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Watch the trailer at: http://www.foxsearchlight.com/theclearing/index_nyt.html \----------------------------------------------------------/ One More Opportunity for United on Loan Backing June 21, 2004 By MICHELINE MAYNARD United Airlines, pulling all the political strings it can to avoid a third and presumably final rejection of its application for a federal loan guarantee, may have to make even more painful cuts if it succeeds. The UAL Corporation, United's parent, is getting an unprecedented new opportunity to submit a revised application, a courtesy no other airline has been given, thanks in big part to support from House Speaker J. Dennis Hastert, Republican of Illinois, its powerful Washington ally, and the Bush administration. Even if United is ultimately successful, its employees are facing the prospect of having to grant another round of wage and benefit concessions that would be dictated by the new investor the airline will have to find in order to secure the loan guarantee, and ultimately its exit financing from bankruptcy. The cuts that would be required would be to wages and benefits - including pensions - for United's 62,500 active and 27,000 retired employees. If United fails yet again to win approval for a loan guarantee, then it faces an even more turbulent outlook, as it will virtually have to start over in remaking to company to attract enough capital to become solvent. For now, United is operating normally in bankruptcy, with debtor-in-possession financing in place through the end of the year. After United's latest application was rejected last week by a 2-to-0 vote of the three-member Air Transportation Stabilization Board, Mr. Hastert and a senior White House official called Treasury Secretary John W. Snow, whose agency houses the loan board, to express concern. Treasury's representative, Brian C. Roseboro, the under secretary, had been one of the two who voted no. This week, as United scurries to prepare the third version of its application, government officials are deciding their next move. Over the weekend, there was speculation that the Treasury Department might replace Mr. Roseboro with a board member who would vote yes, a prospect causing apoplexy among United's competitors. Mr. Roseboro could not be reached for comment. But even if that switch were to be made, there is still another hurdle: Federal Reserve governor, Edward M. Gramlich, who joined Mr. Roseboro in voting no. As the loan board's chairman, Mr. Gramlich has sole power to convene a meeting. On Friday, he issued a statement saying that he had not seen a need to consider United's revised application. He added that if United submitted additional information, and other board members were "inclined to reconsider," the board's staff would evaluate the new material - not exactly a ringing endorsement of another vote. No matter what happens, the real question is why United, whose efforts have stretched nearly two years beyond the original June 2002 deadline for loan applications, failed to win the board's approval, not once but twice. Alarmed at the prospect that a federal board would turn down its application for a loan guarantee, United Airlines executives rushed in new proposals the night before the panel met, hoping the information would salvage their case. But the 2-0 vote proved their hopes had been misplaced. The member who abstained from the vote was the Transportation Department's board member, Jeffrey N. Shane, who said that United, the nation's second-biggest airline, should have more time. The last-minute dash to Washington by United executives with new proposals in hopes of staving off a rejection, followed by a 2-0 vote against them, was an exact replay of what happened in December of 2002, with the result that the airline was forced into bankruptcy protection with the opportunity to reapply. The difference this time was the addition of high-level political pressure to the mix. United's defeats have come on proposals that it insisted were fundamentally sound, only to offer frantic revisions when it became obvious that efforts had fallen short. In United's original $1.8 billion bid, the board's staff prodded the airline with a detailed letter listing six areas where it needed to send more information. Regardless, the board turned down United's application, sending it into Chapter 11. That gave United 18 months to figure out what the board might deem acceptable. Actions it took in bankruptcy made its case seem stronger: $2.5 billion a year in wage and benefit concessions from its unions, part of $5 billion in total costs savings; creation of a low-fare carrier, called Ted; and most important, $2 billion in exit financing from J.P. Morgan and Citibank, contingent on the guarantees. The two banks agreed to provide $400 million in financing to supplement the government-backed loans, which United executives repeatedly used as justification of the soundness of their business plan. "They certainly didn't do it because the speaker called and asked them to," United's chief financial officer, F. Frederic Brace III, said last month, referring to Mr. Hastert's known support for United's bid. Before last week's vote, Peter D. McDonald, United's executive vice president for operations, said, "The business plan we've put forth has been validated by Citibank and J.P. Morgan." But the banks' faith, for which they would reap millions of dollars in fees, was not enough to sway the loan board, even though it praised United's improvements. To be sure, the board has maintained an aura of inscrutability since it was created in September 2001 to administer $10 billion in loan guarantees to the airline industry, which was then distraught. None of its deliberations take place in public, and airlines never meet with board members, only its staff, which then relays its recommendations. That may be why United has counted on political influence to round out its efforts, in much the same way that it relied on J. P. Morgan and Citibank to supplement the loan guarantee. Yet, in neither case did it present the board with applications so watertight that no one among United's contentious competitors could question them. That is vitally necessary given experience of US Airways, which fell technically in default of its $900 million guarantee, forcing it to renegotiate the terms. Just as United has sought political cover, the board needs its own cover from United, so that the awarding of the biggest single loan application is never under a cloud. But United did not provide that - in fact, just the opposite. In March, when it appeared low-fare airlines were about to publicly come out against United's bid, on top of behind-the-scenes maneuvering of industry's big players, Mr. Brace vowed that United could come out of bankruptcy whether it received the loan guarantee or not. Executives of the airline repeated that vow in recent weeks. That was fine in terms of machismo, but one stipulation of the loan guarantee is that an airline is cut off from credit markets, a fact the board noted last week in turning down the application, saying in effect it believed United could tap capital markets. Likewise, when United came forward last week with its offer of "enhancements" to its application, on top of faxes and e-mail messages sent to shore up its original application, the airline proved it had been bluffing both times. "Despite having being at it with the board for two years," said Robert W. Mann Jr., an industry consultant, "United was claiming, unbelievably, that it hadn't yet had an opportunity to submit its best and final offer." Now it is facing the likelihood that it will have to do so, thanks to the very political intervention that has extended the life of its application. In a textbook case of be careful what you wish for, Mr. Hastert's bid on United's behalf ultimately will lead to more turmoil for the airline's 67,000 employees, whose jobs he was arguably trying to protect in an election year. Even with a loan guarantee, analysts say the airline is going to have to find new capital of at least $400 million, according to its own financial advisers, and as much as $800 million to $1 billion, according to government analysts' estimates. That would mean a new investor, who will undoubtedly dictate further cuts in the airline's operations to make it competitive and eventually profitable. In a memorable instance, David G. Bronner, US Airways' chairman and lead investor, threatened to put the airline in liquidation if employees would not grant a second set of concessions. The airline, facing another stint in bankruptcy despite federal help, is now seeking its third round. Even with the cuts already made, United's costs are still higher than those at American Airlines, the industry's biggest player, which won concessions from its unions last year, on the threat of bankruptcy, according to Standard and Poor's Ratings Services. Likewise, without a loan guarantee, United will have to find billions in fresh capital, putting management jobs as well as those of its employees at risk. This weekend, The Chicago Tribune, the airline's hometown paper, which endorsed its loan guarantee bid, said in an editorial that United had better get ready for the worst: "United deserved a shot at this loan guarantee, but it's imperative that the airline now plan for life without it." http://www.nytimes.com/2004/06/21/business/21united.html?ex=1088827561&ei=1&en=f7337a085aed06f4 --------------------------------- 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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