United Grounded?

Ever have one of those days when everything has gone so wrong that you expect, any minute, a knock at your door from someone arriving to kick your dog? Yeah, me too. And I don't even have a dog.

Yesterday had to be that kind of day for UAL Corp.'s United Airlines. The U.S. government rejected United's application for $1.6 billion in loan guarantees, its second such appeal in the last 18 months. (The first came in December 2002, for $1.8 billion, and was also turned down.)

No doubt the airline business has been tough lately. Rising fuel prices have threatened to take a bite out of profits. And the CEO of long-troubledDeltaAir Lines (NYSE: DAL  ) this week reported that bankruptcy was still an option for the company. In the wake of such news, United's predicament is hardly surprising.

Interestingly, United spun news of the rejection as good, citing the government's claim that United doesn't need its backing. The company appears to have seen this coming, for a week ago CEO Glenn Tilton said United would exit bankruptcy with or without federal loan assurances. (Fool Salim Haji today said the government's rejection will be beneficial to the industry, as it will help even the playing field for the low-cost carriers.)

It won't be easy either way. According to a report in the Chicago Tribune, United needs $2 billion to repay loans it received to ride out bankruptcy. Citigroup (NYSE: C  ) and JP Morgan Chase (NYSE: JPM  ) had agreed to provide much of the funding, figuring federal backing was likely. Now, without it, United could be forced to sell a hefty ownership stake and get more sacrifices from employees to earn the moola needed.

The runway to a comeback appears long for United, and for the industry in general. Yet despite yesterday's setback, United is making progress. On Tuesday, it reported a modest operating profit for May, including a 7% rise in passenger revenue from May 2003. Cost per seat mile flown, a key measure, also dropped 15% over the same period. Indeed, it may be a huge mistake to write off the airline industry entirely in your investing. David Gardner, for example, has chosen JetBlue (Nasdaq: JBLU  ) as a Motley Fool Stock Advisor pick, and he's walloping the market. If you're interested in conducting your own research, here's a few other places to look:

Which airline will you fly for vacation this summer? Haven't figured it out yet? Take a peek at Tim's 5 Tips for a Foolish Trip for some money-saving ideas.

Motley Fool contributor Tim Beyers owns no stake in any of the companies mentioned, but he has family members who have worked for UAL. You can view his Fool profile here.


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