United agrees to scale back aid request
By Caroline Daniel in Chicago
Published: June 22 2004 23:36 | Last Updated: June 22 2004
23:36
United Airlines on Tuesday finalised the terms of its new
application to the federal body overseeing loan guarantees,
agreeing to scale back its request for aid from $1.6bn to $1.1bn,
to seek $500m in private equity and to embark on a new round
of cost cutting.
The proposed terms, set out in a letter to the Airline
Transportation Stabilization Board, which oversees the
guarantees, are designed to support United's request for a
reconsideration of its application. The airline has also agreed to
maintain minimum cash balances of $1.5bn as a condition of the
loan and is proposing to pay it off within five years, not seven,
according to a person familiar with the talks.
The plan, which does not include a specific target on cost cuts,
follows intense discussions between United executives and
officials from the office of John Snow, Treasury secretary, and
the Department of Transportation.
Last week the ATSB turned down United's application. It is
unclear how soon the ATSB will respond to the letter.
The private equity concessions represent a climbdown for
United, which has consistently avoided taking this route. One
person involved in the bankruptcy said: "It almost doesn't matter
now if the ATSB agrees a loan, as it is now clear that Glenn
Tilton [chief executive of United] can't get away with a job half
done. He is going to have to restructure further and cut costs."
The battle over the future of United now lies in the hands of
private equity groups and what conditions they will demand in
return, such as management changes, a new labour deal or
terminating pension plans.
Finding a private equity investor is expected to take months,
pushing United's exit from bankruptcy into next year.
Even if United's new request is turned down by the ATSB, the
airline will have already begun a process of talking to private
equity groups and allowing them to conduct due diligence, since
the biggest detail that could change would be the size of the
investment required from them, according to a person familiar
with the bankruptcy.
One investment banker said potential investors could include
Greenbriar Equity - whose managing partner, Gerald
Greenwald, was a former chairman and chief executive of
United - and Texas Pacific Group, which has the best track
record of any private equity group for its airline investments.
Cerberus Capital Management and Oak Hill Capital Partners
are also active in the sector, offering last week to invest $250m
in Air Canada.
United's revised application could face legal challenges from
other airlines amid charges it has received special treatment.
Dennis Hastert, the influential speaker of the House of
Representatives, called Mr Snow several times before the
Treasury department made the decision to allow the airline to
reapply for the loan guarantee.
Peter Fitzgerald, a senator from Illinois, on Tuesday wrote to
Dennis Schindel, acting inspector-general at the Treasury,
requesting an investigation into whether "inappropriate political
pressure or intimidation has been or is being applied to Mr
Roseboro [the Treasury appointee on the ATSB] to change his
vote . . . This issue is worthy of your consideration because it
goes to the integrity and the credibility of the ATSB."
If United is easily able to find $500m of private equity it could
confirm one of the central arguments the ATSB used to reject
United a week ago - that it has access to the capital markets and
therefore does not need a federal guarantee. "If they can find
$500m in a few weeks, what happens if we give them a few
months? Perhaps they won't need our money at all," said one
government official.
The fact that United is going to have to seek further cost cuts,
especially from labour, could also have a significant impact on
the rest of the airline industry. It could put pressure on Delta's
pilots to agree to concessions soon, in order to avert Delta
executives using any renegotiated deal from United as a new
benchmark.
Northwest, which is also seeking a labour deal, could also
benefit. Jamie Baker, analyst at JP Morgan, said: "The threat that
UAL could establish a new, lower network carrier pay structure
is expected to accelerate pilot negotiations at those two carriers.
"Delta pilots can ill-afford to drag their feet on the current 30 per
cent pay cut proposal, only to have United establish lower rates
in the meantime."
By Caroline Daniel in Chicago
Published: June 22 2004 23:36 | Last Updated: June 22 2004
23:36
United Airlines on Tuesday finalised the terms of its new
application to the federal body overseeing loan guarantees,
agreeing to scale back its request for aid from $1.6bn to $1.1bn,
to seek $500m in private equity and to embark on a new round
of cost cutting.
The proposed terms, set out in a letter to the Airline
Transportation Stabilization Board, which oversees the
guarantees, are designed to support United's request for a
reconsideration of its application. The airline has also agreed to
maintain minimum cash balances of $1.5bn as a condition of the
loan and is proposing to pay it off within five years, not seven,
according to a person familiar with the talks.
The plan, which does not include a specific target on cost cuts,
follows intense discussions between United executives and
officials from the office of John Snow, Treasury secretary, and
the Department of Transportation.
Last week the ATSB turned down United's application. It is
unclear how soon the ATSB will respond to the letter.
The private equity concessions represent a climbdown for
United, which has consistently avoided taking this route. One
person involved in the bankruptcy said: "It almost doesn't matter
now if the ATSB agrees a loan, as it is now clear that Glenn
Tilton [chief executive of United] can't get away with a job half
done. He is going to have to restructure further and cut costs."
The battle over the future of United now lies in the hands of
private equity groups and what conditions they will demand in
return, such as management changes, a new labour deal or
terminating pension plans.
Finding a private equity investor is expected to take months,
pushing United's exit from bankruptcy into next year.
Even if United's new request is turned down by the ATSB, the
airline will have already begun a process of talking to private
equity groups and allowing them to conduct due diligence, since
the biggest detail that could change would be the size of the
investment required from them, according to a person familiar
with the bankruptcy.
One investment banker said potential investors could include
Greenbriar Equity - whose managing partner, Gerald
Greenwald, was a former chairman and chief executive of
United - and Texas Pacific Group, which has the best track
record of any private equity group for its airline investments.
Cerberus Capital Management and Oak Hill Capital Partners
are also active in the sector, offering last week to invest $250m
in Air Canada.
United's revised application could face legal challenges from
other airlines amid charges it has received special treatment.
Dennis Hastert, the influential speaker of the House of
Representatives, called Mr Snow several times before the
Treasury department made the decision to allow the airline to
reapply for the loan guarantee.
Peter Fitzgerald, a senator from Illinois, on Tuesday wrote to
Dennis Schindel, acting inspector-general at the Treasury,
requesting an investigation into whether "inappropriate political
pressure or intimidation has been or is being applied to Mr
Roseboro [the Treasury appointee on the ATSB] to change his
vote . . . This issue is worthy of your consideration because it
goes to the integrity and the credibility of the ATSB."
If United is easily able to find $500m of private equity it could
confirm one of the central arguments the ATSB used to reject
United a week ago - that it has access to the capital markets and
therefore does not need a federal guarantee. "If they can find
$500m in a few weeks, what happens if we give them a few
months? Perhaps they won't need our money at all," said one
government official.
The fact that United is going to have to seek further cost cuts,
especially from labour, could also have a significant impact on
the rest of the airline industry. It could put pressure on Delta's
pilots to agree to concessions soon, in order to avert Delta
executives using any renegotiated deal from United as a new
benchmark.
Northwest, which is also seeking a labour deal, could also
benefit. Jamie Baker, analyst at JP Morgan, said: "The threat that
UAL could establish a new, lower network carrier pay structure
is expected to accelerate pilot negotiations at those two carriers.
"Delta pilots can ill-afford to drag their feet on the current 30 per
cent pay cut proposal, only to have United establish lower rates
in the meantime."
