NYTimes.com Article: One More Opportunity for United on Loan Backing

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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


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