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June 13, 2004 By MICHELINE MAYNARD THE wounded on the battlefield are the most dangerous, according to the old saying, because they distract attention. Though said about war, it could apply to the airline industry, too, where the competitors of United Airlines face just such a hazard. United, which filed for bankruptcy protection in December 2002, is expected to receive an answer soon on its application for $1.6 billion in federal loan guarantees. Though United says its bid for approval appears on track, some analysts have begun questioning whether its case is strong enough, given the cloudy atmosphere surrounding the troubled industry. Whether United wins or loses, competition among airlines will only become tougher, whether in fare wars or in the search for badly needed financing. Industry officials, including those at United, are nervous because they have no way to know when the Air Transportation Stabilization Board will rule - or what it will decide. Since its creation in 2001, the board, whose three members are from the Treasury Department, the Transportation Department and the Federal Reserve, has operated mostly in secrecy. It emerges only when it issues a ruling or, in rare cases, seeks more information from an airline seeking its assistance. The board, which turned down United's original application for $1.8 billion in loans, sending it into bankruptcy protection, may be preparing to make its final decision about the airline. Its staff, though still seeking information from United, a unit of the UAL Corporation, has competed a number of interviews with industry officials and experts. Just a month ago, the prevailing wisdom was that United's request for loan guarantees would be granted, with conditions. That thinking was spurred as much by politics as by the steps United had taken to streamline its operations. Its bid has had the tireless support of J. Dennis Hastert, the House speaker and a Republican of Illinois, the airline's home state. Perhaps emboldened by expectation, UAL's chief executive, Glenn F. Tilton, and his management team set off on a barnstorming publicity tour in May. Mr. Tilton said repeatedly that the airline had met the requirements for a loan - and that it deserved it, given that it had cut labor costs $2.5 billion a year and had saved billions more in operating costs. But that may have been a premature victory lap. United also disclosed last month that fuel costs in 2004 would be $750 million more than it had projected. That news came only months after US Airways, which received a $900 million loan guarantee, the biggest so far, fell technically into default on its loans and was forced to renegotiate their terms. Moreover, United remains in a court battle with unsecured creditors over prices it pays to suppliers, although it reached agreement with its unions last week on another thorny issue, health care cuts for retirees. A bankruptcy judge, Eugene C. Wedoff, is expected to act on United's request for more time to put its emergency plan in place. Mr. Tilton, who once said United might be able to exit bankruptcy protection by December 2003, now says this fall is more likely, assuming the loan application is approved. Approval is still the most likely outcome, industry officials grudgingly acknowledge, because United is a powerful economic force. It has 80,000 employees, many at its big operations in Chicago, Washington, San Francisco and Denver. If the loan guarantee is approved, the greatest impact may be on American Airlines, which is in a cutthroat battle with United at O'Hare International Airport in Chicago, where together they control 80 percent of the traffic. Both have had their wrists slapped by the Transportation Department for packing in too many flights, prompting modest cutbacks. Yet American is in better shape, having cut its costs over the last year and wrested concessions from its unions on the threat of bankruptcy. Its operating costs are now lower than United's, according to an estimate by Standard & Poor's Ratings Services. Philip A. Baggaley, an airline analyst at S.& P., said he saw a strong possibility that United would have to make further cost cuts even if it got the loan guarantee, given the stiff competition from low-fare airlines. Those carriers have raised deep concerns about United's application, saying it would provide an unfair advantage. A replenished United would have more resources to battle them through its low-fare service, Ted, and cheaper tickets on mainline routes. Executives at one airline, who insisted on anonymity, voiced alarm at some United fare cuts, which, for instance, have meant $60 one-way tickets between Salt Lake City and Cody, Wyo., a low-volume route that normally fetches top-dollar fares. These executives said United could hurt itself and rivals on routes that could be lucrative. Indeed, many in the industry say rising fuel expenses alone could cost United its bid for a loan, because it cannot offset those expenses elsewhere. If its bid does fail, one thing is clear: United will not vanish anytime soon. Airlines have hung on for years in bankruptcy protection, even surviving several filings; Continental sought protection twice, in the 1980's and early 1990's. In an interview last month, Mr. Tilton suggested that competitors might face a worse situation if United stayed in bankruptcy protection, where it is shielded from certain expenses and can always cut costs further. United says it has no Plan B. It must take that position publicly; otherwise it would technically not be eligible for a loan guarantee, reserved for airlines without access to capital markets. Yet it has undoubtedly been considering its alternatives. Mr. Tilton and UAL's chief financial officer, Frederic F. Brace III, have said United will emerge from bankruptcy "one way or another." To do so, it will eventually have to find capital. Its bankruptcy financing, already extended once, runs out at the end of this year, and it needs to come up with at least $2 billion to emerge on its own. A prospective lender could dictate severe cuts at the airline, which has steadfastly clung to its assets, even though Eastern, T.W.A. and others had to shed routes and operations in their ultimately unsuccessful struggle to survive. United's drive to become solvent is also likely to threaten Delta Air Lines, which has warned that it, too, may have to seek bankruptcy protection unless its pilots' union agrees to cuts. There is no line of investors waiting to snap up airlines, so United and Delta could be dueling for risk takers. And a desperate but still-breathing United means that the rest of the industry reaps no benefit from a reduction in capacity, something that economists say is long overdue. In an interview last month, the chairman of Southwest Airlines, Herbert D. Kelleher, said the loan board had distorted the industry by interfering with supply and demand. As it tries to bounce back, United will face ever more treacherous skies, given the relentless push by low-fare airlines. Last week, JetBlue picked up options to buy 30 more Airbus planes, on top of 100 Embraer regional jets that it will add in coming months. Southwest is taking delivery of a dozen planes a month over the next few years, while AirTran, Spirit and others have new planes on the way. Mr. Kelleher, whose airline has not taken a stand on United's application, refused to discuss its prospects. But he said it would be dangerous for any airline to go into bankruptcy protection more than once. "You soon run out of assets to finance outside," he said, "and then it may become a question of what you have left." That is a situation United hopes to avoid. Otherwise, instead of simply being an injured player, it could become the next victim. http://www.nytimes.com/2004/06/13/business/yourmoney/13atsb.html?ex=1088223726&ei=1&en=a4b4fae96148dc4e --------------------------------- Get Home Delivery of The New York Times Newspaper. Imagine reading The New York Times any time & anywhere you like! Leisurely catch up on events & expand your horizons. Enjoy now for 50% off Home Delivery! 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