The federal Air Transportation Stabilization Board announced today that it was not going to change its its June 17 decision to deny United Airlines government backing for a government credit enhancement that was the central component of United’s reorganization plan in its pending chapter 11 case. United will now be forced to retool its reorganization plan based upon the higher financing costs that it will incur in the private market.
Hurt by a slowing economy and the Sept. 11, 2001 terrorist attacks on New York and Washington, United initially applied for $1.8 billion in loan guarantees in June 2002, just before the deadline for airline applications. The company’s request was the largest of the 16 carriers that applied to the panel that was created after the September 11 attacks to help airlines lower the cost of new capital.
The loan board initially denied United in December 2002, which resulted in United filing its chapter 11 case. United has reduced costs and shrunk its operations in chapter 11, but the company’s operations still are not particularly competitive with the emerging low-cost airlines that have expanded their market share dramatically over the past two years.
As noted here earlier, the ATSB’s decision is the correct one. The creditors and employees with stakes in United’s survival should share the full economic risk of reorganizing the company. The risk of loss and threat of failure are much better and more powerful inducements to reorganizing a big company correctly than government largesse that often covers up and delays changes that need to be made.