You have to give UAL's (OTC BB: UALAQ) United Airlines credit for trying. After twice being rejected by the Air Transportation Stabilization Board for federal loan guarantees, the beleaguered airline scaled back its request to a meager $1.1 billion and made a third appeal. Apparently, persistence counts little with the ATSB, which again said it isn't interested in dating and issued a restraining order against any future submissions.
United first appealed for federal backing with a $1.8 billion request in December 2002, an application that was summarily dismissed, forcing the airline to seek bankruptcy protection. A second request for $1.6 billion was denied on June 17, when the board concluded that "granting the loan guarantee wasn't necessary to ensure the viability of the nation's aviation system." Today's final ruling against United's third bid was a unanimous declaration that the board saw no justification for reversing its earlier decision.
The latest setback will seriously hamper United's plans to emerge from Chapter 11 bankruptcy by year-end. Citigroup (NYSE:C) and JP Morgan Chase (NYSE:JPM) had agreed to finance a $2 billion exit package, but only if the bulk of the loan was government-backed. United's fate is now in the hands of private investors.
The ATSB was originally established to provide liquidity to the airline industry in the wake of the Sept. 11 attacks. It doesn't exist simply to bail out cost-ridden carriers from slowly fading into obsolescence. Just look at US Airways (NASDAQ:UAIR); it received a $900 million loan guarantee and is now facing the harsh possibility of a second bankruptcy filing. United may disagree with the rationale for today's decision, but ultimately it will profit by it.
Pushing United into the capital markets will force the company to clamp down even tighter on costs. More than $5 billion has been slashed (and another $300 million targeted) from the annual budget, including $2.5 billion in payroll savings, but more needs to be done. Critics are quick to point out that United was losing money even before the terrorist attacks, and private investors are going to be reluctant to jump on board without further cost-cutting, a hard look at the company's drastically underfunded pension, and assurances that the nation's second-largest airline has a solid business plan to counter mounting competition from discounters such as Southwest Airlines (NYSE:LUV) and JetBlue Airways (NASDAQ:JBLU).
Even assuming the best, United's shares are likely to be worthless after the company reorganizes out of bankruptcy. Remember what happened to Kmart (NASDAQ:KMRT) last year? The ATSB has wisely chosen not to arbitrarily abrogate the free-market system. United must find a way to compete effectively, or it will not compete at all.
Need some more in-flight reading material? Try these:
- United Loses, Airlines Win and Fuel Costs Force Shakeout, by Salim Haji
- JetBlue's Soaring Quality, by Alyce Lomax
- Ted's Not-So-Excellent-Adventure, by Tim Beyers
Fool contributor Nathan Slaughter wonders why peanuts were replaced with pretzels. He owns none of the companies mentioned.
