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United Faces Bankruptcy

December 5, 2002 at 12:00 AM EDT


RAY SUAREZ: The United story is first. To walk us through the latest developments, we’re joined by Paul Merrion, a senior reporter who covers aviation for Crain’s Chicago Business, a weekly newspaper.

Well, Paul, what was United seeking from the Air Transportation Stabilization Board (ATSB)?

PAUL MERRION: They were trying to get a $1.8 billion federal loan guarantee that would back up a $2 billion loan from lenders in order to restructure their finances.

RAY SUAREZ: And the board turned them down. Where does this leave United?

PAUL MERRION: Well, they have one last chance. They can appeal. They’re working on some kind of an appeal now. They’re trying to get together with their unions and see if there’s one last round of concessions that they can put together that will convince the board that they ought to get the loan guarantee.

RAY SUAREZ: The ATSB discussed publicly why it made the decision it did?

PAUL MERRION: They issued a statement after their decision. It was a closed meeting. But they said that the plan was not financially sound, the revenue projections were too optimistic. They had concerns that the… that they had not accounted for the low fare carriers and what kind of competition they’d create. Also they were concerned about the funding of the under funded pension plan going down the road.

RAY SUAREZ: Just recently United’s Machinist Union turned down a concession package that included a 7 percent pay cut. Did this end up being key in the decision not to give them the loan?

PAUL MERRION: Not at all because the Machinists were going to vote again today. They assumed — the ATSB assumed that the vote would have been positive this time, but they determined that that would still not have been enough. The mechanics canceled the vote last night because it became a moot point.

RAY SUAREZ: So United Airlines has to make some loan payments quite soon.

PAUL MERRION: Coming up next week. They’ve got some payments due Monday and they’ve got a big payment on Thursday, December 12, $875 million. They cannot really make these payments. It would take up virtually all the cash they’ve got. Without any kind of a loan guarantee and some kind of restructured financing, they’ll have to declare bankruptcy.

RAY SUAREZ: Where does this leave the businesses that do business with United Airlines?

PAUL MERRION: If they declare bankruptcy? It actually puts them in a better situation because in bankruptcy your vendors are protected. You get almost as much priority as the debtor in possession lenders so in a way they’d be in a better position. Right now a lot of their venders are demanding cash up front. They’re not extending credit like they normally would. And so that’s added to United’s problems.

RAY SUAREZ: So between now and the 16th, will United be able to buy, for instance, jet fuel, prepared meals, the things that a carrier has to buy really day after day after day?

PAUL MERRION: Oh, I would think so, yes. I think they’re going to be able..they’ve got about a billion dollars in cash so they can pay for things like that on an ongoing basis. It’s these debt payments that create the huge problem.

RAY SUAREZ: And what about people who hold tickets or reservations with United Airlines?

PAUL MERRION: Well, right now I don’t think there’s any reason to be immediately concerned. Even if they declared bankruptcy tomorrow, they would not be changing their schedule for the holidays immediately. In fact my own mother is flying United for Christmas when she comes to see me. Down the road, it remains to be seen what kind of flights will be cut, how they’ll have to reduce costs by changing their whole route structure, but for the immediate future it will really be business as usual as we saw with U.S. Airways when they filed in August. The traveling public saw little or no difference right away.

RAY SUAREZ: Well, when U.S. Airways was approaching bankruptcy, they went to the same board, the same ATSB, and asked for some loan guarantees and they got them. What was the difference between the U.S. Airways and United cases?

PAUL MERRION: Well, they got conditional loan guarantees based on the unions coming up with the actual cuts that they had promised and other cost savings from their vendors and so forth. In the case of United, their total savings in relation to U.S. Airways were less. I think the board felt that they just needed to do more, given the outlook for revenues in the whole industry.

RAY SUAREZ: So they’ll have to more–in the view of the ATSB–they’ll have to more drastically change the way they do business day to day.

PAUL MERRION: Yes; they can’t change the ATSB’s mind about the revenue projections. Unfortunately the ATSB doesn’t reveal what its revenue projections are. In a way, United is just trying to do the best job it can, not knowing exactly what the target is they have to hit. But they clearly have to come up with lower cost structure that will allow them to weather a prolonged slump in the airline industry, which a lot of people think will last for a few more years and particularly if there’s a war with Iraq, it could be terrible for everybody.

RAY SUAREZ: So how long are we talking about for this transitional, this perilous period? Do we see a new United emerging early next year, further into 2003? How long does this kind of thing take?

PAUL MERRION: It’s hard to say. U.S. Airways’ plan is to come out in January. So that’s about five months. United hasn’t said anything about what its plan actually is, given how much bigger of an airline it is and how much more complicated it is. It could take longer.

RAY SUAREZ: And be shedding lots of jobs in the meanwhile?

PAUL MERRION: They were already planning to downsize further next year in response to the bad economy and the downturn in travel. They’re likely to have to shed more jobs.

RAY SUAREZ: Paul Merrion, thanks a lot.

PAUL MERRION: Thank you.