The federal Air Transportation Stabilization Board announced on Thursday that it has rejected Chicago-based United Airlines‘ application for a $1.6 billion federal loan guarantee, which is the foundation of the second largest U.S. airline’s current reorganization plan to emerge from its pending chapter 11 bankruptcy case. The ATSB concluded that “the likelihood of United succeeding without a loan guarantee is sufficiently high so as to make a loan guarantee unnecessary.” The ATSB represents the Treasury Department, the Department of Transportation, and the Federal Reserve.
Nevertheless, the political pressure is already mounting to undermine the ATSB’s decision. House Speaker Dennis Hastert, R-Ill., said he favors reconsideration of United’s application. Moreover, United said in a statement that it will bring important modifications to its application and request reconsideration. Finally, United’s union members have been hammered with deep pay cuts during the reorganization, so Union leadership reacted angrily to the ATSB’s announcement.
In that connection, a reconsideration appears at least reasonably possible because the ATSB decision was a split vote. Treasury Undersecretary Brian Roseboro and Fed Governor Edward Gramlich voted no, while Transportation Undersecretary Jeff Shane voted to defer a decision to give the airline more time.
By all accounts, United’s new business plan was far superior to its previous ones. During its chapter 11 case, the company has cut its annual expenses by about $5 billion. However, the airline industry has continued to change rapidly during United’s chapter 11 case as a group of successful discount carriers now controls 25% of the domestic market. With their much higher costs, big airlines such as United have been losing billions of dollars a year by matching the discounters’ fares. Meanwhile, fuel prices have skyrocketed, making matters worse for the big boys.
The ATSB’s decision continues an admirable Bush Administration policy of being relunctant to bail out airlines. The ATSB was set up by Congress three years ago to handle the doling out $5 billion in direct grants to the industry and administering up to $10 billion in loan guarantees. At that time, the then-secretary of the Treasury and Federal Reserve Chairman Alan Greenspan criticized the idea of loan guarantees. The loan board received 16 applications for guarantees before the June 2002 deadline, and was tight-fisted in doling out aid. Eight applications were denied. The six that were issued amounted to about $1.5 billion.
The decision has no immediate effect on United’s operations in its pending chapter 11 case, which is a year and a half old now. Despite the political knashing of teeth over the ATSB’s decision, the decision is the correct one. Hopefully, the decision will stand and simply force the creditors with stakes in United’s survival to share the full economic risk of reorganizing United. As Professor Ribstein has articulated eloquently, risk of loss and threat of failure are powerful inducements to reorganize a big company the right way.