US rejects United Airlines bid for loan guarantee
Reuters
US rejects United Airlines bid for loan guarantee
Thu December 5, 2002 12:57 AM ET
(Updates with mechanics union canceling vote)
By Kathy Fieweger
CHICAGO, Dec 4 (Reuters) - United Airlines failed on Wednesday to secure a $1.8 billion U.S. government loan guarantee, pushing the world's No. 2 airline to the brink of filing for bankruptcy.
United was prepared to file for Chapter 11 bankruptcy protection as soon as it can line up about $1.5 billion in financing needed to keep flying in Chapter 11, sources familiar with the matter told Reuters late on Wednesday.
United officials were said to have met with bankers in New York on Wednesday to line up the so-called debtor-in-possession financing. The amount United needs is not yet final.
The Air Transportation Stabilization Board, voted 2 to 1 to reject United's loan guarantee bid despite a huge lobbying campaign by employees, Wall Street advisors and high-ranking politicians.
"The board believes that the business plan submitted by the company is not financially sound," the federal board said 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."
United's chairman Glenn Tilton said in a statement the airline would continue to fly as he consults with union leaders and other parties on what to do next. He stopped short of saying United would file for bankruptcy, but he also did not say the airline would amend its application again, as the government said it could.
The late afternoon decision in Washington pushed the airline's stock price down 50 percent in after-hours trading. Union leaders denounced the decision by the federal board set up to help airlines struggling financially after the Sept. 11, 2001, attacks.
"We are extremely disappointed ... and do not agree with the Board's analysis of United's business plan nor the timing of its announcement," Capt. Paul Whiteford, head of the United's pilots union, said in a statement.
But the board's vote drew praise from rival Continental AirlinesCAL.N , which is also struggling to cope with a severe business travel slump.
INDUSTRY CRISIS ONGOING
The U.S. airline industry has been stuck in its worst financial crisis ever since the Sept. 11, 2001, hijack attacks on New York and Washington. Carriers lost an estimated $10 billion in 2001 and are on track for another round of massive losses this year. US Airways GroupUAWGQ.OB , based in Arlington, Virginia, filed for bankruptcy in August.
United, a unit of UAL Corp.UAL.N , had counted on the federal guarantee to support 90 percent of $2 billion in loans it hoped to get from its banks. The company planned to use some of that money to repay debt and avoid filing for bankruptcy protection.
United can still change its business plan and ask the board to reconsider a loan, a federal official said. But the plan that was rejected had been hammered out after months of negotiations with United's labor unions.
The board concluded that United's revenue projections were unreasonably optimistic and its costs, still too high. It also expressed "substantial concern" with underfunded pensions and how much assets were worth.
The board would consider giving United exit financing upon its emergence from bankruptcy, Daniel Montgomery, executive director of the board, told reporters in a conference call.
Elk Grove Village, Illinois-based United, with about 83,000 employees, had fought a difficult battle for months to win concessions from workers, vendors and suppliers, it has repeatedly warned it would be forced to seek court protection without the federal loan backing.
HARD DECISIONS
Board members Federal Reserve Gov. Edward Gramlich and Peter Fisher, treasury undersecretary for domestic finances, voted to reject United's application. An assistant transportation secretary voted to defer a decision until Dec. 9 to give the airline more time to submit information.
"These are hard decisions, and I certainly feel for the affected employees," Gramlich said in a statement. "At the same time, the loan board has a responsibility to taxpayers, and to fostering the long-term health of the airline industry."
Fisher said United flat out failed to meet the loan guarantee criteria. "This is not just about costs, it's about a business plan that is fundamentally flawed."
Several airline analysts said they saw no way United could escape a bankruptcy filing, even though the agency told reporters United could submit a new plan.
"This is the final nail in the coffin," said Standard and Poor's analyst Phil Baggaley. "United will have to file for bankruptcy very quickly. The timing will probably be driven by when they have debtor-in-possession financing credit facility lined up."
United's mechanics union said it has canceled a re-vote on a package of wage concessions that had been set for Thursday, calling a vote at this juncture "pointless," according to a statement on its Web site. Union members had been expected to vote again on $700 million in concessions that are part of a $5.2 billion giveback package.
UAL shares fell 50 percent in after-hours trading to $1.54 a share from a close of $3.12 on the New York Stock Exchange.
Chicago-based United posted a record $2.1 billion loss in 2001, and has lost another $1.7 billion so far this year. It is burning through about $8 million in cash daily and must keep a certain minimum level of cash to function.
The airline has been working with Chicago-based Kirkland and Ellis as its bankruptcy counsel.