There several additional areas of risk that need to be considered by the ATSB and Congress, who authorized the ATSB.
1. It is pure myth that in bankruptcy United would be able to simply nullify labor contracts and pay employees wages and benefits it deemed competitive. There is not a single case of where there was labor â€“ management animosity during a period of bankruptcy where the airline survived (e.g. Eastern Airlines). Management would have to enter into a negotiation process with each of its labor groups.
2. United could expect an immediate loss of revenue of 10% to 15% from leisure and business travelers booking away. These travelers would come to know that unlike in the past, competing airlines would not likely honor their tickets were United to fail because of these airlinesâ€™ own financial problems. Additional revenue erosion would also likely occur as corporate incentive meetings and national conventions book away because large deposits are usually required upon signing contracts for such group movements.
3. Whether financial restructuring happens outside or inside bankruptcy protection, the same order of magnitude of borrowing would be necessary to stabilize the firm, i.e. $2 billion. There is no guarantee that United would be able to secure such lending. Indeed, once in bankruptcy, US Airways was unable to interest a single lending institution in participating in a loan.
4. United should not want to exploit its creditors under Chapter 11 as such a practice would limit Unitedâ€™s access to capital markets for years while driving up its long-term cost of funds.
5. United would be ceding significant control to a bankruptcy Judge whose job would be to balance competing stakeholdersâ€™ interests. The enterprise would surely change but in uncontrollable and unforeseeable ways. For example, would United exit bankruptcy without its Pacific or Atlantic routes, or with or without its wide-body jets?
6. A United bankruptcy would put airport services at risk at some of the country's busiest airports including Chicago, Denver, San Francisco and Los Angeles. United provides substantial portions of the operating revenues and capital budgets for those airports through landing fees, project expenditures and bond issues. Were United to default on those obligations, airports would likely curtail services.
7. The prospect of United and American operating under court protection raises the serious problem of defaults on airport bond payments. A collapse of the airline bond market would impact millions of individual investors who participate in these bond funds as part of their retirement planning.
8. A United bankruptcy would disrupt an already shaky financing market. United backs more than $4 billion of public market secured bonds and more than $2 billion of unsecured bonds. The unsecured bonds would be wiped out in a bankruptcy and one could expect United to default on most of its secured bonds. An American bankruptcy would mean even more bond defaults. The airline financing market has never experienced anything approaching such a disruption. Some experts believe a series of defaults would likely shut down the public capital markets for two to three years for every major U.S. airline other than Southwest.
9. An uncertain bankruptcy process would negatively impact suppliers and vendors and their employees up and down the airline industry supply chain.
10. If unsuccessful, and United is liquidated in a Chapter 7 process, competition would suffer over the short and long terms. The customer needs as many viable airline competitors as possible. Losing a strong competitor such as United, especially on a global basis with its industry-leading STAR alliance, would damage the industry irreparably.
BTC believes that United Airlines, and its numerous stakeholders, would be far better off if a financial restructuring takes place outside of bankruptcy protection. It is not just an urgent matter due to Unitedâ€™s cash position. The prospect of hostilities with Iraq, where United would be required to redeploy aircraft to carry U.S. troops, and absorb an upward spike in jet fuel costs, also points to a need for the ATSB to move with great dispatch in approving Unitedâ€™s application for a loan guarantee.
The main concern of the ATSB should be whether United would be able to repay a $2 billion loan. It might be useful to put this loan application in the context of the larger public policy framework. The current guiding U.S. public policy, with regard to commercial air transportation, is deregulation, as opposed to government regulation.
United arguably has the best franchise of the major U.S. network airlines. If after significant cost reduction and productivity improvements United fails, then it is exceedingly probable that the top six major network airlines would likewise fail, in which case, we would require a new public policy. Put another way, if United fails, a $2 billion loan default would be the least of our governmentâ€™s problems.