For the second time in 18 months, the federal government late last week rejected United Airlines' application for a federal loan guarantee, setting the stage for more restructuring and a likely retrenching at the world's second-largest carrier.
The first rejection by the Air Transportation Stabilization Board, in December 2002, sent United to bankruptcy court. This rejection, which denied the carrier $1.6 billion in federal backing for a $2 billion loan package, will keep it there for the foreseeable future. ATSB, however, left the door ajar, hinting it would evaluate additional information or changes to the carrier's application.
Following the rejection, United issued a statement declaring it "premature," saying, "We do not believe that the Board was made fully aware of the important modifications United was willing to bring to the table."
ATSB, which was created by Congress shortly after the 2001 terrorist attacks, made clear its opinion that United is not in need of federal support, citing the carrier's cost reductions and improving airline industry credit markets. Moreover, ATSB said "a guaranteed loan to United is not a necessary part of maintaining a safe, efficient and viable commercial aviation system in the United States," a requirement of the legislation that established the board.
The company's own statements during the past several months suggested improving financial performance, excluding fuel costs, and an ability to emerge from bankruptcy protection without the nod from ATSB. Such assertions may have undermined United's case for support
(see editorial, which went to press prior to ATSB's decision).Nevertheless, undersecretary of transportation for policy Jeffrey Shane, the U.S. Department of Transportation's representative on the three-member ATSB, voted to defer the decision for one week to allow further discussion between the board and United. The Federal Reserve Board and the Treasury Department each voted to deny, though Treasury said it "is open to reconsidering" an improved application "in the coming days."
If and when ATSB closes the door for good, United is far from finished. Industry analysts said liquidation, at least in the foreseeable future, is highly unlikely. The company, however, would have to take dramatic and painful steps, possibly including a termination of employee pension plans, a fresh round of wage concessions, capacity cuts and a realignment of its global network.
"United would probably also be forced to sell assets and restructure its route system," said Helane Becker, analyst at The Benchmark Co. "This would benefit Frontier Airlines in Denver, American in Chicago, JetBlue and American in the transcontinental market and Southwest Airlines on the West Coast."
UBS analyst Sam Buttrick earlier this month said a rejection would lead to "some combination of a longer stay in the protective custody of bankruptcy, redoubled cost-reduction efforts to achieve a cost structure that would attract market capital and perhaps some modest level of network downsizing."
In addition to a potential retreat in the domestic market—which could impact United's fledgling low-fare Ted operation—United has lucrative international assets, including Asian routes. Some competitors also would jump at an opportunity to grab United's highly coveted London Heathrow slots.
"While not immediately pushing UAL into oblivion," said J.P. Morgan Securities analyst Jamie Baker, "a rejection would likely send UAL back to the drawing board."