As noted in this earlier post, the federal Air Transportation Stabilization Board announced last week that it had rejected Chicago-based United Airlines‘ application for a $1.6 billion federal loan guarantee, which was the foundation of United’s reorganization plan to emerge from its pending chapter 11 bankruptcy case.
Well, that government credit enhancement is just too attractive to pass up. Yesterday, only six days after the Board’s rejection of the prior proposal, United Airlines scaled back its request for federal loan guarantees to $1.1 billion from $1.6 billion and offered several other concessions in an effort to obtain the Board’s approval of the request.
Interestingly, Sen. Peter Fitzgerald (R., Ill.), a staunch opponent of the airline-aid program, yesterday asked the acting inspector general of the Treasury Department to investigate whether “any inappropriate political pressure or intimidation has been or is being applied to” the Treasury nominee on the loan board.
If the ATSB ultimately turns United Airlines down for a third time, the carrier will be forced to overhaul its business plan, cut its expenses further and hunt for a financing package in the open market, which, of course, is exactly what United Airlines should be required to do. Inasmuch as the company is reasonably flush with cash (that’s one of the advantages of operating in chapter 11 for a long time), United isn’t in any immediate danger of liquidation. However, United’s unrestricted cash, which was nearly $2 billion as of March 31, is projected to fall to under $800 million by year end. Airline analysts estimate that a comfortable level of unrestricted cash for an airline the size of United would be at least three times that amount. That’s why United is trying so hard to obtain this federal credit enhancement and also why the ATSB should not grant it.
Meanwhile, the Wall Street Journal’s Holman Jenkins, Jr. expands on Professor Ribstein’s position that good economic policy not only allows companies to thrive, but also to die:

What should be causing beads of sweat on the policymaking community’s collective brow is a structural impasse that makes it nearly impossible for failing airlines to die. Blame the bankruptcy courts, international route regulation, foolish antitrust prejudices or misguided investors. Blame Congress, which shouts “oligopoly” at any hint of an airline disappearing. Whatever the culprit, the country’s in a bad fix. It has too many network carriers trying to shrink their way to profitability when what we really need are fewer, bigger network airlines. Three such carriers would be plenty and two would probably be enough in a world where regional jets are coming on strong and where low-cost, entrepreneurial operators will show up on any route when money’s to be made by undercutting the incumbent.
Meanwhile, low-cost airlines now account for 29% of the business, up from single digits 15 years ago. They’re moving out onto the longer-hop routes (partly because fewer Americans rely on the plane for short trips since the security hassles tipped the balance in favor of driving). Frontier, Southwest and others are even developing what look suspiciously like hubs and spokes.