For the second time United Airlines has had its application for a government-backed loan rejected, forcing the carrier to rethink its bankruptcy exit strategy.

United Airlines is to determine its own future after the stunning rejection by the US Air Transportation Stabilisation Board (ATSB) guarantee of a $1.6 billion loan that United sought. It is the second time the board, created after 11 September, has rejected a United application.

The first rejection precipitated United's December 2002 bankruptcy filing, and the carrier's strategy to emerge from bankruptcy court protection had been based on winning the government backing for an application it revised and updated. It would have been the basis for a $2 billion private financing package United had negotiated.

However, the ATSB says that two of three of its members believe that "the likelihood of United succeeding without its loan guarantee is sufficiently high so as to make a loan guarantee unnecessary". United, says the board, has cut its costs and strengthened its competitive position strongly while private sector credit markets have been improving. In the days before the rejection, United executives said they could succeed without the federal backing; in the days following the rejection, United appealed the decision and enlisted its key ally on Capitol Hill, House Speaker Denny Hastert, a powerful member of Congress from the Chicago area - home to United and many of its employees.

However, political clout alone may not be enough to help United in an election year in which anti-business sentiment is on the rise. Global Aviation Associates consultant Jon Ash says: "After 18 months of revising its application, it became clear that United's problems go back before the 11 September crisis that the ATSB was created to address, and it is now time for United to go to plan B."

After appealing the ATSB rejection, United began a search for new investors, prompting wide speculation that the Texas Pacific fund would step in. That investor group, which had also backed Continental and America West in their emergence from bankruptcy, was the original backer of US Airways before that struggling carrier found an investor in the Alabama state pensions fund. Now out of bankruptcy court with the aid of a smaller ATSB loan guarantee, US Airways is struggling to avoid a return trip into reorganisation, a dilemma that United's opponents had cited in urging the board to turn down this latest request.

United also prepared to negotiate further concessions from its suppliers, but held off making immediate demands of labour. It would need at least $400 million in new capital, possibly twice that much, and must address under-funded pensions liabilities of as much as $10 billion. But analysts including Sam Buttrick of UBS expect United to survive.


Source: Airline Business