United Airlines' parent company is expected to file for bankruptcy within days, following a federal panel's decision Wednesday to deny the carrier a crucial $1.8 billion loan guarantee.
The Chicago-based airline's business plan "is not financially sound" and "would pose an unacceptably high risk to U.S. taxpayers," the Air Transportation Stabilization Board ruled.
United, a unit of UAL Corp., reportedly has arranged up to $2 billion in financing to fund its operations if it files for Chapter 11 bankruptcy-court protection.
The board's ruling "virtually assures a (Chapter 11) filing," said Sean Egan, an airline analyst with Egan-Jones Ratings Co.
"Stick a fork in it. It's done," said Mike Boyd, an Evergreen-based aviation consultant.
The company, running short on cash, faces $920 million in debt payments next week and had warned it would file for Chapter 11 this month if it didn't quickly receive the government backing.
Chief Executive Glenn Tilton said in a statement that United appreciates "the possibility expressed (by the ATSB) to consider an improved proposal at a later date." He said United will consult with union leaders and other stakeholders to determine its next step.
"Despite our disappointment," he said, "we believe that the work we've accomplished in developing our ATSB proposal will serve us well as we build our platform for the future, regardless of the path we take."
United - the second-largest U.S. carrier and Denver International Airport's dominant airline - reiterated that it would keep flying if it sought shelter from creditors. That means a Chapter 11 petition, which would be the embattled industry's largest ever, would likely have no immediate impact on passengers.
The three-member ATSB made its ruling a day before United's 13,000 mechanics were set to vote on a revised package of pay and benefit concessions worth $700 million - part of the carrier's plan to win a guarantee. The mechanics rejected a similar proposal last week and were the only employee group that had not agreed to givebacks. Today's vote was canceled, the International Association of Machinists union said.
UAL shares slid 69 percent to 95 cents in after-hours trading Wednesday.
The carrier, which has lost $4 billion since June 2000 and is bleeding more than $7 million daily, sought the federal guarantee to raise money from private lenders. The guarantee would be a promise that the federal government would repay part of the loan in case of default. United sought 90 percent backing of $2 billion in private loans.
The ATSB's ruling came despite an aggressive lobbying effort by United supporters, including lawmakers from states where it has a substantial presence, such as Colorado.
The decision was a victory for United rivals such as American and Continental, which had campaigned vigorously against the loan guarantee. United's competitors filed documents with the ATSB and other U.S. officials charging that the financial forecasts United had submitted to the board were flawed.
The ATSB was created by Congress to dole out $5 billion in cash aid and up to $10 billion in loan guarantees to the industry after the 2001 terrorist attacks exacerbated a travel downturn triggered by the U.S. recession.
The ATSB's ruling showed the panel wasn't swayed that United's business plan was sufficient, with or without concessions from the mechanics. Part of the board's mandate is to provide backing to carriers that have a viable business plan, not to prop up failing companies. It is not supposed to be swayed by political clout, although many observers say it would be difficult for such a government panel not to be influenced to some degree by political muscle.
United's recovery plan projected $14.1 billion in cost savings and revenue improvements over the next 5 ½ years. The centerpiece of the plan called for $5.2 billion in labor concessions. United had said it would turn a profit by 2004 - a forecast some analysts said was unrealistic given the grim state of the industry.
"United's business plan does not position the company to meet the challenges of the current airline industry environment and to achieve long-term financial stability," the board said. "Specifically, the plan is based on unreasonably optimistic revenue projections."
Said Ray Neidl, an analyst with Blaylock & Partners: "They thought the same thing we were thinking: Basically, the plan stunk."
Two of the three board members - Treasury's undersecretary for domestic finance, Peter Fisher, and Federal Reserve Board member Edward Gramlich - turned down United's request. The third member, Kirk Van Tine, the general counsel of the Department of Transportation, voted to delay a decision until Monday to allow United to submit more financial data.
"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."
Fisher said: "This is not just about costs; it's about a business plan that is fundamentally flawed."
