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Watch the trailer at: http://www.foxsearchlight.com/theclearing/index_nyt.html \----------------------------------------------------------/ Government Rejects $1.6 Billion Loan Guarantee for United June 18, 2004 By MICHELINE MAYNARD A federal loan board rejected United Airlines' application for $1.6 billion in federal loan guarantees yesterday, saying that it thought the airline could survive on its own without government help. United, the nation's second-largest airline, was the last to apply for a loan guarantee under a $10 billion program established by Congress to aid the airline industry after the September 2001 attacks. It has been operating normally under bankruptcy protection, and the board's decision was not expected to have any immediate impact on travelers or the airline's employees. But United's plans for emerging from bankruptcy depended heavily on winning the loan guarantees, and the board's decision was a major setback. It now faces the daunting task of winning more concessions from its 67,000 workers and finding new financing on its own. The rejection was the second in 18 months for United, which is based outside Chicago. In December 2002, the Air Transportation Stabilization Board rejected United's first request, for $1.8 billion in loan guarantees. That action sent the airline into bankruptcy. This time, United sought a smaller package, hoping to use the loan guarantees as the centerpiece of a restructuring plan. And it enlisted a powerful ally - House Speaker J. Dennis Hastert, Republican of Illinois - to lobby on its behalf. Still, the three-member loan board denied its application on a 2-to-0 vote. The representatives of the Treasury Department and the Federal Reserve voted no; the Transportation Department representative abstained and asked that United be given an additional week to improve its application, which has been before the board for seven months. Though the deadline for new applications is long past, the loan board held out a ray of hope for United, saying it could come back yet again with a third application. That aspect of the decision is bound to ignite controversy among United's competitors; most of them did not seek federal loan packages after deeming the criteria for them too restrictive. To qualify, the board required each airline to demonstrate that it had been harmed by the Sept. 11 attacks, in which United lost two aircraft. Each airline also had to show that it had a realistic chance of paying back the federally backed loans, and that it could not find financing without guarantees. The original deadline for applications was June 28, 2002. United, a unit of UAL, has insisted that it met all the main criteria. But in recent months, its executives, including its chief executive, Glenn F. Tilton, have said they believe that the airline can emerge from bankruptcy with or without federal help. Those comments undoubtedly hurt the airline's case. In a letter to United, the board's executive director, Michael Kestenbaum, said that the board believed that credit markets had improved in recent years, allowing United to find financing for its restructuring. "A majority of the board believes that the likelihood of United succeeding without a loan guarantee is sufficiently high so as to make a loan guarantee unnecessary," Mr. Kestenbaum wrote in the letter, which was addressed to Frederic F. Brace III, United's chief financial officer and the architect of both its applications. In a statement issued last night, United said it believed that the board's decision was "premature," and that if given more time, the airline could have revised its application to make it acceptable to the board. The airline said it was "respectfully petitioning" the board to reconsider its application. Mr. Tilton abruptly canceled an appearance in New York on Wednesday to fly to Washington to meet with the board. At that meeting, Mr. Tilton and Mr. Brace proposed a series of last-minute revisions to United's application, but the board members said they did not believe that the revisions would be enough, Mr. Kestenbaum wrote. Industry analysts were surprised at the rejection. "This is pretty stunning," said Kevin P. Mitchell, chairman of the Business Travel Coalition, which represents corporate travel departments and business travelers. "And the fact that it happened in a political year is even more remarkable." Mr. Mitchell said that it proved that United executives were unrealistic in their approach, having now been turned down twice. "This is bad news for all their employees and retirees," he said, adding that the airline, which has already cut its annual labor costs by some $2.5 billion since it filed for bankruptcy protection, would now have to seek even more concessions. Mark Bathurst, a senior leader of the pilots' union at United, called the board's rejection "a slap in the face to each United pilot and other employee who worked tirelessly and sacrificed greatly over the past 18 months to secure the company's financial survival." The board left unclear just how much time United would have to re-apply for aid. In a news release, the Treasury Department, which oversees the board, said that the airline could return with a revised application in coming days and the department would consider it. But the fact that two of the three members of the board - Edward M. Gramlich, a governor of the Federal Reserve, and a Treasury under secretary, Brian C. Roseboro - voted no signaled that a revamped application from United might again face an uphill battle for approval. Complicating matters, a federal bankruptcy judge in Chicago is scheduled to consider today a United request for three additional months to prepare its restructuring plan. Without the promise of federal assistance, United will have to search for lenders to put up, without federal guarantees, at least the $1.6 billion it sought, and probably more. Apparently expecting to need more money in any case, the airline began the search even before the board's decision. According to people involved in the discussions, United has been trying to arrange several hundred million dollars in new financing, taking it well above the total of $2 billion that it originally thought it would need to emerge from bankruptcy. As part of that effort, United was said to be willing to find a partner to take an equity stake in the airline, a step it had resisted. Those conversations were described yesterday as preliminary, however. The board's rejection is likely to mean more pain for United's workers and retirees. Their wages and benefits have already been cut by $2.5 billion a year, about half of United's total of $5 billion in annual spending reductions. That includes about $300 million that the airline expects to save by cutting health care benefits for 27,000 retirees under a deal reached with unions last week. Along with those steps, United had created a low-fare carrier, nicknamed Ted; brought in a new slate of top managers; and hired Robert Redford to narrate a series of animated TV commercials with the slogan "United. It's time to fly." United tried to bring all its political influence to bear on the board to win approval. Upset by the rejection of United's first application in 2002, Mr. Hastert lobbied tirelessly for approval this time around. Earlier this week, he pleaded the airline's case with Treasury Secretary John W. Snow, department officials said, and the speaker was said to have had another conversation yesterday morning with Mr. Snow, who is in California. United's application was the last pending before the board, and if approved, it would have been the largest loan guarantee package the board granted, equaling the value of all the others combined. Most of United's major rivals, including American, Delta, Continental, Northwest and Southwest, decided not to apply for federal help. The exception was US Airways, which filed for Chapter 11 protection in 2002 and obtained a $900 million package of loan guarantees. Riva D. Atlas contributed reporting for this article. http://www.nytimes.com/2004/06/18/business/18air.html?ex=1088571119&ei=1&en=ae69d10bd981e54a --------------------------------- 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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