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Watch the trailer at: http://www.foxsearchlight.com/theclearing/index_nyt.html \----------------------------------------------------------/ United Again Denied U.S. Aid to Emerge From Chapter 11 June 29, 2004 By MICHELINE MAYNARD The third attempt by United Airlines to get a package of government loan guarantees failed yesterday, and it will not get a fourth chance. United, the nation's second-largest airline, now faces the daunting task of emerging from Chapter 11 bankruptcy protection without the federal aid it was counting on. To persuade lenders and investors to put up the money it needs, the airline is expected to turn to its workers for new cuts in jobs, wages and benefits on a scale approaching the $2.5 billion a year that they have already accepted since the airline filed for bankruptcy in 2002. The 3-to-0 vote by the Air Transportation Stabilization Board ended nearly two years of efforts by United, a subsidiary of the UAL Corporation, to secure loan guarantees. The board was created in the wake of the Sept. 11 attacks to help stabilize the aviation industry, but analysts said the decision to shut the door on United might instead touch off a fresh round of turmoil in the industry. With United having to make deep cuts in labor costs to survive, analysts said that competitors like AMR's American Airlines and Delta Air Lines would be under intense pressure to follow suit, and one or more of the major full-fare airlines might be forced out of the game as a result. In an 11th-hour effort to sway the board, United reduced its request for federal backing by $500 million, to $1.1 billion, after the board rejected its bid for $1.6 billion in guarantees on June 17, a decision that was enveloped in political controversy. Closing the United case effectively ends deliberations by the board, which includes one representative each from the Treasury and Transportation Departments, and the Federal Reserve. The board will now exist mainly to oversee the loan guarantees, totaling $1.56 billion, that were awarded to six other airlines during its tenure. For now, the board's decision has little effect on passengers. The airline, based near Chicago, has continued to operate its full system of domestic and international routes while under bankruptcy protection. But it put immediate pressure on the airline's management to find lenders, and probably new equity investors as well, who are willing to provide $2 billion or more in new capital. The company must move swiftly. It faces a July 15 deadline for a crucial decision on whether to continue funding its employee pension plans, and a Sept. 15 deadline for making a $700 million contribution to those plans. July is also when its time runs out to present a restructuring plan to the bankruptcy court, though it may get another extension. United said yesterday that it disagreed with the board's decision, but that it was "already moving forward to secure the exit financing we need to take United out of bankruptcy." Referring to the board by its initials, the airline said, "The message from the A.T.S.B. is that we can get the exit financing we need on our own." United officials and the airline's financial advisers have already begun work on a plan that could include proposals for fresh cuts of $2 billion to $2.5 billion a year in wages and benefits, people involved in the effort said yesterday. United warned employees last week to expect another round of cost-cutting, without mentioning a figure. United's unions reacted with dismay to the board's ruling, but at the same time made clear their opposition to any further wage or benefit cuts. Mark Bathurst, chairman of the pilots' union, said the group expected solutions to United's crisis to be found "without the company again turning to employees, who have already provided significant financial relief." The International Association of Machinists was more blunt. Randy Canale, president of District Lodge 141, called on United to resist efforts to use employees as "human fertilizer" to satisfy potential lenders. "It will not serve United to exit bankruptcy at the expense of thousands of front-line employees, on whose backs the airline's recovery ultimately rests," Mr. Canale said in a statement. The board rejected United's original application in December 2002 because it found the airline's financial plans unrealistic, but gave United permission to try again. The second application was rejected June 17 on a 2-to-0 vote, with the board saying that United had not shown either that it was unable to get financing on its own or that it was a "necessary part" of the country's transportation system, two requirements for granting loan guarantees. After the second vote, the Treasury Department, whose representative had voted no, and the Transportation Department, whose representative had abstained, decided to offer United another opportunity to amend its application, a chance that no other airline had been given. That move came after the Treasury secretary, John W. Snow, was contacted on the airline's behalf by the House speaker, J. Dennis Hastert, Republican of Illinois, United's home state, who has been a vocal advocate for the airline. A senior White House official also called Mr. Snow, expressing concern, according to people close to the situation. United reduced the amount of the guarantees it sought by nearly one-third, cut their duration to five years from seven, and pledged to find more private financing. But yesterday, all three board members - Treasury Under Secretary Brian C. Roseboro; Edward Gramlich, a