The board has awarded final approval for guarantees to only two of more than a dozen applicants. The two recipients were America West Airlines Inc. and American Trans Air Inc. Others, including Denver-
based Frontier Airlines Inc., have received tentative board approval.
"The U.S. government did the right thing for the taxpayers and for competition by letting the marketplace determine winners and losers," Continental said of the ruling on United's request.
UAL - 55 percent owned by workers - has roughly $1 billion in cash, Tilton said recently.
But debt payments that start coming due Monday would leave it with virtually no reserves. It is already in the grace periods for the repayment of $920 million in debts and faces the prospect of default next week. Among pending obligations are $375 million owed to bondholders for aircraft debt and $500 million to the German bank Kreditanstalt fuer Wiederaufbau.
The carrier, which also owes $70 million in back wages to some employees this month, has been working with Chicago-based Kirkland and Ellis as its bankruptcy counsel.
United, with nearly 7,800 employees in Denver, could seek a federal loan guarantee as part of a Chapter 11 reorganization, a board official said.
The board tentatively approved a $900 million loan guarantee for US Airways Group Inc. before it filed for bankruptcy Aug. 11. The board extended that offer to help the airline emerge from Chapter 11.
A Chapter 11 filing by United could have major repercussions for its employees and others.
The carrier likely would seek to amend labor contracts and try to extract concessions from lenders, suppliers and aircraft lessors - such as Boeing and Airbus.
United's employees also could face further layoffs in addition to the 9,000 already planned by 2004.
Furthermore, bankruptcy likely would erase the value of UAL shares, including those held by mechanics, pilots and other workers, Neidl said.
United also might further trim flight capacity, but some industry experts have said they don't expect major changes, including at DIA, the carrier's second-largest hub.
A UAL bankruptcy could have a huge impact on the beleaguered industry. If the carrier is able to drastically cut costs as it restructures, rivals such as American and Continental might seek concessions from their own workers, suppliers and others to stay competitive.
Some legal experts said United probably will seek Chapter 11 - but might not file immediately.
Martin Zohn, a lawyer with Pros- kauer Rose LLP in Los Angeles who specializes in bankruptcies, said he doubts that it would be devastating even if United does miss loan payments due next week, since most creditors have little incentive to reclaim the aircraft United holds as collateral for much of the debt.
"The fact of the matter is those airplanes aren't going anywhere," Zohn said. "If anyone were to try to foreclose on those airplanes, they could pack them in the desert and polish them. . . . It's not as if there's anyone clamoring for those aircraft."
Some industry experts had contended that the government should assist United because it is too important to the nation's travel system to let it slide into bankruptcy. Others, however, argue a bankruptcy filing ultimately will benefit United and customers because the airline would become more competitive through massive cost-cutting.
Kevin Mitchell, head of the Business Travel Coalition, a passenger advocacy group, charged Wednesday that the ATSB's move "will put at significant risk the interests of the consumer, United Airlines' employees and the economy."
He argues that a slimmed-down United will allow competitors to raise business and leisure fares.
There is some worry that United might not emerge from Chapter 11 and would have to liquidate.
"If United slips into a Chapter 7 liquidation, 19 percent of domestic capacity will be lost," Mitchell said.
In addition to criticizing United's revenue expectations, the board said that - despite the airline's efforts to reduce labor costs - the company remains "among the highest cost carriers in the industry."
The rejection letter alluded to a last-minute attempt by United to revise its proposal, via e-mails and faxes sent to the board on Tuesday night. But the board said the proposed revisions "are highly unlikely to change their assessment of United's proposal."
The head of United's pilots union, Captain Paul Whiteford, criticized the ATSB's decision.
"We believe the purpose of the ATSB is to stabilize, not restructure, the airline industry," said Whiteford, who is also a UAL board member.
He said the union will work with the company in the next few days in hopes of coming up with an out-of-court recovery.
Boyd, the Evergreen-based consultant, said he wasn't surprised by the ATSB's ruling.
"To be honest with you, I don't think United demonstrated it could pay (the money) back," Boyd said. "United has to do something very differently. The employees aren't the solution. It's on the management side."
43 PM MrMarky wrote: 