By: Mike Comerford Daily Herald Business Writer

February 16, 2005, Chicago Daily Herald

United Airlines lost $1.6 billion last year and $2.8 billion the year before. It hasn't had a profitable quarter in nearly four years. So why is the financial community lining up to lend Elk Grove Township-based United Airlines $2.5 billion in bankruptcy exit financing?

It's not an easy question to answer. "Don't try to apply logic to airline financing because the air transportation model doesn't work right now," Michael Boyd, an airline consultant based in Evergreen, Colo., said Tuesday.

On Monday, Chief Financial Officer Jake Brace said that the nation's second largest airline had four proposals from unidentified financial institutions. Neither the names of the parties, nor the terms were disclosed. And, the airline said, the financing is contingent on cutting labor costs and pensions to save $2 billion in annual costs.

Cutting pensions could prove to be difficult. United's mechanics union, Aircraft Mechanics Fraternal Association, has authorized its leadership to call a strike if the airline unilaterally eliminates its members' pension plan.

United has said it needs the financing in order to exit Chapter 11 bankruptcy by fall.

Turnaround specialist William Brandt Jr. said Tuesday the financing is likely to be used to cover the debtor-in-possession financing United has already secured. Known as DIP loans, they must be paid back first, before other lessor-grade debtors are paid.

"This would be a loan consolidation, it rolls up the DIP financing," said Brandt, of Chicago-based Development Specialists Inc. "Think about it. If you lent United money, your best strategy is to get them out of bankruptcy where you have more control. You don't have to go in front of a bankruptcy judge every time."

However, airline analysts point out that United has been using the value of its aircraft as collateral but there is a glut of airplanes in the industry and repossessed planes wouldn't likely command a premium.

"I'm surprised at the size of the loans, at $2.5 billion, I'm very surprised," said Todd Pulvino, professor of finance, Kellogg School of Management, Northwestern University, Evanston. "I don't know the details. But clearly it is a risky deal ... I don't think there is free money on the table."

Airline analyst Ray Neidl said he thinks United might be offering shares in the future out-of-bankruptcy United as an inducement.

"Eventually, I think they are looking for an equity holder," said Neidl, of Calyon Financial. "They (lenders) must think they (United) can make a profit someday."

United failed in three attempts to get loan guarantees from the federal Air Transportation Safety Board. But Citibank, General Electric and JP Morgan Chase have been active in lending to the floundering airline industry, where most airlines are posting losses.

Despite the turmoil of the industry, United can generate lots of cash revenue and has attractive national and international routes, Boyd said.

And if United can cut $2 billion in costs and high fuel prices moderate, it could easily be in the black by fall, Boyd said.

"If you were to bet on an airline to survive this downturn, United isn't a bad bet," Boyd said.