor and go back to creditors and get deeper concessions, which is exactly what should happen,'' Robyn said. ``Despite having been through bankruptcy, United Airlines labor costs and other costs are still substantially higher than those of low-fare airlines that are their major competitors.
``The board may well have thought that United hadn't used this crisis to get their costs as low as they need to be,'' Robyn said.
Pilots
The decision surprised United's Airlines Pilots Association, said spokesman Steve Derebey. He didn't comment on whether pilots, the highest paid employees at any airline, would be willing to offer additional concessions.
``We'll be working, obviously, with the company in the coming weeks to find out what their plan is,'' Derebey said. The pilots union said in a statement that the rejection is ``slap in the face to each United pilot.'' The union will be ``more determined to ensure'' United exits the bankruptcy process.
Under terms of the United request, the U.S. would have repaid 80 percent of the loan if the airline defaulted. J.P. Morgan Chase and Citigroup tentatively agreed to provide UAL with a $2 billion loan, including a collective $400 million that wouldn't be backed by the U.S. guarantee.
United probably will remain in bankruptcy court proceedings longer, redouble its efforts to reduce costs to attract new market capital, and, perhaps, shrink a bit, said UBS Securities analyst Samuel Buttrick in a June 10 report.
Opponents
Rivals opposed the application. The loan program wasn't meant to boost business plans likely to fail, AirTran Holdings Inc. Chief Executive Joe Leonard told a congressional panel June 3. Airlines with a reasonable chance of repaying loans can get them from private markets, America West Holdings Corp. Chief Executive Douglas Parker told the panel the same day.
United expects fuel costs to be $750 million higher than forecast for this year on rising fuel prices. UAL is aiming to cut $300 million in costs other than labor expense and boost revenue by $300 million. The airline recently cut $300 million in costs over six years by reducing retiree benefits.
UAL had expected to exit Chapter 11 protection by the middle of this year. Now, the company has said it's planning to emerge sometime in the second half of the year.
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Last Updated: June 17, 2004 20:49 EDT