Airline Relying On Government Backing To Exit Chapter 11

United Airlines has made it clear, it needs federal money to stay afloat. A United executive on Friday said the company is focused on winning government approval for a big loan as the way to get out of bankruptcy. Management would not disclose what their back-up plans were. On two recent occasions, United Airlines executives were asked if they have an alternate plan to exit Chapter 11 protection if they do not get the U.S. government backing for $1.6 billion -- part of a $2.0 billion loan. Twice, different executives replied they are totally focused on the government loan.

Peter McDonald, executive vice president of operations, told reporters "that's the plan," referring to the loan guarantee application, when asked if a "Plan B" existed. Similarly, Chief Financial Officer Jake Brace said at a recent New York investment banking airline conference that the government loan was the airline's focus. However, Brace did add that United would get out of Chapter 11 "one way or another."

In some ways, United is stuck in the proverbial "rock and a hard place" with regard to commenting on the loan process underway at the Air Transportation Stabilization Board. Among key requirements, loan guarantees are only available if no private sector financing is reasonably available. The loan  program is considered a last resort, so the government would not appreciate an applicant seeking help but also saying that backup options — which could include private financing, a major equity investor or deeper cost cuts — might be available. The stabilization board was established by Congress to help struggling carriers after the Sept. 11, 2001, attacks threw the U.S. airline industry into an unprecedented financial downturn. The three-member board has been stingy in granting guarantees, and is under no deadline to help United.

The airline first applied for a loan guarantee in 2002, but the board called its business plan "flawed" and the request was denied. Shortly after, the airline filed the largest aviation bankruptcy ever and has since restructured a lot of its financial obligations, sharply cutting expenses. United's amended loan guarantee application and revised business plan have been before the agency for a few months, but as some issues including pension funding relief and aircraft litigation remain unresolved, no decision has been made. As a result, United has delayed its timing for bankruptcy exit to some time this summer, rather than by the end of the firs half of the year.

FMI: www.ual.com