United's Bid For Loan Guarantee Rejected

Airline 'Perplexed,' Says It Will Reapply

UAL Corp.'s United Airlines was turned down yesterday for a $1.6 billion federal loan guarantee, throwing into doubt whether it can emerge from bankruptcy reorganization by the end of the year.

It was the second time the Air Transportation Stabilization Board rejected United's loan guarantee application. The board rejected United's application for $1.8 billion in December 2002. Days later, United became the nation's largest airline to file for bankruptcy.

United executives said they were "perplexed" by the decision and planned to reapply. "We have reason to believe we are in the midst of a process with the ATSB to make our application acceptable and that a decision was premature," said United spokesman Rich Nelson. "We do not believe that the board was made fully aware of the important modifications United was willing to bring to the table."

Indeed, two of the three federal agencies represented on the ATSB said they would be open to reconsidering United's application with more information.

In a prepared statement, ATSB officials said they believed that the airline had made "positive strides" in reducing costs since entering bankruptcy proceedings and that it could probably obtain the $2 billion in financing it needs to emerge from protection without a federal loan guarantee.

During its stay in bankruptcy, United has cut about $5 billion in annual costs, including $2.5 billion from workers -- many of whom took 40 percent pay cuts. The Elk Grove Village, Ill.-based airline, which has a hub at Washington's Dulles International Airport, said it also made a small operating profit in May.

"Given these circumstances, 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," ATSB officials said.

The ATSB was created by Congress to oversee a $10 billion loan guarantee program, intended to stabilize the airline industry following the Sept. 11, 2001, terrorist attacks. Seven airlines have received loan guarantees totaling $1.56 billion.

The board's statement that United probably did not need a loan guarantee was a key argument made by some of United's competitors, which also argued that even if United did need the guarantees, its problems could no longer be blamed on the Sept. 11 attacks.

ATSB Chairman Edward M. Gramlich, a Federal Reserve governor, and Brian C. Roseboro, Treasury undersecretary for domestic finance, voted against United's application. Jeffrey N. Shane, transportation undersecretary for policy, voted to defer the decision for one week pending further board discussions with United.