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United Loses Loan Guarantee Bid, Faces Bankruptcy

BY Admin  December 5, 2002 at 1:12 PM EDT

Trading on the company’s stock was suspended for most of the morning because of what the New York Stock Exchange said was “pending news” regarding United. But trading resumed later in the day with no announcement from United on its next move.

Meanwhile, the credit agency Standard and Poor’s lowered United’s debit rating from “junk bond” to the lowest possible category, “default.”

Cash-starved United has said for months that without government backing, it could not get the $2 billion private loan it needs to avoid bankruptcy. It faces $920 million in debt payments due next week, which will wipe out most of its cash. Union leaders and employees are holding out hope that the airline will reapply for the loan guarantee.

Analysts say that the Air Transportation Stabilization Board’s rejection of United’s request for $1.8 billion in federal loan guarantees Wednesday all but ensures a Chapter 11 bankruptcy filing.

“We believe bankruptcy is inevitable,” J.P. Morgan analyst Jamie Baker wrote in a note to investors Thursday.

“I can’t imagine them avoiding it unless someone writes them a check for $2 billion,” Ray Neidl of Blaylock and Partners told the AP.

United Chief Executive Glenn Tilton tried to reassure passengers and the airline’s 83,000 employees, saying, “Whatever course we chart, it should be emphatically clear that United will continue to fly.”

Tilton didn’t reveal whether the company would file for bankruptcy or submit a revised proposal.

Meanwhile, United’s mechanics canceled a vote scheduled for Thursday on $700 million in wage cuts the carrier said it needed to stay out of bankruptcy. Union leaders said the government board’s decision had rendered the vote moot.

Employees own 55 percent of United under a 1994 plan designed to encourage labor harmony. The plan is blamed for saddling the carrier with some of the highest costs in the industry.

The Air Transportation Stabilization Board sighted the carrier’s high costs when it rejected the company’s request.

In a letter to Chief Financial Officer Jake Brace, the Air Transportation Stabilization Board wrote that “even with the benefit of United’s proposed cost reduction initiatives, United would remain among the highest cost carriers in the industry.”

The Board also concluded that United’s revenue projections were unreasonably optimistic and that it underestimated the threat from low-cost airlines.

“In the Board’s view, United’s management presented a business plan that does not position the company to meet the challenges of the current airline industry environment and to achieve long-term financial stability,” the letter also said.

Analysts expressed hope that the carrier could emerge from bankruptcy.

“We think that a bankruptcy filing is probably the best thing that could happen to UAL Corp. since hopefully it will allow the company to get out of its current flawed structure of majority ownership by employees,” Deutsche Bank airline analyst Susan Donofrio told Reuters.

“If they make peace with labor, they will come out of Chapter 11 stronger than they’ve ever been,” Darrell Jenkins, head of George Washington University’s Aviation Institute, told the AP.

If United does file Chapter 11, it would be the largest bankruptcy in airline industry history.