NEW YORK (CNN/Money) - United Airlines appeared to be flying toward bankruptcy Thursday after a government panel voted two-to-one against an application for $1.8 billion in federal loan guarantees.

Shares in the stock of United parent UAL Corp. (UAL: Research, Estimates) lost more than two-thirds of their value, closing down $2.12 at $1.00, as the New York Stock Exchange weighed delisting the shares in the employee-controlled company.

A source at one of United's banks told CNNfn that $1.5 billion in special financing is in place, which would become available in the event of a Chapter 11 bankruptcy filing. The so-called debtor-in-possession, or DIP, financing is used to fund operations during a bankruptcy reorganization and is often easier to obtain for financially troubled companies because the lenders get paid back before other creditors. United reportedly would be able to use about half of the financing immediately.

But Scotty Ford, president of the International Association of Machinists unit that represents the mechanics at United told CNN/Money Thursday evening that he does not expect a bankruptcy filing within the next couple of days.

And credit rating agency Standard & Poor's downgraded UAL's debt Thursday to its lowest possible level, a "D" rating, saying that default on $920 million in debt payments the company missed Monday is now certain, as is a bankruptcy filing.

"UAL and United should be able to reorganize in Chapter 11 [of the bankruptcy code, which allows continued operations], assuming no serious damage to airline revenues relating to a war in Iraq or terrorism, but the bankruptcy process could be long and difficult," the S&P report said.

A United spokesperson said told CNNfn the company has not made a final decision whether to file for bankruptcy. But according to one source familiar with the situation, the company's board is expected to meet on the weekend, and a final decision is likely at that time.

The airline operated a normal schedule of flights Thursday, and vowed to continue flying even if it is forced to seek bankruptcy court protection. While UAL Corp. CEO Glenn Tilton told a Chicago television station that a bankruptcy filing is "not a foregone conclusion," analysts said they saw no alternative for the world's No. 2 carrier. An airline spokesman said company executives were meeting Thursday with the unions and other "stakeholders" such as suppliers and overseas airline partners.

Passengers of the airline are expected to see little if any immediate change in service even if there is a bankruptcy filing, but one business passengers group predicted higher fares and less competition if the airline is forced to shrink significantly in bankruptcy court. But others said the growth of low-fare carriers, which played a large role in financial problems of old-line carriers such as United, should keep fares in check.

United had been counting on the federal loan guarantee program, passed in the wake of the Sept. 11 terrorist attack to help an industry battled by a sharp drop in demand for air travel. The company had said in several statements and filings that it would have to file for bankruptcy without the guarantees. It faces the end of grace periods on missed debt payments totaling $920 million next week, and it has said it needed the guarantees to make those payments.

But the Air Transportation Stabilization Board (ATSB), the three-member panel set up to weigh loan application requests, said it doubted that United would be able to get out of financial problems even with its help.

The president of the International Association of Machinists,Tom Buffenbarger, responds to the ATSB's decision not to provide a loan guarantee. Play video (QuickTime, Real or Windows Media)

"The board believes that the business plan submitted by the company is not financially sound," said the ATSB in a statement Wednesday evening. "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 added the plan is based on "unreasonably optimistic revenue projections."

"The board believes that with a more reasonable revenue forecast, United's revenues and costs still would not be aligned, even with the benefit of all proposed cost reduction initiatives," the board said.

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President Bush did not criticize the board's decision to deny United the loan guarantee. White House spokesman Ari Fleischer told reporters Thursday that "the president respects the decision...[it] was made on the merits by the board based on the extensive financial information available to them and based on the criteria that were established in the law."

United said it would consult with union leaders and other stakeholders to determine its next move.

"Whatever course we chart, it should be emphatically clear that United will continue to fly and to deliver exceptional service to our customers worldwide," said Tilton's statement.

ATSB Executive Director Dan Montgomery said the vote was not a final one, that United could revise its business plan and resubmit its application. But time is running out for United, and many analysts expect a filing over the weekend. The first grace period, for $300 million owed a German bank, expires Monday.

