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UAL next bankruptcy?
United parent confirms trouble winning federal help; analysts believe bankruptcy filing likely.
August 12, 2002: 12:13 PM EDT

NEW YORK (CNN/Money) - United Airlines parent UAL Corp. is having trouble winning nearly $2 billion in federal loan guarantees it is seeking and rejection could force the world's second-largest air carrier to seek bankruptcy court protection.

A spokesman for UAL confirmed Monday that Jake Brace, the company's chief financial officer, said the airline has been having trouble winning necessary approval from the Air Transportation Stabilization Board, a three-member federal panel established to consider loan guarantee requests. The airline has requested guarantees for $1.8 billion of $2.0 billion in new borrowing.

"We're facing some negative sentiment in Washington. We talk to lots of people in Washington. Their message is: More is needed," Brace said.

Shares of UAL (UAL: down $0.81 to $4.39, Research, Estimates) fell more than 20 percent in early trading Monday.

The airline has won labor concessions from the leadership of the Air Line Pilots Association, although rank-and-file employees have yet to vote on the agreement. Nonunion employees have had a pay cut imposed on them. But the carrier's two other major unions, the International Association of Machinists and the Association of Flight Attendants, have refused to agree to wage concessions.

Concessions by employees and suppliers is one of the elements sought by federal regulators before agreeing to loan guarantees that were included in the post-Sept. 11 federal bailout of airlines. Some analysts suggest that without wage concessions, a bankruptcy filing will follow.

"Without those concessions, we think approval of the loan is unlikely," wrote Jim Higgins, analyst with Credit Suisse First Boston, in a note to clients last week in which he downgraded UAL to a "hold" from a "buy" rating. "Without the guaranteed loan, we believe UAL will have to file for Chapter 11 bankruptcy protection by the end of the year."

Higgins estimates that UAL will be down to less than $300 million in available cash by the end of the year, and said the chance of a bankruptcy filing before the end of the year is close about 75-to-80 percent if there is no loan guarantee.

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"An airline needs a significant amount of cash to operate," he said. "You don't run it to zero."

UAL spokesman Jeff Green said he won't comment on speculation on a possible bankruptcy filing, and Brace also refused to comment.

"We're focused on working with that ASTB and doing what is necessary to get the government loan guarantees," Green said. "A big part of that is getting all employees to participate in the recovery plan."

Vanguard Airlines recently filed for bankruptcy court protection after rejection of its loan guarantee request. US Airways Group has won conditional approval of its loan guarantee request on the condition that it win wage concessions from its employees. It filed for bankruptcy court protection Sunday. But Higgins said while the US Air filing might draw more attention to UAL's plight, he doesn't think it makes a filing at UAL more likely.

"I don't see (UAL) linked to US Airways," Higgins said. "If anything, maybe it will lower the chance of filing because maybe United's labor will understand that Chapter 11 is really an option."

Wage concessions at UAL and US Air aren't likely to spread to other carriers, Higgins said, but it should help contain future wage increases.

"This is not a negative for the industry," said Higgins. "The union leadership at other carriers are going to be hard-pressed to give up anything. What this does do is help to change contracts that are pending."

Chapter 11 allows companies to shed some of their debt and get out from under labor agreements they no longer can afford. UAL confirmed earlier this month that it hired bankruptcy attorneys in the wake of the cash crunch that followed the Sept. 11 terrorist attack.

The company reported unrestricted cash balance of $2.4 billion as of June 30 in its most recent financial statement, but losses are expected to continue into next year even with wage concessions. Analysts surveyed by earnings tracker First Call expect the company to lose $11.37 a share in the second half of this year, an improvement from the $15.80 a share it lost in the first half of the year. They also see a loss of $14.22 a share in 2003.  Top of page

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