In This E-Line Federal Government Rebuffs UAL on Loan Guarantee  US Air Seeks OK For Midway Air Regional Jet Service Pact

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U.S. rebuffs UAL on loan guarantee 
By August Cole & Jennifer Waters, CBS.MarketWatch.com
Last Update: 8:23 PM ET Dec. 4, 2002 

CHICAGO (CBS.MW) -- The U.S. government late Wednesday rejected United Airlines parent UAL's application for a $1.8 billion loan guarantee, pushing the No. 2 carrier a step closer to bankruptcy.

The Air Transportation Stabilization Board said the company's business plan was not "financially sound." The independent, three-member board said UAL's (UAL: news, chart, profile) application for backing of most of a $2 billion loan was based on "unreasonable revenue projections."

The ATSB said, however, that UAL can resubmit its application -- a move that seems unlikely and likely futile. 

"These are hard decisions, and I certainly feel for the affected employees," said Edward Gramlich, a Federal Reserve governor and ATSB member who voted against the guarantee. "At the same time, the loan board has a responsibility to taxpayers and to fostering the long-term health of the airline industry."

The ATSB decision -- coming only hours before mechanics were set to vote again on proposed concessions to UAL -- in effect strangles the struggling carrier's ability to pay off more than $900 million in debt due within days. It also essentially wipes out any value left for stockholders of UAL, where 55 percent of all shares were held by employees. 

UAL -- with its shares plunging 50 percent in after-hours trading (see related story) -- said it took heart in the ATSB's language that another proposal could be considered.

"We will consult with our union leaders and other stakeholders and quickly determine what step to take next," said UAL Chairman Glenn Tilton in a statement. "Despite our disappointment, we believe that the work we've accomplished in developing our ATSB proposal will serve us well as we build our platform for the future, regardless of the path we take."

Battling bankruptcy

If United files for protection, it would be the airline industry's biggest meltdown since Continental Airlines' (CAL: news, chart, profile) bankruptcy in 1990. It would also rival the Chapter 11 filing by Global Crossing as the fifth-biggest in corporate history.

Fighting to stave off bankruptcy for many months, the carrier said this week that it would need the ATSB guarantees to pay off $375 million in airplane certification trust debt and $500 million owed to a German bank.

As of the end of the third quarter, UAL had assets of $24.2 billion and debt and capital lease liabilities of $10.3 billion. The company is bleeding through about $7 million a day and unable to secure financing from the capital markets. It also is facing a default rating -- the lowest rung on the debt ladder -- from Standard & Poor's, the credit agency said this week. 

Analysts, who have mainly been of the opinion that the airline would be forced into bankruptcy with or without an ATSB loan guarantee, see a Chapter 11 filing in the near future. Listen: Blaylock analyst Ray Neidl said he sees no alternative to Chapter 11.

But on a conference call with reporters, Dan Montgomery, a spokesman for the ATSB, said the board's decision could be changed. UAL, he said, could theoretically amend its application.

"The action is not a final denial," he said. Montgomery stressed that the ATSB's ruling was not influenced by outside pressures from politicians or industry leaders.

"Our analysis was independent of any outside information, industry analysis or any airline comments in the papers," he said. 

"Our mandate is to review the statute and regulation as passed by the Office of Management and Budget," he said. "We did not have a view on bankruptcy. We were looking at the viability of a business plan." 

Taking a stand

Of the board's three members, Gramlich and the Treasury Department's Peter Fisher were against the deal.

"This is not just about costs, it's about a business plan that is fundamentally flawed," said Fisher, undersecretary of the treasury.

The third board member, Kirk Van Tine of the Transportation Department, favored delaying a UAL decision until Dec. 9.

"The board believes that the business plan submitted by the company is not financially sound. This plan does not support the conclusion that there is a reasonable assurance of repayment and would pose an unacceptably high risk to U.S. taxpayers," the board's statement said.

Betting on relief

Ahead of the announcement, UAL shares had risen 7 cents to $3.12 as Wall Street weighed the likelihood of the federal loan guarantee. See full story.

Sam Peltzman, a professor at the University of Chicago Graduate School of Business, said he was surprised by the board's move. 

"This is the end," he said. "It's been defeated by American Airlines, apparently," Peltzman said, noting that American is a likely candidate for ATSB help.

AMR (AMR: news, chart, profile), parent of American Airlines, did not comment on the action or return calls. 

But an elated Continental Chief Executive Gordon Bethune did. "The U.S. government did the right thing for the taxpayers and for competition by letting the marketplace determine winners and losers," he said in a statement. 

Not everyone is giving up. The pilots union said in a statement that it would keep working to stave off bankruptcy.

"We are extremely disappointed by the decision by the ATSB and do not agree with the board's analysis of United's business plan nor the timing of its announcement," said Paul Whiteford, chairman of the United Air Line Pilots Master Executive Council. 