The Air Line Pilots Association issued a statement blasting the vote, and saying it had not yet given up hope that the airline could avoid 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 the statement from Paul Whiteford, a United captain and the head of the ALPA unit at United. "We believe the purpose of the ATSB is to stabilize, not restructure, the airline industry. 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."

The decision came a day before a scheduled vote by the airlines' mechanics on a 7 percent wage cut designed to save the airline $700 million over the next 5-1/2 years, part of a $5.2 billion labor cost reduction package put together by the carrier in an attempt to get the help.

But the International Association of Machinists, which represents the United mechanics, announced late Wednesday that it had cancelled the vote, calling it "pointless." Mechanics rejected a nearly identical wage package last week, and the vote had been seen as a last chance to win the loan guarantee.

The ATSB's Montgomery said that the panel considered the application as if the mechanics had approved the concessions package and all the promised cost savings were in place.

The collapse of the loan guarantee application and the mechanics' rejection of their concession package means that all the wage concessions granted by other union employees are now void, leaving most employees at or near industry-leading wage scales while the airline continues to lose more than $7 million a day.

Even if the airline is forced to file for bankruptcy protection, it may continue to operate. Many carriers, including US Airways Group, which filed for bankruptcy protection in August, have continued to fly while operating under bankruptcy.

United could see some continued loss of passengers and market share to competitors, as some passengers fear booking flights, and building up coveted frequent flier miles, on a carrier whose long-term outlook is uncertain.

"We're all worried about losing our miles. Do you want to put additional miles on an airline that might not make it? Probably more people have frequent flier miles than stock," said Alison Baldwin, 32, an attorney in Chicago who was traveling to Dallas through O'Hare.

But past bankruptcy filings by airlines has helped assure passengers that it is OK to stay with United, especially since some bankrupt carriers that have ceased independent operations, such as Trans World Airlines, had their frequent flier programs rolled into the carrier which bought them.

There was also debate on the impact a bankruptcy could have on fares. The oversupply of airline capacity is one of the factors driving fares down and driving up losses through much of the industry. If United removes a significant portion of its fleet from service, it could affect the supply and demand equation in the industry.

"This decision will put at significant risk the interests of the consumer, United Airlines' employees and the economy," said a statement from Kevin Mitchell, chairman of the Business Travel Coalition, who predicted higher fares would result even if United is not forced to cease operations.

But John Heimlich, director of economic and market research for the Air Transport Association, the industry trade group, said that it's not clear that fares will rise, especially in the short term. He pointed out that the carriers gaining the most market share in recent years have been the low-cost, lower-fare carriers that could see further gains from a smaller United. And he said other carriers also are working to lower their costs, not raise fares, as the way to stem losses.

The United employees are near certain losers from the financial problems. The carrier has already been announcing staff cuts and seeking wage concessions. The bankruptcy filing could wipe out the Employee Stock Ownership Plan that controls a majority of the shares of the company. Pilots at United have about a 25 percent stake in the airline, while members of the IAM have about a 20 percent stake. The employees also could lose their labor contracts' protections under bankruptcy.

"These are hard decisions, and I certainly feel for the affected employees," said a statement from ATSB chairman Edward Gramlich. "At the same time, the loan board has a responsibility to taxpayers, and to fostering the long-term health of the airline industry. Given our conclusion that the business plan submitted by the company is financially unsound, I believe it best not to approve the United proposal."

Political leaders, including U.S. House Speaker Dennis Hastert, who like United is from Illinois, had lobbied on behalf of the loan guarantees.

Competing airlines, including No. 1 carrier American Airlines (AMR: Research, Estimates) and No. 5 Continental Airlines (CAL: Research, Estimates), had lobbied against the loan guarantees, saying United's problems were due to its cost structure, not the Sept. 11 terrorist attack, and that it should solve its problems without federal assistance.

"The U.S. government did the right thing for the taxpayers and for competition by letting the marketplace determine winners and losers," said a statement from Continental on Wednesday.

Montgomery denied that lobbying by politicians and other carriers had an effect on the staff, saying they had looked only at the fundamentals of United's business plan.