"Some Light Shed on Panel Decision to Deny Aid to United"

Wednesday, August 25, 2004

Some Light Shed on Panel Decision to Deny Aid to United
By MICHELINE MAYNARD
The New York (NY) Times


Members of a federal loan board said they felt that United Airlines' bid
for $1.6 billion in assistance was based on a faulty business plan and
they believed that helping the airline could hurt the rest of the
industry, newly released minutes of the board's deliberations show.

The minutes were posted yesterday on the Air Transportation
Stabilization Board's Web site. They provide a view into two meetings in
June, when United's second and third applications for federal assistance
were turned down, forcing the airline to seek private financing.

In turning down United's application, the board said that the company
could find financing elsewhere and that it had not proved that the loan
was needed to maintain a viable air transportation system. The minutes,
however, show that members of the board also debated the financial
underpinnings of United's case.

A United spokeswoman, Jean Medina, said yesterday: "We disagree with the
decision. Our business plan is built on very realistic assumptions. We
know we have more work to do. We need to meet the challenges of the
changing environment and extraordinarily high fuel costs."

Last week, United, the operating unit of the UAL Corporation, said it
was likely to terminate its four employee pension plans, and it has said
it will not make required contributions while it is in bankruptcy. The
threat has raised the ire of United's unions, and some of their leaders
have blamed the loan board for United's decisions to stop the
contributions.

The three-member loan board was formed after the September 2001
terrorist attacks to administer $10 billion in loan guarantees made
available by Congress to help the struggling airline industry. United's
application would have been the biggest awarded by the board, which has
provided assistance to US Airways, Frontier and America West, among
others.

United filed for bankruptcy in December 2002, after the loan board
rejected its original application for $1.8 billion in guarantees. 

A year later, it applied for $1.6 billion, which it planned to
supplement with $400 million in financing from J. P. Morgan and
Citibank.

But on June 17, Brian C. Roseboro, under secretary of the Treasury,
joined Edward N. Gramlich, a Federal Reserve governor, in voting against
United's application. 

The day before that decision, United's chief executive, Glenn F. Tilton,
traveled to Washington to offer changes in United's business plan that
the airline hoped would ease the package's approval.

The appeal made no difference to Mr. Roseboro, according to the minutes.
He said he did not think that a loan package for United was necessary to
maintain the nation's commercial aviation system, and also said that
outside financing was "reasonably available" to United.

The minutes showed that Mr. Roseboro said he did not think United would
face liquidation and that "providing a subsidy to a high-cost air
carrier would likely have very negative long-term effects on the
industry and competition," the minutes said.

Mr. Roseboro also said that the Treasury Department "determined that the
obligation would not be prudently incurred, specifically that the
underlying business plan was built on unrealistic assumptions and the
restructuring was insufficient." The minutes were not more specific. 

The board's executive director, Michael Kestenbaum, predicted that
private investors "would likely require further changes to United's
business plan," according to the minutes. 

Mr. Kestenbaum also said that asset sales could play a part in United's
ability to raise capital for any restructuring.

But United has said throughout its bankruptcy that it would not sell its
assets. It told a United States Bankruptcy Court last week that its
assets are pledged to secure its bankruptcy financing, which must be
repaid when it emerges from bankruptcy.

At the June 17 meeting, Mr. Gramlich, the board's chairman, praised the
airline for progress it had made in bankruptcy, saying it was a "much
improved airline" compared with the one that had applied for loan
guarantees in December 2002.

But Mr. Gramlich said airlines' access to capital markets was also much
better than it had been immediately after the September 2001 attacks. 

According to the minutes, Mr. Gramlich said "there is a strong
possibility that United would successfully emerge from bankruptcy
without" a loan guarantee package, and thus he voted against the plan.

The board's third member, Jeffrey N. Shane, an under secretary in the
Transportation Department, abstained from voting, saying he wanted to
defer a decision until the board could further examine Mr. Tilton's
suggested changes. The rejection provoked a political storm that came to
involve the White House, Congress and the Treasury Department.

United ultimately cut its request to $1.1 billion, promising to find an
additional $500 million in equity or equity-based financing on top of
the $400 million already arranged. 

Treasury Secretary John W. Snow, who had received appeals on United's
behalf from House Speaker J. Dennis Hastert and a senior Bush
administration official, asked the board to consider a revised
application from the airline. Mr. Hastert is a Republican from Illinois,
which is United's home state. 

The action caused speculation that Mr. Roseboro might resign from the
board in favor of someone who would back United's application, but he
remained a board member. 

At another meeting on June 28, the board voted unanimously to reject
United's third application. At that meeting, Mr. Kestenbaum said that
United "did not address the statutory criteria under which its loan
guarantee request had been denied," which was that a loan to United was
not necessary to maintain the nation's commercial air system.


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