Tuesday, June 29, 2004

United Airlines loses bid for loan guarantee


Company seeks investors after rejection of assistance

By Dave Carpenter
The Associated Press

CHICAGO - United Airlines lost its third and final try for a government loan guarantee Monday when a federal board rejected its latest bid and insisted the bankrupt carrier can survive without one.

The announcement by the Air Transportation Stabilization Board, unanimously affirming its June 17 decision despite the reduced request United submitted last week, forces the airline to seek new financing and throws the outcome of its 11/2-year-old bankruptcy makeover into doubt.

REACTION
Reaction to Monday's decision by the Air Transportation Stabilization Board to deny United Airlines' request for a $1.1 billion federal loan guarantee:

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"While we disagree with their decision, we are gratified by the ATSB's public recognition of our progress and are already moving forward to secure the exit financing we need to take United out of bankruptcy. ... The work we have done over the past 18 months has created a solid, highly competitive business platform that we expect will attract the capital necessary to exit." - United Airlines

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"We are extremely disappointed that the Air Transportation Stabilization Board failed to live up to its congressionally directed mandate of helping airlines hit hardest by the terrorist attacks of 9/11. Apparently, members of the ATSB opted to turn their backs on United Airlines, a company that lost two planes, 18 employees and 89 passengers on that tragic day. ... (However), we are confident in United's ability to secure private investors to complete the financing of our exit from bankruptcy." - Mark Bathurst, United captain and head of the United branch of the Air Line Pilots Association

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"The campaign by a gaggle of analysts and politicians to deny United any financial aid is clearly aimed at reducing labor costs industrywide by forcing United to set new, lower standards for employee compensation. ... This is an opportunity, perhaps the best opportunity yet, for United to rise above expectations and refuse to use its employees as human fertilizer to satisfy lenders and politicians." - Randy Canale, president of District 141 of the International Association of Machinists and Aerospace Workers

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"The challenges facing the U.S. airline industry are many, but the most appropriate course of action is to allow the marketplace to determine the shape of the industry. Continental Airlines is confident that private investment and further structural change - rather than government intervention - can position United Airlines for success in this difficult environment." - Continental Airlines, in a news release

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"United has an attractive route system, substantial market share, and has made progress on reducing labor costs. However, in order to attract a new equity investor and providers of credit, the airline will very likely have to undertake further cost cuts and demand further reductions in its debt and lease obligations. ... United's ability to attract new investment will depend partly on its success in further restructuring, but also on an absence of adverse events (such as major terrorism or a further jump in fuel prices) that could scare off investors." - Standard & Poor's analyst Philip Baggaley

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"They're probably getting pretty close in trimming fat from the employee end where they're hitting bone." - Tom Hill, corporate restructuring expert, Alvarez and Marsal

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"Obviously we're disappointed that the loan guarantee didn't go through. In the meantime, the speaker fully supports United's leaders and its employees as they work to fully emerge from bankruptcy." - Pete Jeffries, spokesman for U.S. House Speaker Dennis Hastert, R-Ill., who lobbied on behalf of United's application.

It also is likely to delay United's emergence from Chapter 11 into next year as the company looks for ways to further trim a cost structure that has kept it unprofitable since 2000.

Unions representing United's 62,500 employees, faced with the prospect of more painful concessions on top of huge wage and benefit cutbacks already made, denounced the government decision and publicly urged the airline to look elsewhere besides the work force for savings.

The company said it was in talks with lenders as it works to craft an alternative way out of bankruptcy.

Monday's setback came in the form of a three-paragraph letter from the federal board to United chief financial officer Jake Brace. Just six days after United reduced the amount of the loan guarantee sought to $1.1 billion from $1.6 billion, the panel said its decision stands.

The board said it carefully considered the additional financial information provided by United but concluded again that a loan guarantee wasn't necessary to ensure the viability of the nation's aviation system, a requirement for receiving federal assistance.

It said it would not entertain any other United attempts to secure government backing.

The board again noted that the airline had taken positive steps to pare costs and strengthen its competitive standing. But the panel once again said that credit markets have improved since the Sept. 11, 2001, terrorist attacks, meaning the company has a chance of getting the financing it needs without federal assistance.

United said that while it disagreed with the decision, "We are gratified by the ATSB's public recognition of our progress and are already moving forward to secure the exit financing we need to take United out of bankruptcy."

Company executives were tight-lipped about the options they are pursuing, but there is no shortage of potential investors in an airline that has been filling more seats and delivering improved operational results.

The airline has said it needs about $2 billion in order to pay back the creditors who funded its bankruptcy restructuring and to emerge from Chapter 11. Citigroup and J.P. Morgan Chase agreed last year to provide that exit loan package if the government would guarantee much of it.

With the prospect of government backing gone, United can either secure a stronger commitment from banks or, if that fails, obtain equity elsewhere. Either option is likely to entail further cost-cutting and other changes.

"United will now have to seek alternative forms of financing to exit bankruptcy, most likely a combination of a new equity investor, secured bank lending and possibly other forms of debt," said Standard and Poor's analyst Philip Baggaley in a research note.

Experts see banks as unlikely to extend big loans to United without some credit backing, particularly with major airlines still struggling to cope with high fuel costs and discount competitors.

"The lenders might make up some of the shortfall, but they're not going to make up the whole shortfall," said Tom Hill, a corporate restructuring expert in Chicago with Alvarez and Marsal.

Robert Mann, an industry consultant based in Port Washington, N.Y., called it unlikely that United could emerge from bankruptcy any earlier than spring 2005 because of the inevitable need to negotiate further labor cuts.

Employees signaled they won't accept such an option readily.

Randy Canale, a union district president representing United machinists, said the airline must refuse to use its workers as "human fertilizer" to satisfy lenders and politicians.

United pilots' union chief Mark Bathurst said pilots will work with management in searching for solutions, but he emphasized, "We fully expect that such solutions will be found without the company again turning to employees who already have provided significant financial relief for this airline."




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