United Airlines bankruptcy likely after feds reject loan

WASHINGTON -- United Airlines lost its bid for $1.8 billion in federal loan guarantees Wednesday, a major setback to the nation's second-largest air carrier in its efforts to avoid bankruptcy.

The Air Transportation Stabilization Board said that despite efforts to pare costs, "the business plan submitted by the company is not financially sound."

Chicago-based United had asked that the government guarantee $1.8 billion of a $2 billion private loan package. Without the guarantee and the loan, the airline has said it would probably have to file for Chapter 11 bankruptcy protection.

The $1.8 billion is the largest request received by the board, double the amount that US Airways was conditionally granted earlier this year.

The board was established by Congress last year to oversee a $10 billion loan program, part of an airline industry bailout after last year's Sept. 11 terrorist attacks.

The board, in its statement, said United's 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 chief executive officer, Glenn Tilton, expressed disappointment with the board's decision, but he didn't say whether the company would file for bankruptcy or file a revised proposal for a federal loan guarantee with the board.

"We appreciate, however, the possibility expressed to consider an improved proposal at a later date," Tilton said. "We will consult with our union leaders and other stakeholders and quickly determine what step to take next."

Mechanics' vote canceled

Hours after the board announced its decision, the union representing 13,000 United mechanics and aircraft cleaners canceled a vote on wage cuts scheduled for today.

Two of the three board members -- Treasury's undersecretary for domestic finance, Peter Fisher, and Federal Reserve Board member Edward Gramlich -- rejected United's request. The third member, Kirk Van Tine, the general counsel of the Transportation Department, voted to defer a decision until Dec. 9 to allow United to submit additional financial information.

"These are hard decisions, and I certainly feel for the affected employees," said Gramlich. "At the same time, the loan board has a responsibility to taxpayers and to fostering the long-term health of the airline industry," he said, explaining his decision to reject United's request.

Fisher said: "This is not just about costs; it's about a business plan that is fundamentally flawed."

The board's executive director, Daniel Montgomery, told reporters that United still has an opportunity to file a revised request with the board even if the airline were to file for bankruptcy.

The head of United's pilots union held out hope of avoiding a bankruptcy filing, although he did not specify how that might be accomplished.

"We are extremely disappointed by the decision of the ATSB and do not agree with the board's analysis of United's business plan," said Paul Whiteford, head of the United pilots union. "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," he added.

The union representing United flight attendants, the Association of Flight Attendants, also was disappointed by the board's decision.

After losing an industry-record $2.1 billion in 2001, United is on course to exceed that loss this year as it struggles amid a weak economy and a decline in business travelers.

Some passengers flying United on Wednesday said the government should help United stay in business.

"We need the competition to keep the fares lower," said Courtney Burkholder, 31, of Lincoln, Neb., as she walked through Chicago's O'Hare International Airport. "Generally, it seems unfair that the airlines suffered for the terrorist attacks."

A bankruptcy would be unlikely to have any immediate effect on passengers. United has said it would continue flying its normal schedule, as US Airways has been doing since its Chapter 11 filing in August.

But United is trying to avoid a filing because its stock shares would probably become virtually worthless and it would lose control of its restructuring to a judge. The airline is 55 percent owned by its employees.

United shares had risen 7 cents in regular trading Wednesday to close at $3.12 on the New York Stock Exchange. But the shares plummeted in after-hours trading, losing 56 percent of their value, or $1.75, to $1.37 each.

The board' decision makes it "highly likely" that United will be forced to file for bankruptcy, said Aaron Gellman, an airline industry expert and professor at Northwestern University's Transportation Center.

But the decision doesn't mean United's schedule will be decimated, he said.

"They will not stop flying. When they come out of bankruptcy, they'll come out leaner and meaner," Gellman said.

The board in early November sent a letter to United, seeking additional information including details on cost savings that could be achieved from labor unions and from management, capital spending commitments and pension obligations.

Only two major airlines have gotten help from the board.

The board in July gave conditional approval to US Airways' application for a $900 million federal loan guarantee, but the carrier still ended up filing for bankruptcy protection. And, in December of last year, America West received conditional approval for a federal loan guarantee of $380 million.

The board has approved loan guarantees for some smaller airlines, as well.

A person familiar with United's situation said the airline was close to securing $1.5 billion debtor-in-possession financing that would be needed in order to keep it operating while in bankruptcy. The airline has been in negotiations with several banks organizing the loan, including J.P. Morgan, Bank One and GE Capital, a unit of General Electric, said the person, speaking on condition of anonymity.