United's Bid For Loan Guarantee Rejected

Industry analysts said United now should not rush out of bankruptcy, especially with traditional carriers struggling with high fuel costs and competition from expanding low-cost airlines.

To emerge from bankruptcy this year, United may need additional concessions from its workers and aircraft lease holders to persuade private lenders to agree to $2 billion in loans, said airline analyst Helane Becker of Benchmark Co. Becker said United should be able to secure financing but will probably have to pay much higher interest rates than it would have paid for the guaranteed loans.

United had secured $2 billion in financing from J.P. Morgan Chase & Co. and Citigroup Inc., but that was contingent on getting the loan guarantees.

"I don't think there is any rush for them to exit bankruptcy. Why not wait until oil prices decline and revenue environment improves," Becker said.

Becker said by staying in bankruptcy longer, United could avoid the problems encountered by its marketing partner, Arlington-based US Airways, because it came out of bankruptcy too quickly. After cutting nearly $2 billion of its costs in reorganization last year, US Airways recently said that without another $1.5 billion in cuts, it might have to file for bankruptcy again.

Henry H. Harteveldt, vice president for travel research at Forrester Research, said he was not surprised that United's bid was rejected. "So much time has gone by, many of the challenges United faces are no longer related to the terrorist attacks," Harteveldt said. "Instead they are related to broader business issues."

Although Harteveldt gives United an 85 percent chance of survival without the loan guarantee, he said it faces challenges such as the higher interest rates on private-sector loans and the uncertain prospects for its new low-fare unit, Ted. "United has made substantial progress in improving its business," he said, adding that "there is an awful lot the airline must do."

Some analysts speculated that the rejection may lead to a top-level management shake-up involving chief financial officer Frederick Brace and possibly even Glenn F. Tilton, United's chairman and chief executive.

In rejecting United's first loan guarantee application, the ATSB had criticized United management, and Brace by implication, for presenting unrealistic revenue projections and questioned the company's business plan.

Some members of the management team will "get kicked out," including Tilton, because its task was to obtain the loan guarantee, said Darryl Jenkins, a visiting professor at Embry-Riddle Aeronautical University in Florida.

Blaylock & Partners analyst Raymond Neidl added, "United is going to have to go after a Plan B and to get an investor. Replacement of top management may have to be an option."

United's bid had political and business leaders lobbying on both sides. Speaker of the House J. Dennis Hastert (R-Ill.), whose district includes United's corporate headquarters and its most valuable hub, said that he was disappointed by the decision and that he hoped it was not final.

"It is my understanding that ATSB decision may be premature, and that United Airlines may still be in the process of enhancing its application, to make it more acceptable to those who are making the decision," Hastert said in a written statement. "It is my hope that the ATSB reconsiders its decision, based on those enhancements."