UAL Seeks Fed Loan Backing

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CHICAGO (Reuters) - UAL Corp.'s (NYSE:UAL - News) United Airlines, the No. 2 U.S. carrier, on Monday asked the government for $2 billion in loan guarantees, the largest request of any airline since the Sept. 11 attacks slashed the demand for air travel.


Of that amount, $1.8 billion would be guaranteed by the Air Transportation Stabilization Board, the federal agency set up after the attacks to bail out the struggling industry, which lost a record $7 billion last year.

The government set up the airline bailout program on Sept. 22, 2001, just 11 days after four jets were hijacked and crashed into the World Trade Center in New York, the Pentagon outside Washington and rural Pennsylvania.

"United is the perfect candidate for the ATSB program," said Chief Executive Officer Jack Creighton in a statement.

"We're now burdened by short-term financing needs that are driven by the aftermath of September 11 and aggravated by the weak economic recovery," he said.

Creighton said recently the airline would apply for its share of the $10 billion federal loan guarantee program once it had labor concessions in hand.

Last week, it secured wage cuts of nearly $1 billion over three years from pilots and salaried and management workers. Pilots are paid the most of unionized workers at United.

But the Elk Grove Village, Illinois-based company, employing more than 80,000 workers, does not have deals with machinists or flight attendants. United has six labor unions and the International Association of Machinists is the biggest.

The bailout program included nearly $5 billion in direct cash aid and pledges to pay back up to $10 billion in loans if airlines could not get financing from the private sector without the blessing of Uncle Sam.


BAILOUT BALLGAME

The loan program at one point this spring was in danger of being scrapped altogether by Congress as it searched for ways to cut spending. Some lawmakers said it attracted little interest from big airlines and was no longer needed.

Some 9,000 rank-and-file pilots must still approve the pilots' portion of the financial recovery plan, which includes authorization for a proposed code share arrangement with No. 6 US Airways Group Inc. (NYSE:U - News), more regional jets and 13.5 million stock options.

Once a loan guarantee application is approved by the federal government -- far from a certainty -- United would grant pilots options for 9.75 percent of common stock, while the salaried and management workers would get options for 8.1 percent. Those percentages hold true only if all options are converted to stock.

Pilots are giving up 10 percent of wages to start, but raises kick in beginning in 2003.

US Airways is the next-biggest airline to have sought the federal loan guarantees. It wants $900 million of loans backed and the application is still pending. America West Holdings (NYSE:AWA - News), the No. 8 U.S. carrier, received backing for a $380 million loan but had to give up warrants for up to one-third of common stock.


FULFILLING THE EXPECTED

United's formal application is completely digested and expected both on Wall Street and throughout the industry.

Jamie Baker, airline analyst at JP Morgan Chase, believes United's chances of getting the government to back private-sector loans are not known.

"We don't believe United has exhausted all its potential sources of capital," Baker said. "From United's perspective, We don't believe the government loan program is the lender of last resort."

Goldman Sachs analyst Glenn Engel said UAL is in no more trouble than any other airline and really wants a credit line.

"What they're looking for is a credit line, let's say a billion-dollar credit line with the banks, so this way if there's any terrorist actions or other events they will have some liquidity they can draw down to," Engel said.

"What's ironic is, if you can get enough labor concessions, you don't need the loan guarantee. But if you don't get the labor concessions, then you need the loan guarantee, but you can't get it. So it's sort of a Catch-22."

United listed its cash position at the end of the first quarter at more than $3 billion, with billions more in unencumbered aircraft that could be used as collateral.

UAL has already said it expects to post a significant second-quarter loss and likely a loss for full-year 2002. But its daily cash burn was halved in the first-quarter to $5 million and should improve significantly in the second.

In its 2001 annual report, United said it estimated the Sept. 11 attacks hurt revenues by $1.7 billion. It reported a record loss of $2.1 billion in 2001.
 
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