United turned down by feds
Request for loan guarantees rejected due to doubts about business plan; bankruptcy likely.
December 4, 2002: 6:57 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 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.
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 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.
Spokesmen for United said they would have a comment on the vote shortly.
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 that all the promised cost savings were in place.
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 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.
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 politician and other carriers had an effect on the staff, saying they had looked only at only the fundamentals of United's business plan.