Loan Refusal Puts United Airlines on the Brink

United Airlines, the world's second largest carrier, was on the brink of bankruptcy last night after the US government turned down its appeal for a $1.8bn (£1.15bn) loan guarantee.

The decision will be a bitter disappointment for the airline, which has worked hard in recent weeks to wring $5.2bn of pay cuts from its workers over the next five and a half years in an effort to stay airborne.

Shares in the company in after hours trading fell by more than 55% to $1.39 as the hopes of averting bankruptcy appeared to fade.

The air transportation stabilisation board, the federal department responsible for the bail-out package which was put in place for the airline industry after last year's terrorist attacks, said it had turned down the application because United was not "financially sound".

Two of the three-member panel voted against the application.

"The board believes that the business plan submitted by the company is not financially sound," it said in a statement. "This plan does not support the conclusion that there is a reasonable assurance of repayment and would pose an unacceptably high risk to US taxpayers.

United's parent company, UAL, has said that it will have no choice but to file for bankruptcy if the loan guarantee was turned down.

The company has lost $4bn over the past two years and is still losing $8m a day. It faces the repayment of nearly $1bn on deferred debt obligations over the next two weeks.

The company's management had been struggling to get a grip on United's bloated cost base. In recent weeks it had agreed $412m in pay cuts from its 24,000 flight attendants and had found a compromise with pilots.

An agreement was brokered for 7% cuts with mechanics at the beginning of the week and the 13,000 members at United were due to vote on a deal today. As an olive branch, senior executives including chief executive Glenn Tilton said yesterday they would take 11% cuts to save $60m.

American Airlines yesterday said it would cut another 1,100 flight attendants' jobs, about 5% of the total, as it too struggles to return to profit.

The entire airline industry is suffering from the combined effects of the September 11 attacks and a soft economy that has sharply reduced the volume of business travel.

US Airways filed for bankruptcy earlier this year and a number of smaller airlines have gone out of the business.

Phil Baggeley, an analyst at Standard and Poor's, said: "This is the final nail in the coffin. United will have to file for bankruptcy very quickly. The timing will probably be driven by when they have the debtor-in-possession credit facility lined up."