US airlines with sound business plans, private lender backing and employee concessions will have preference in getting some of the US$10 billion in federal government loan guarantees, a US official said.
The guarantees would run as long as seven years and won't cover all the principal and interest, White House budget director Mitch Daniels said. A four-member board that includes Federal Reserve Chairman Alan Greenspan and Treasury Secretary Paul O'Neill will have broad discretion in deciding who gets the backing and how much of the loan is guaranteed, he said.
The board "will not pick winners and losers but instead will follow clear guidelines in giving preference to the strongest applications," Daniels said.
America West Airlines will probably apply for a guarantee, Chief Executive Doug Parker said, and UAL Corp's United Airlines, Northwest Airlines Corp, Continental Airlines Inc and package delivery company FedEx Corp all said they're evaluating whether to apply. Midsized airlines including America West, US Airways Group Inc and Continental are considered by some analysts to be among weaker carriers in need of such help.
Wealthier carriers who can get credit elsewhere may have a hard time qualifying for guarantees, as will companies on the verge of bankruptcy that can't demonstrate a solid business plan, Daniels said. "This does set up, in essence, a competition," he said. "This is not an entitlement program." "Several airlines have indicated to us they would move very quickly to get an application in front of the board," Daniels said, adding that the first requests could come within weeks.
While June 28 is the cut off for applications, the regulations may be amended if necessary to extend the program, he said.
The guarantees are part of a US$15 billion federal bailout plan adopted after Sept. 11 terrorist hijackings prompted the two-day grounding all US air traffic.
Independence hope
The government wants "to help, but they don't want the airlines to be completely dependent on the government guarantee," said Mark Altherr, who covers transport and technology industries as director of high-grade credit research at Credit Suisse First Boston. "The market has to take some risk here with these loans, it sounds like, which is maybe going to be a little troublesome for some of the weaker carriers." Airline executives said the attacks cost more than US$5 billion in lost revenue at a time when the industry was forecast to lose as much as US$2.5 billion this year amid a slump in corporate travel.
The four-member board, which also includes Transportation Secretary Norman Mineta and Comptroller General David Walker as a non-voting member, must consider borrowers' ability to repay loans, protection of government financial interests and the lender's ability to administer loans, Daniels said.
Carriers also can gain loan preferences if they reduce the length of the loan or pledge collateral, allow the government to take part in the company's financial gains, and don't use loan proceeds to refinance debt. The rules also indicate a preference for companies that can show "concessions by creditors, employees and others that will strengthen the financial condition of the company.'' ``If an application came in and failed to include several of these preference items, it's not likely to fare very well," Daniels said.
Persuasion
Bankrupt carriers may apply for loans as long as they have a court-certified recovery plan. As for carriers that need a loan guarantee to avoid bankruptcy, Daniels said, "the heart of their application must be a business plan that is persuasive. That will not be easy to do" if the carriers' future isn't clear or suggests that bankruptcy can't be avoided, he said.
America West's Parker said he's "reasonably certain we will be applying," without specifying a time. "We're in a much less precarious position today than we were two weeks ago." Continental and other carriers said it's too soon to say whether they will apply for the guarantees.
"We have to have a longer-term view of the business results we'll be experiencing before we decide," said Continental spokesman David Messing in commenting on whether the Houston-based carrier will apply for one of the loan guarantees. The carrier previously had said it was looking for the government to provide full backing for the loans. The final terms disclosed appear close enough to work for Continental, he said.
"However they want to set this loan program up is fine with American," said John Hotard, a spokesman for AMR Corp's airline.
US Airways Chairman Stephen Wolf told USA Today that he would rather not use the loans though he didn't explain why. US Airways spokesman David Castelveter declined to comment on Wolf's comment and the airline's intentions.
Atlanta-based United Parcel said it won't apply for the low- interest loans, said Norman Black, a company spokesman.
Airborne Inc, the third-largest US air-freight carrier, declined to comment on whether it has sought grant funds or plans to apply for loans under the federal aid program.
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