governor of the Federal Reserve; and Jeffrey N. Shane of the Transportation Department - voted no. United's applications roiled the industry in a two-year debate. Even the third and smallest loan-guarantee package it requested would have been larger than any other the board granted. US Airways was given $900 million in guarantees in 2003, helping it emerge from bankruptcy. Many of United's competitors, large and small, lobbied publicly and privately against giving it federal assistance. And even those who took no stand said they were upset by the process. Herbert D. Kelleher, chairman of Southwest Airlines , said in an interview this spring that the board's loan guarantees had distorted industry competition. David Neeleman, chief executive of JetBlue Airways, said in an interview last week that the situation had turned into "a bit of a circus." At the beginning of the year, analysts had expected the airline industry as a whole to turn a small profit this year, for the first time since 2000. But sharp increases in fuel costs since then mean that the airlines are now expected to lose at least $3 billion in 2004. Executives at United, including its chief executive, Glenn F. Tilton, and its chief financial officer, Frederic F. Brace III, had insisted before the second vote that United could emerge from bankruptcy with or without federal assistance. Now, the airline will have to prove that contention. "Essentially, the federal government has called United's bluff," said Jan K. Brueckner, professor of economics at the University of Illinois. United, which has interim financing to last it through the end of the year, had been counting on a combination of federally backed loans and new private money to emerge from bankruptcy sometime this fall. In December 2003, it said it had lined up $2 billion in exit financing from J. P. Morgan and Citigroup, but most of that was contingent on a yes vote from the board. Both banks said yesterday that they were continuing to work with United on its exit strategy, but that it was too early to comment on the specifics of any new strategy. Robert W. Mann Jr., an industry consultant based in Port Washington, N.Y., said it would probably take the rest of the year for United to find investors, cut its costs and address other outstanding issues in its bankruptcy case. He predicted that United would not be able to emerge from bankruptcy protection before the spring of 2005 at the earliest. Judge Eugene C. Wedoff of United States Bankruptcy Court has given management the exclusive right to file a reorganization plan for the airline only through July 30. At the end of May, the airline asked for a three-month extension, to Sept. 30, but the judge granted only one month. Analysts said that the crucial area where lenders and investors would want to see United make significant new cuts was its pension plans. Beyond the $700 million cash payment due in mid-September, United needs to pay some $4.1 billion over the next five years to fund its pensions, which cover 62,000 active and 27,000 retired workers and have not yet been touched. According to Standard & Poor's, the financial rating agency, United's operating costs are higher on average than those of the industry's largest carrier, American Airlines, which persuaded its unions to grant concessions last year on the threat of a bankruptcy filing, or Continental Airlines, which went through bankruptcy twice in the 1980's and 1990's. People who have been briefed on United's internal deliberations said that the airline might now strive to reduce its costs far below those of American or Continental and closer to low-fare carriers like Southwest and JetBlue, two of the industry's leanest companies. If that happens, rivals like Delta and Northwest Airlines, which are already talking to their unions about concessions, may have little choice but to turn up the heat. United, in its statement yesterday, said its lenders "continue to be tremendously supportive of us." Saying that its new capital will come largely through debt, United's statement added, "We are now holding discussions with our lenders and others to determine what an appropriate overall capital structure might be." In a research report issued after the board's third and final vote, S.& P. said that United's ability to attract new capital would depend both on its own efforts and on an absence of any external events like a terrorist attack or a further rise in fuel prices, which could scare off investors. Professor Brueckner said the advantages of United's old structure, with a broad route system serving many small American cities as well as major outposts abroad, might not be as attractive as it once was. In the United States and elsewhere, low-fare airlines are grabbing a greater share of passengers and earning profits by keeping costs low. "You need a blank slate for the old airlines to be competitive with low-fare airlines, and we're simply not there yet," he said, " It's simply so difficult to erase the historic impact of these carriers." He added: "I wouldn't want to see United go away. It's part of our national psyche. But on the other hand, you have to let the market do what it will." Riva D. Atlas contributed reporting for this article. http://www.nytimes.com/2004/06/29/business/29air.html?ex=1089534642&ei=1&en=797a82467d464fe2 --------------------------------- 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! Click here: http://homedelivery.nytimes.com/HDS/SubscriptionT1.do?mode=SubscriptionT1&ExternalMediaCode=W24AF HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2004 The New York Times Company