WASHINGTON – United Airlines (search) lost its bid for a $1.6 billion federal loan guarantee on Thursday, prompting new uncertainty about its prospects for emerging from bankruptcy this fall.
The Air Transportation Stabilization Board (search) voted to reject United for a second time, but said it might reconsider the matter.
United, the No. 2 U.S. airline and a unit of UAL Corp., said it was "perplexed" by the announcement and believes the decision was premature.
"We do not believe that the board was made fully aware of the important modifications United was willing to bring to the table," the company said in a statement. "We are respectfully petitioning the ATSB for reconsideration of our pending loan application."
The airline's pilots' union, the Air Line Pilots Association (search), called the decision "a slap in the face" to employees.
United has been in Chapter 11 since December 2002 and sought the loan guarantee to back $2 billion in private financing that is crucial to its restructuring.
But the stabilization board, created after the September 2001 hijack attacks to help struggling airlines, disagreed United's situation is unworkable. It credited cost-cutting moves over the past 18 months and said it believes the company's access to credit markets is improving.
"Given these circumstances, a majority of the board believes that the likelihood of United succeeding without a loan guarantees is sufficiently high so as to make a loan guarantee unnecessary," the board said in a letter to United Chief Financial Officer Frederic Brace.
Company officials have been reluctant to discuss alternative financing. Brace said several months ago that the company would get out bankruptcy "one way or another."
TWO VOTES AGAINST
Federal Reserve Board Governor Edward Gramlich (search), chairman of the stabilization board, and Brian Roseboro, undersecretary of Treasury for domestic finance, voted to deny United's application.
The board's third member, Transportation Department Undersecretary Jeffrey Shane (search), deferred his decision for one week, pending further discussions with United regarding its most recent proposals to the board.
Glenn Tilton, the airline's chairman and chief executive, waged a tireless lobbying campaign in Washington and was in the capital this week in last ditch talks to sway the board.
But the board has been stingy and first rejected United in 2002 for a $1.8 billion guarantee, saying its costs were too high and its business plan inadequate.
United is the first big airline to not get a guarantee. US Airways received a $900 million guarantee to back its bankruptcy financing in 2003.
Some have speculated strongly that US Airways' deepening financial troubles, which prompted it to restructure its loan guarantee payment terms this year, and its uncertain outlook influenced the board in its deliberations on United.
United and other big legacy airlines continue to struggle despite surging passenger volume this summer. They have been especially hurt by record high fuel prices and stiff competition from discount rivals.
The company said recently that this year's fuel costs alone will be at least $750 million more than planned.
In addition to hefty cost cuts, half from labor, United has also renegotiated aircraft leases and will benefit from industry pension relief approved by Congress.
Some industry observers agree with the majority of the loan board that United has a future without a loan guarantee.
"It's a solid airline," said Michael Boyd, an industry consultant with the Boyd Group of Evergreen, Colorado. "It will take longer to get out but there's too much substance to that company for the loan guarantee (decision) to it bring down."
Wall Street has speculated the absence of a loan guarantee may force United to sell some its lucrative assets or shrink further to attract private capital.