"We believe the purpose of the ATSB is to stabilize, not restructure, the airline industry," he added.

"We will work very hard over the next few days with both the company and union coalition to evaluate the situation and respond as quickly as possible to achieve an out-of-court recovery for the company," he said. "We continue to believe in the company, in its employees, its franchise, and its future."

United's flight attendant union slammed the ATSB's decision and any proponents for what comes next.

"Anyone in the airline industry who would applaud this decision is a fool. The likely effect of the denial of the loan guarantee is that capital markets will close not just to United, but to all of the major network carriers, who are also in serious financial trouble," said Greg Davidowitch, head of the 24,000-strong United Airlines attendants union.

For Chicago Mayor Richard M. Daley, who had lobbied for government help, called the move a "disappointment and a blow to United and its employees."

August Cole is spot news editor at CBS.MarketWatch.com in Chicago, and Jennifer Waters is Chicago bureau chief. Washington bureau chief Rex Nutting contributed.


Dow Jones Business News
US Air Seeks OK For Midway Air Regional Jet Service Pact
Wednesday December 4, 4:11 pm ET 
By Carol McCleary, Of DOW JONES NEWSWIRES 


WASHINGTON -(Dow Jones)- US Airways Group Inc. is seeking court authorization to assume a regional jet service agreement with Midway Airlines Corp. (Nasdaq:MDWYQ - News) and to provide Midway with funding to cover some startup costs.

In court papers filed Monday, US Airways said that the 10-year service agreement is a "critical" component of its business plan and would provide it with equity and warrants for additional equity in the reorganized Midway.

The agreement would allow Midway to fly regional jets under the US Airways Express banner, with US Airways providing reservation, ground support and other services.

The service agreement, which was contemplated by a special protection pact the two carriers reached in July, provides that Midway will operate 18 regional jets initially, but gives US Airways the power to add up to 48 additional jets to Midway's fleet.

US Airways has agreed to fund Midway's aircraft lease security deposits and other deposits and prepayments, not to exceed $7 million, and provide up to an additional $2.4 million in debtor-in-possession financing to assist Midway in paying customary expenses to get the regional jet operations off the ground.

In return, US Airways will receive an undisclosed amount of equity in a reorganized Midway and be entitled to warrants to buy additional new equity. A term sheet describing the equity agreement was included with US Airways' court papers, which Dow Jones Newswires obtained recently, but all key terms were blackened out.

The deal must be approved by both the court overseeing US Airways' Chapter 11 proceedings as well as the court overseeing Midway's Chapter 11 proceedings.

The U.S. Bankruptcy Court in Alexandria, Va., will consider US Airways' request to assume the agreement at a hearing Dec. 12. The U.S. Bankruptcy Court in Raleigh, N.C., which is overseeing Midway's case, would consider the matter at a hearing Dec. 19 if any objections are filed by Dec. 18. If no objections are filed by then, the Raleigh court would rule on the matter without holding a hearing.

At the Dec. 12 hearing, US Airways also will seek court authorization to examine Electronic Data Systems Corp. (NYSE:EDS - News) under Bankruptcy Rule 2004. In a separate court filing Monday, US Airways accused EDS of failing to honor the " most favored customer" clause of its contract by providing better pricing and terms to American Airlines Inc. (NYSE:AMR - News)

US Airways said that it pays EDS more than $200 million a year for data processing and telecommunications services. The services, formerly provided by Sabre Group Inc., are crucial to the airline, the filing said.

An amended information technology services agreement reached with Sabre and assigned to EDS in July 2001 gives US Airways pricing and other service terms and conditions comparable to those provided to American Airlines.

US Airways said that American Airlines renegotiated its agreement with EDS at the beginning of the year to get more favorable pricing and terms. EDS disputes this.

In requesting a Rule 2004 examination, US Airways wants access to the renegotiated American Airlines agreement so that it can determine whether the terms are more favorable than those contained in its own pact with EDS.

Bankruptcy Rule 2004 allows parties to investigate a debtor's business, records and employees, provided they get court approval.

Objections to the carrier's Rule 2004 motion are due Tuesday.

Separately, the court on Wednesday signed a bridge order temporarily extending the company's exclusive period for filing a Chapter 11 reorganization plan through Dec. 12, when it will consider the US Airways' bid to extend exclusivity through Jan. 31, 2003. Exclusivity was set to expire Dec. 9.

The company has maintained it will seek to emerge from Chapter 11 bankruptcy protection in early 2003. The Retirement System of Alabama's agreement to invest $240 million in the company in exchange for an equity stake in the reorganized airline requires the company to file its reorganization plan by the end of the calendar year.

US Airways listed about $7.81 billion in assets, $10.65 billion in liabilities and $8.3 billion in annual operating revenue when it filed for Chapter 11 protection on Aug. 11. 

-By Carol McCleary, Dow Jones Newswires; 202-628-8916; carol.mccleary@dowjones.com

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