United Airlines yesterday was turned down for a third and final time in its bid to win a federal loan guarantee, forcing the airline to try to persuade investors to lend it nearly $2 billion without the government's backing.
The financing is needed to allow the world's second-largest airline to emerge from bankruptcy proceedings. United may be forced to seek further cost cuts to obtain the funding.
All three members of the Air Transportation Stabilization Board voted against approving a $1.1 billion loan guarantee for United's parent, UAL Corp.
The ATSB rejected a United bid for a $1.6 billion loan guarantee on June 17 but allowed the carrier to reapply. The airline reduced its request to $1.1 billion, hoping the lowered amount would sway board members.
But the ATSB yesterday reiterated its earlier decision, saying it believed United had reduced its costs to a level low enough that would allow the airline to secure financing from private lenders without government support.
"The Board believes that airline credit markets have been improving since late 2001 and 2002, . . . increasing the likelihood of United succeeding without a loan guarantee," wrote Michael Kestenbaum, executive director of the ATSB.
Kestenbaum added that the ATSB would not accept any further submissions from the airline. The agency rejected United's first application for a loan guarantee of $1.8 billion in December 2002. Within days of its denial, United filed for bankruptcy, becoming the world's largest carrier to seek Chapter 11 protection from its creditors.
United spokeswoman Jean Medina said the airline has approached potential borrowers about securing financing to exit bankruptcy.
"We expect the exit financing process will take some time," Medina said. "We are moving forward quickly and decisively."
United's new financing will most likely have to be a combination of a new equity investor, secured bank lending and other forms of debt, said Standard & Poor's analyst Philip Baggaley.
But to obtain that financing, Baggaley said, the airline might have to cut its costs further and seek additional concessions from workers. It may also need to restructure its pension plan, he said. The airline has about $4 billion in minimum pension payments due through 2008.
United has already cut its costs by $5 billion a year, $2.5 billion of which came from employees. Many of the airline's workers took 40 percent pay cuts.
United's pilots plan to meet today in Chicago to discuss the possibility of future concessions, said Duane E. Woerth, president of the Air Line Pilots Association.
"The United management will have to make some proposal to United employees. My belief is that proposal will be costly" to the pilots, Woerth said.
An investment banker familiar with United's exit financing talks said the carrier should be able to secure the needed financing because of the steps it has made in its restructuring, but it may take additional time to receive the funding, and concessions from workers, retirees and creditors may be necessary. As a result, he added, United's chances of emerging from bankruptcy this year might be limited.
United had secured from J.P. Morgan Chase & Co. and Citigroup Inc. the $2 billion in financing it said it needed to exit bankruptcy, but that funding was contingent on getting the federal loan guarantees. A source close to the airline said the carrier remained in talks with those lenders but was also in discussions with other potential investors.
Without the federal support, the airline may reduce how much it seeks depending on the interest rate, equity stakes and other terms that might be set by a lender, a source said.
In a statement, Continental Airlines Inc. praised the ATSB decision. "The challenges facing the U.S. airline industry are many, but the most appropriate course of action is to allow the marketplace to determine the shape of the industry."
Following the ATSB's rejection of United's bid earlier this month, the Treasury Department began a probe into whether its member on the board was pressured to change his vote in favor of United.