Bankruptcy fear puts United into tailspin

Saturday, November 30, 2002

CHICAGO -- United Airlines said Friday it had begun urgent talks to win over mechanics who rejected wage cuts the company considers key in its bid to get badly needed loans. Wall Street analysts said bankruptcy for the world's No. 2 airline appears all but certain.

With hefty debt payments and other challenges looming, there's almost no time left for United to find the financial backing it needs to avoid filing for bankruptcy protection.

Bankruptcy concerns prompted a heavy sell-off of United stock Friday. Shares in United parent UAL Corp. plunged $1.12, or 31 percent, to close at $2.51.

Other workers have agreed to a total of $5.2 billion in companywide labor cuts over 5 1/2 years, but mechanics' rejection of their $600 million share Wednesday put United's financial recovery plan in limbo as its cash reserves rapidly dwindle.

"The mechanics' vote makes bankruptcy virtually inevitable for United and UAL," said credit analyst Philip Baggaley of Standard & Poor's, which downgraded the company's long-term corporate debt rating deeper into junk status.

Other airline experts concurred, and United reiterated its intention to file for Chapter 11 protection if it can't get mechanics to swiftly agree to the cuts.

"We need to reach that amount that we already agreed upon with a coalition of union leaders if we're going to get a government loan guarantee," United spokesman Jeff Green said.

The Machinists said late Friday that no formal negotiations had been held. A meeting is scheduled with United officials Sunday.

Vote jeopardizes loan

Even if mechanics quickly choose to accept wage cuts, as their US Airways counterparts did this fall, United's application for a $1.8 billion federal loan guarantee was put in jeopardy by Wednesday's vote.

A ruling is expected any day on the guarantee, which cash-poor United says it needs to obtain $2 billion in private loans.

United's pilots insisted the airline still has a chance to avoid bankruptcy.

"We are convinced that the process for an out-of-court recovery for United Airlines is not over," United's pilots union said in a statement. "We encourage all parties to continue their hard work in solving the open issues."

UAL stock has lost 92 percent of its value since before the Sept. 11 attacks as United struggles to reverse more than two years of daily losses amid a fragile economy and less profitable flying environment.

The airline faces a tough decision on whether it has enough cash to make a $375 million debt payment Monday, although under a grace period it could push that back to Dec. 16. Its cash reserves, believed to be around $1 billion, are on a pace to run out this winter.

Another deadline for United is Dec. 31, when wage-cutting agreements accepted by its pilots and other employee groups expire unless the mechanics agree to concessions.

The effects of a bankruptcy filing likely would have a profound impact on the airline industry.

A bankruptcy court judge probably would slash labor and other costs even more severely than United has proposed, prompting cutbacks and new revenue strategies among competitors. United's employee stock ownership plan also would be endangered, as would workers' remaining investments in the 55 percent employee-owned carrier.

There is likely to be no immediate effect on passengers, however. If it is forced to resort to a bankruptcy filing, United has said it will continue flying its normal schedule -- just as US Airways has been doing since its Chapter 11 filing in August.

Although news of a possible bankruptcy has unsettled United passengers and frequent-flier-mile holders, it was business as usual Friday amid a busy holiday travel weekend.

At Chicago's O'Hare airport, the carrier's hometown hub, one longtime United customer said she's not overly worried about the airline's future.

"All businesses have rough times, you just have to ride them out," said Carol Wuertzler, who was headed out with her husband on a trip to Florida. "We've lived with them through all the tumultuous times of the last year.

"If everyone deserts them, they're really in trouble."


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