United Airlines Asks for $1.8-Billion Loan Backing

United Airlines, severely damaged by the weak economy, labor-management feuds and a slump in air travel after Sept. 11, said Monday that it applied for a $1.8-billion federal loan guarantee to help ensure its survival.

Although the nation’s second-largest carrier still has nearly $3 billion in cash, United and parent company UAL Corp. are losing millions of dollars a day, face big debt payments later this year and are nearly closed off from conventional lending sources. So the airline decided to seek federal backing before the loan-guarantee program stops taking applications Friday.

United’s petition for help--by far the largest request since the program was created by Congress after the terrorist attacks--is fraught with unknowns. Among them: whether United would even be granted the guarantee and, if not, how much that would further cripple the carrier. For 2001, United reported a loss of $2.1 billion, an airline record.

Neither United nor most industry analysts suggest that the airline would seek bankruptcy protection if it failed to receive federal help. In fact, some observers wonder if the agency granting the guarantees--the Air Transportation Stabilization Board--might view United as not yet being in dire-enough straits to need the backing.

But the request marks a steady decline in the fortunes of United, once the nation’s largest airline but now second to AMR Corp.’s American Airlines. Some United employees said privately Monday that they were embarrassed that the airline--which on peak days flies 250,000 people to 117 cities in 26 countries--must seek support from Uncle Sam.

United’s huge reach, in turn, presents the government with a dilemma. If the Air Transportation Stabilization Board denies the loan guarantee--a decision that could come within three months--and United’s condition further deteriorates to the point that its survival is jeopardized, it could cause havoc for the whole travel industry. At Los Angeles International Airport, United is the biggest carrier, with more than 20% of the flights.

Most airlines are still losing money as they grapple with the post-Sept. 11 fallout and a depressed market for business travel. The only major carrier that is profitable, Southwest Airlines, manages to stay in the black because it has one of the lowest cost structures in the business.

Carriers such as American, Delta, Northwest and Continental are considered somewhat healthier than United because either their operating costs are lower than United’s or their balance sheets are stronger. And after the industry received $5 billion of immediate cash aid as part of its $15-billion bailout after Sept. 11--United garnered $725 million in cash aid--most airlines have not yet felt the need to tap the loan guarantees. But United’s move might prompt some of them to apply to stay competitive with United.

A few smaller airlines, such as America West and US Airways, already have asked for loan guarantees. Only America West has secured one so far, amounting to $380 million. US Airways, with routes concentrated in the East and with the industry’s highest cost structure, is in much worse shape than United and is seeking a $900-million loan guarantee.

Under a federal loan guarantee, the government agrees to pay loans a company receives from the private sector in case the company defaults.

That backing gives the company lower interest rates on the loans than it would otherwise receive. Once the company repays the loans, the government could get the “spread” between the two different rates as compensation, although there may be other terms as well. The government has shown, as in the America West case, that it also might seek an ownership stake in the company. But United said that would be unnecessary because the airline has assets to pledge against its loan.

United’s crucial role in aviation, and the size of its request, recall two other times when big companies sought federal loan guarantees: the $1.5-billion bailout of auto maker Chrysler Corp. (now part of DaimlerChrysler) in 1979, and the $250-million bailout of aerospace giant Lockheed Corp. (now part of Lockheed Martin) in 1971.

Those bailouts were debated and approved by Congress to save a specific company, and both survived before eventually merging with other firms. United, however, is applying to a general program that Congress created when the airline industry as a whole was pushed to the brink, with the three-member air board deciding which carriers will get help.

“United is the perfect candidate for the ATSB program,” United Chairman and Chief Executive Jack Creighton said in a statement. The program is aimed at helping airlines “weather the liquidity challenges” that have followed Sept. 11, he said.

United, with 84,000 employees, normally would pay or refinance its upcoming bills by going to banks and the credit markets. But in light of the problems at United and all the airlines, “access to the traditional markets is greatly diminished,” Jake Brace, United’s chief financial officer, said at a news conference.

Lenders would make cash available to United if they know Uncle Sam stands ready to pay them in the event United defaults. Ray Neidl, an independent analyst who testified about the industry’s condition at congressional hearings when the bailout was created, said that “if United can prove that it’s on the road to cost cutting” with its employees, creditors and suppliers, he believes it would the guarantee.

In the last two years, United has been racked by a sharp drop in business travel, its biggest source of revenue, owing both to the recession and business fliers’ growing displeasure with United’s fares and service.

“I truly believe United’s problems are mainly because their service has consistently gone downhill, and not just since Sept. 11,” said Dave Lydon, a Los Angeles businessman who logs more than 100,000 miles a year on United.

United, 55%-owned by its employees, also has experienced repeated squabbles between its executives and labor unions over the carrier’s efforts to slash its relatively high labor costs, United’s ill-fated plan to merge with US Airways and other management strategies. United’s boardroom also has been filled with turmoil: The Elk Grove Village, Ill.-based carrier has had three chief executives in the last five years.

The Sept. 11 attacks, and the subsequent plunge in air travel, only exacerbated United’s problems. United lost two of the four jetliners involved in the hijackings and crashes. After its record loss last year, United is expected to post a loss of more than $1 billion again this year. Plus, the airline faces debt payments and capital spending requirements of $1.5 billion during the next 18 months, which will seriously deplete its cash.

The Air Transportation Stabilization Board has signaled that it looks more favorably on an airline that has persuaded its employees and other “stakeholders” to make concessions. Creighton, an interim CEO for United until it finds a permanent replacement, has secured about $950 million in savings over three years from concessions by United’s pilots and its management and salaried personnel.

But the pilots’ deal is contingent on United getting the loan guarantee. And two other employee groups--United’s mechanics and flight attendants--so far haven’t committed to any concessions.

What if United doesn’t get the guarantee? Chief Financial Officer Brace said it would try again to borrow from private lenders on terms United can afford.

UAL’s stock fell 25 cents, to $11.70, on the New York Stock Exchange; the shares have tumbled 63% in the last year.