DAVID FIELD WASHINGTON
US carriers received their compensation payouts before the holiday and are now turning to the issue on government loan guarantees
By Christmas, the federal government had become the bearer of great and glad tidings to the US airline industry, handing out $3.81 billion in compensation payments. It was also poised to become a major investor in troubled carriers through its first loan guarantees under the $15 billion bailout package.
By year-end, the Airline Stabilization Board had become the key focus of industry attention. This newest, smallest and most obscure of government agencies still has virtually no staff or resources, yet it is already pondering the grant of vital loan guarantees to three carriers: one in bankruptcy (National); one tottering near it (Vanguard); and one precariously close to a return trip to the bankruptcy court (America West).
In fact, the Department of Transportation (DoT) had already started salvage operations when it effectively resurrected Midway Airlines from the dead by handing it compensation. The carrier had been under bankruptcy protection since 13 August and was grounded within 24 hours of the 11 September attacks.
Midway reprieve
The cash grants had been relatively uncontroversial until then. But using the compensation, Midway planned an immediate return to the skies as a low-fares carrier from its base at Raleigh-Durham International Airport with about 25 daily flights to six east coast cities. The DoT said it explicitly wanted the funds to go to help Midway restart operations instead of going to the debtors. North Carolina congressmen, including a member of the feared House Appropriations Committee, had pushed hard for Midway to be allowed to use the fund to resume flights. Midway has one Boeing 737-700 it can use.
The DoT also granted $7.3 million to Vanguard Airlines which had struggled to remain aloft before 11 September as low-fare competition from Southwest Airlines squeezed it at its Kansas City home base. Now in its seventh year, Vanguard has not posted a quarterly profit in the last two years.
"It goes back to propping up sick companies, which, as TWA proved, can take years to die," comments Avmark consultant Barbara Beyer.
However, in terms of industry significance, the direct compensation pales by comparison to the $10 billion portion of the bailout which is earmarked for the loan guarantees. The DoT has become a lender to the desperate while discouraging the relatively healthy.
Vanguard, in addition to the direct aid, seeks a loan guarantee to complete a restructuring. Scot Dickson, Vanguard chairman, says that "prior to 11 September we were working with prospective investors to arrange financing to continue our movement toward profitability. As a direct result of that tragedy, such financing is no longer available." He noted that one bank has agreed to provide $60 million if repayment is guaranteed by the government. In addition, current investors have agreed to put up another $20 million.
Vanguard thus became a test of airline policy, although the case that will set precedent is likely to be America West, which was the first and largest carrier to seek federal loan guarantees. In its consideration of America West's plan, the board was playing that favourite US game show - "Let's Make a Deal".
Government stake
Weeks after it first sought the loan guarantee, and after a long silence from the board, America West revised its request, offering the government an option to buy a 10% stake of about 3.4 million shares. It also raised the fees it would pay the government from $100 million to $175 million. Finally, it increased the at-risk portions of the loan from $26 million to $45 million, which would cut the government guarantee portion to under 90% of the $445 million loan.
It thus became the first to make an outright, detailed offer of state control in return for the government loan guarantee. Although America West did not specify the price level at which the government's options could be exercised, the carrier has market capitalisation of less than $90 million. Similarly, Vanguard said it was willing to give the government "participation in the future success of Vanguard" in return for a guaranteed loan of $60 million.
In addition to these two carriers, only National Airlines, which filed for bankruptcy in December 2000, has said it will seek a loan guarantee. Indeed, National has made the federal backing a significant step in its plan to emerge from reorganisation. Based in Las Vegas, the carrier has denied that local Nevada state legislators such as Senator Harry Reid, the Senate Majority Whip, shaped the bailout package to its advantage.
Delta Air Lines president Leo Mullin has said the loan guarantee programme could help consolidation. In some cases, Mullin said, "the board should promote - and perhaps encourage - combinations of carriers. Consolidation is an accepted method in all industries of improving performance - operationally and financially". Some opposition to this may come from those who feel that combinations would hurt competition, but Mullin believes there are mechanisms in place to ensure that competition in the marketplace remains strong.
