A day after the federal government rejected United Airlines' $1.8 billion loan-guarantee application, executives scrambled to assure major corporate clients and frequent fliers that service would not be interrupted and to determine whether there was a way to avoid a bankruptcy filing.
United's board is scheduled to meet tomorrow, and some analysts expect the board to announce plans to file for bankruptcy after the meeting.
The decision by the federal Air Transportation Stabilization Board to turn down the bailout request of the nation's second-largest airline but approve those of five other airlines raised questions among some key lawmakers about the board's decision-making process. The board was created by lawmakers last year after the terrorist attacks to help the financially ailing airline industry.
Sen. John D. "Jay" Rockefeller IV (D-W.Va.), chairman of the Senate Committee on Commerce, Science and Transportation's aviation subcommittee, said Congress should "hold the ATSB accountable" for its decision. "The ATSB's actions to date have not come under any real scrutiny; however, given their most recent actions, it's time for Congress to hold the ATSB accountable. The board's actions leave many unanswered questions."
Shares in parent UAL Corp. lost two thirds of their value on the New York Stock Exchange yesterday, with trading halted for the session's first four hours of trading while the exchange reviewed UAL's qualifications to continue being listed. In heavy afternoon trading, shares plunged $2.12, or 68 percent, to close at $1 -- the lowest level in decades as Dow Jones & Co. dropped United from its transportation index, replacing it with United Parcel Service.
United executives spent yesterday meeting with major corporate clients as well as sending e-mails to some 40 million frequent fliers, assuring them that their service won't be interrupted. United also took out full-page advertisements in The Washington Post and other newspapers that serve cities where United has large operations. United is Dulles International Airport's largest carrier.
The Bush administration left open the option that the airline could submit a new loan guarantee application. But sources close to the federal board said that for United to get a loan guarantee it must overcome major obstacles. The board was harshly critical of its business plan and skeptical of its profit projections.
In addition, United is working under a tight deadline. Next week, United must make $920 million in debt payments. Its first payments totaling $300 million are due Monday, while a payment of $575 million is due by Thursday.
Furthermore, William Rochelle, a bankruptcy lawyer who has worked on US Airways, Continental Airlines and Trans World Airlines cases, said the government's rejection could lead United's main suppliers of fuel, parts and food to begin asking for payments up front, further deleting United's cash balance. "If it were a client of mine, I would have been recommending for several weeks that they not extend credit unless they're prepared to lose," Rochelle added.
United has been in negotiations to borrow as much as $2 billion from various banks, including Citigroup Inc. and J.P. Morgan Chase & Co., to use if it filed for bankruptcy, according to analysts.
But Rochelle said without the loan guarantee, United may have problems securing that money. He said potential lenders want to know "what is available immediately and what has conditions." For example, when US Airways filed for bankruptcy in August, the airline was able to attract interim financing because the government had already conditionally approved the airline's $900 million loan guarantee.
United, which has one of the highest cost structures in the airline industry, has been struggling with massive losses for more than a year. At the end of its third quarter, United had about $1.65 billion in cash. It is losing about $8 million a day. Those losses could increase as the winter weather worsens and flights are delayed or canceled and fewer travelers opt to fly, say analysts.
As its economic problems worsened, it had problems raising money and in the summer asked the government to guarantee loans. But a source close to the ATSB said the plan was deficient on several fronts. For instance, the airline offered up its fleet of planes as collateral, but the government said the planes were worth less than United's estimates because drastic flight reductions by the industry over the past year have left thousands of planes sitting idle in Western deserts.
In addition, the board decided that United's most prized possessions -- its Pacific routes -- were insufficient as collateral because of the uncertainties over whether the routes would be flown and by whom, the source said. Various government approvals are needed for those international flights. And the board said the $5.2 billion United has won in concessions from labor, together with the revenue projections, were insufficient.
Wall Street analysts say the board will have to make some tough decisions tomorrow. "There's only one thing left for them to vote on, and that's Chapter 11," said Ray Neidl, an airline analyst at Blaylock & Partners.
Stephen R. "Randy" Canale, president of United's machinists union and a member of the United board, said, "If we don't put together a plan that can secure a loan from the ATSB, I'm certain the company will be seeking Chapter 11 at that point."
United spokesman Rich Nelson said he couldn't give a "definitive answer" as to what the airline would do.
House Speaker J. Dennis Hastert (R-Ill.), who supported a loan guarantee for the Chicago-based carrier, was "disappointed" by the ATSB's decision, according to his spokesman, Peter M. Jeffries. "It only makes sense to approve the loan right now because of the high travel season and the economy in a precarious position," Jeffries said, adding that the board's rejection "puts a negative jolt into both of these things."
If the Chicago-based airline files for bankruptcy, the biggest challenge for Glenn F. Tilton, the airline's chairman and chief executive, will be winning the support of its 70,000 employees. Employees own 55 percent of the company, and the carrier has struggled for years with serious labor problems. The mechanics turned down wage concessions that United had thought might help its case before the loan guarantee board.
"If United can go through this without any travel disruptions because of labor, they'll be fine," said Darryl Jenkins, head of George Washington University's Aviation Institute. "But one disruption by labor, travelers will start booking away and the airline could fold."
Yesterday, John Hancock Financial Services said it might have to write down $85 million of investments in UAL, the insurer's single biggest corporate debt holding.
Staff writers Juliet Eilperin, Ben White and Katherine Shaver contributed to this report.