Hemorrhaging millions of dollars in cash daily, debt-riddled U.S. Airways ( U) announced on Sunday that it would seek Chapter 11 bankruptcy protection from creditors.

Bankruptcies are no shock in an industry that's racked up nearly $10 billion in losses over the last six quarters. But while it's the worst possible news for US Air shareholders, the news also raises pressing questions for investors in UAL ( UAL), parent of rival United Airlines.

Does UAL have a leg to stand on? It's a question investors were asking as they offered the company's shares down 25% Monday to $3.92.

Righting the second-largest carrier's ship is a sticky situation, involving the government, bondholders, unions and shareholders, all of which could influence the outcome.

"This isn't going to affect travelers at all," said Jonathan Schrader, equity analyst for Morningstar. But in the event UAL does go bankrupt, "if you're a shareholder, you're going to be left with nothing."

Brother, Can You Spare $1.8 Billion?

The most immediate concern facing UAL, aside from huge debts, declining passenger revenues and falling ticket prices, is its application for a $1.8 billion loan guarantee from the government.

Despite the fact that UAL secured a round of private financing in the first quarter, the company claims its access to credit markets is restricted and that it needs the loan guarantee to help meet debt obligations. To receive the much-needed guarantee, which was offered by the newly created Air Transportation Stabilization Board in the wake of Sept. 11 to provide credit for cash-strapped carriers, UAL must prove it can pay back the federal government.

The ATSB hasn't been handing out the money, however. Only America West ( AWA) has received a cent of the $10 billion set aside for guarantees -- and that vote was far from unanimous. And even though US Airways was the airline most directly affected by the events of Sept. 11, with its Washington hub closed for an extended period, the ATSB merely gave it conditional approval on its loan, contigent on US Airways' receiving concessions from labor.

Few expect that US Airways' bankruptcy will do much to influence the ATSB's decision. "It will be tough for the ATSB to disregard US Airways' bankruptcy, but ultimately they'll base their decision on UAL's application. And I don't think they'll approve it, based on the fact UAL accessed the private capital markets in the first quarter," says Schrader.

Waiting for Lefty

To receive a guarantee, the ATSB demands that airlines reduce debt and cut costs, especially labor costs. But can UAL glean concessions from its unions?

It won't be easy. UAL's relationships with its unions, which own 55% of the company, are contentious at best. The company has reached a tentative agreement with pilots, but the cost reductions offered take effect only if flight attendants and mechanics agree to similar concessions, an unlikely situation given that UAL still has an interim CEO at the bargaining table, says Schrader.

Indeed, in a research note, Deutsche Bank Securities' analyst Susan Donofrio told investors, "We put the odds of United not getting their loan guarantee at 80% to 85%. We think that this would pave the way for a possible bankruptcy."

Without a loan guarantee, UAL could end up just like US Airways -- no small irony given that the duo nearly merged until the feds nixed the deal in July 2001.

Over the next four months, UAL must refinance $900 million in debt, spend $200 million on nonaircraft capital and make a $70 million payment to its unions -- an outlay of nearly $1.2 billion. And though UAL's daily cash burn rate dipped below $1 million in the second quarter, the company warned that it would rise in the third and fourth quarters.

At the end of the second quarter, the company said it had a cash balance of $2.4 billion, which analysts say will disappear as the year drags on. Last week, Credit Suisse First Boston analyst Jim Higgins told investors that UAL's available cash could shrink to $300 million by the end of the year, and he gave the company a 75% chance that it will file for bankruptcy.

The One Condition

The federal loan guarantee program isn't immune to political pressure in an election year, and UAL still could receive conditional approval for a loan guarantee, provided the company can come through with labor concessions.

"Ultimately, the ATSB could be in a wait-and-see period where they look to see if UAL can get all of its concessions in place," says Schrader.

By making the loan guarantee conditional, the ATSB can say it made an effort to help save UAL, and place the ball squarely in UAL's court. UAL could then pressure unions to negotiate smaller contracts, with the very real threat of bankruptcy looming in the distance. But even that might not be enough to prevent UAL from Chapter 11 -- something US Airways' investors learned Sunday.

But it's worth repeating: If UAL declares bankruptcy, shareholders are last in line to get paid, trailing creditors, unions and the federal government.

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