Mullin suggested the board could begin by introducing much-needed financial rigour into the airline industry which could be accomplished by imposing minimum capital reserves for loan applicants to ensure the applying airlines' viability. Mullin hopes that the board would also encourage an improved collective bargaining system that works without the presidential intervention or threats of interventions that have marked every major labour dispute since George Bush was elected.
Most major carriers have withheld their decisions on seeking the guarantees. US Airways has ruled it out flatly in order to reassure its employees that it is in good fiscal health, while Federal Express has said a definitive no. United Airlines, perhaps the most vulnerable of the mega carriers, will not rule out an application because "everything is on the table", in the words of new chairman John Creighton. Continental Airlines chairman Gordon Bethune says it might put in an application before the 28 June deadline just to "keep its options open".
According to Jon Ash of consultants Global Aviation Associates, the deal-making will have this effect: "The big carriers must be saying 'I don't need the aggravation and I don't need the dilution' by issuing new shares."
But even as the airline industry watched and waited for a decision, it did not expect any action soon. That, says Internet analyst Holly Hegeman of PlaneBusiness.com, is in large part because the board has almost no staff and few resources. Its pace is in stark contrast to the alacrity with which Congress created the board - less than two weeks after the attacks.
The pace of action is a real question here. Zuckert Scoutt & Rasenberger partner Frank Costello told a Morten Beyer & Agnew conference: "If the board acts quickly the industry will be smaller, more concentrated and more efficient. If not, it will be even smaller, even more concentrated, and not necessarily more efficient, with less competition."
Ash says: "There will be a real confrontation with Congress if they don't get on with this loan guarantee programme and if they say no but don't have a lot of strong backing for the decision. This is something that Congress has ordered and wants to see done."
Behind the delays are philosophical questions as well as staffing issues. At least two of the board's three voting members - those at the Treasury and at the Federal Reserve - may philosophically be very sceptical. Transportation Secretary Norman Mineta will be for it because he has to see a way of preserving a vestige of competition, Ash predicts.
Sceptical viewpoint
David Walker, the other member of the stabilisation board, who does not vote, has expressed some scepticism as well. Walker, who as the Comptroller General of the USA heads the highly influential General Accounting Office (GAO), has expressed doubts in what he stresses are his personal views. Walker suggests that the board may be making market decisions when it asks whether a carrier has "access to credit on reasonable terms", which is a key condition of qualifying for aid. Instead of picking winners and losers, the government should take more structural steps and consider lifting the 25% cap on foreign investment and reconsidering congestion mitigation and slot control measures, steps that the GAO has in the past urged.
Costello suggests that the board may have the right to allow foreign investment over and above the 25% cap, and that it could take other extraordinary measures because the board's process seems to have no transparency.
But in some ways the aid decision has already been made by the direct grants. Beyer believes the government clearly is encouraged by the past success of loan guarantees to Chrysler in its 1970s restructuring or to air carriers in the 1980s. In this sense, says Barbara Beyer, "the government is the perfect investor for the airlines: it has lots of money and absolutely no knowledge".
| US compensation payments at 10 Dec | |
| Carrier | Total ($ million) |
| United Airlines | 644.0 |
| American Airlines | 583.2 |
| Delta Air Lines | 528.8 |
| Northwest Airlines | 405.5 |
| Continental Airlines | 317.5 |
| US Airways | 255.3 |
| Southwest Airlines | 235.2 |
| TWA | 119.9 |
| Federal Express | 100.6 |
| America West | 98.2 |
| Alaska Airlines | 71.5 |
| American Trans Air | 43.9 |
| Hawaiian Airlines | 24.9 |
| AirTran Airways | 24.6 |
| United Parcel Service | 24.5 |
| American Eagle | 21.2 |
| National Airlines | 17.9 |
| Frontier Airlines | 17.5 |
| JetBlue Airways | 15.8 |
| Atlas Air | 10.1 |
| Midway Airlines | 10.0 |
| Sun Country Airlines | 8.5 |
| Source: US DoT. Payments received by 10 December in accordance with the Air Transportation Safety and System Stabilization Act. | |
Source: Airline Business
