United defers debt payments, seeks mechanics' aid

CHICAGO -- United Airlines has bought itself more time with debtors in its bid to avoid bankruptcy court. Now it's putting its fate in the hands of its mechanics and a government assistance program.

The nation's No. 2 carrier said Monday it was deferring payments on about $900 million in debt now due by mid-December, in hopes it meets conditions for a federal loan guarantee by then.

The next crucial test comes Thursday, when its 13,000 mechanics vote for the second time in eight days on whether to ratify a tentative agreement calling for wage cuts of 6 percent to 7 percent plus four fewer paid vacation days.

The mechanics must participate in companywide concessions in order to preserve United's $5.2 billion package of companywide labor reductions -- the foundation of its pitch for government help.

Under a modified agreement brokered early Monday with the mechanics' union leaders, contract terms on benefits were revised slightly to try to gain approval and CEO Glenn Tilton pledged to resolve a variety of workplace issues mechanics are unhappy about.

If that's enough to reverse the outcome of last week's vote, which failed by 57 percent to 43 percent, United then must quickly win approval for the $1.8 billion loan guarantee it says is necessary for it to get a $2 billion private loan.

Massive debt

Without the guarantee and loan, the airline has said it will be forced to take its restructuring into federal bankruptcy court because it doesn't have enough money to pay off its huge debts.

Analysts said that by putting off decisions on debt payments and a bankruptcy filing as late as possible, United appears to believe it has a reasonable chance to get the loan guarantee from the Air Transportation Stabilization Board.

Investors were more hopeful, too, driving up the battered shares of United parent company UAL Corp. 31 percent on Monday.

"United's situation is a touch less pessimistic than it was," said Standard & Poor's analyst Philip Baggaley, who last Friday called a bankruptcy filing "virtually inevitable." "The agreement to go back to the mechanics so quickly provides a flicker of life still."

Grace period

Following a meeting of its board of directors, United announced it was deferring a $375 million payment on aircraft-backed loans that formally was due Monday but can be put off as late as Dec. 16, and will use similar grace periods for $500 million owed to German lender Kreditanstalt fur Wiederaufbau -- originally due last month.

It had hoped to avoid paying the German loan for even longer, but said it had failed to meet all the conditions for a further extension of that obligation.

United also is already in the grace period for another $45 million in various debt obligations. Altogether, that means the cash-strapped carrier faces imminent debt payments totaling $920 million.

"United believes that taking advantage of these grace periods is a fiscally prudent step in light of its current financial situation," the airline said. If a federal loan guarantee is approved, it said in a statement, "the company plans to make the requisite payments on these obligations."

The mechanics' targeted share of the $5.2 billion in labor cutbacks is $700 million. A second vote rejection of that amount would almost certainly sink the entire package, since cost-cutting agreements accepted by United's pilots, flight attendants and other employee groups expire Dec. 31 unless all groups sign on.

After losing an industry-record $2.1 billion in 2001, United is on course to exceed that loss this year as it struggles amid a weak economy and a decline in business travelers.

Like other troubled airlines before it, United intends to keep flying normally while in bankruptcy court. But it is trying to avoid a filing because its shares would likely be worthless and it would lose control of its restructuring to a judge. The airline is 55 percent owned by its employees.

Bankruptcy also would be a blow for areas where United has large operations. Illinois Gov. George Ryan said Monday he has called United to discuss potential state assistance to help United obtain the loan guarantee. The state's congressional delegation, among others, has lobbied extensively on United's behalf.