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http://www.usatoday.com/money/biztravel/2004-05-13-airlines-federal-intervention_x.htm
U.S. deliberates airlines' future as losses pile up
By Marilyn Adams, USA TODAY
Amid the airline industry's worst financial downturn, the federal government is poised to play its biggest role in the industry since deregulation in 1978. Decisions by federal officials — some this election year — are expected to help shape the future of the industry, now in its fourth year of multibillion-dollar losses.
United argues its request for a $1.6 billion loan guarantee is needed. Others say its risky for taxpayers.
For the industry, those decisions might help determine which carriers survive and which become takeover targets — or simply fade away. For consumers, the decisions could affect whether their hometown gains or loses air service, and how much they'll pay for air travel.
"Over the next few months and years, the government's intervention or absence of intervention could substantially alter the industry," says Washington-based aviation adviser Jon Ash, who has followed the industry for 30 years.
On the transportation docket:
•Loan guarantees. A three-member federal panel is weighing whether United Airlines will get a $1.6 billion federal loan guarantee. The No. 2 carrier says it needs the guarantee to emerge from bankruptcy reorganization and survive.
•Foreign ownership. In talks with the European Union, U.S. negotiators are under pressure to raise to 49% the voting stake a foreign carrier can have in a U.S. airline. The current limit is 25%. The change would encourage the flow of capital into U.S. airlines. It also could lead foreign investors to start carriers here.
•Mergers. With most big airlines hemorrhaging cash, antitrust officials at the Justice Department might be drawn again into an airline acquisition proposal. The most likely takeover candidate is No. 7 US Airways. In 2001, Justice blocked United's bid to buy the Arlington, Va.-based carrier.
Each decision is fraught with controversy. Big airlines say their financial messes result in part from the Sept. 11 terrorist attacks. United and American each lost two jets that day. The drop in air travel that followed slammed the whole industry.
Furthermore, airlines say, the deregulation that freed them 25 years ago to compete on fares and routes did little to remove government from their daily lives. They say they're burdened by constraints on mergers, by federal taxes and by other demands other industries don't face.
Some say the time has come for government to step aside and let the free market rule. That would lead to a natural restructuring of the industry.
"Getting rid of some carriers would be a good thing" for consumers, says economist Clifford Winston of the Brookings Institution.
Continental Airlines CEO Gordon Bethune said recently it's "foolish" to believe all six traditional hub-and-spoke carriers — American, United, Delta, Continental, Northwest and US Airways — will survive. "You don't need six of those networks."
Since the Sept. 11 attacks, Congress has funneled nearly $10 billion in cash relief to the industry: $5 billion in late 2001 to bail out cash-strapped carriers and about $5 billion last year to reimburse carriers for security costs and losses during the Iraq war. Congress also granted loan guarantees to several airlines.
The legislation, which also helped steel firms, reduces required payments for two years. Airlines will seek permanent pension reform after that.
In fact, it will hurt them, says AirTran CEO Joe Leonard, whose airline competes with Delta in Atlanta. Leonard says airlines like Delta will "use government money to try to run us (discount carriers) out of business." He says Delta and United will use savings to help their discount airlines: Song and Ted, respectively. "It gets to the question of whether the government is deciding winners and losers."
Perhaps the most controversial federal action — expected in the next few weeks — will be the three-member Air Transportation Stabilization Board's decision on a loan guarantee for United. The guarantee would require taxpayers to repay United's loan if the airline can't.
United's application has galvanized competitors as well as critics of federal meddling, including Citizens Against Government Waste. Tom Schatz, head of the watchdog group, says airlines have been coddled enough and that such a guarantee would be risky for taxpayers.
"It's clear the problems at United are from bad management, not the terrorist attacks," Schatz says. "I know a bailout when I see it." AirTran's Leonard agrees. "I know it's an election year and no one wants to see job losses, but this is bad policy."
But Tilton, United's CEO, points out that his airline's business plan and circumstances meet the criteria. The guarantee, he says, should be granted "on its merits."
Europeans want in
This week in Washington, U.S. and European Union officials have been meeting about an equally thorny issue: loosening restrictions on flights between the USA and Europe to achieve "open skies."
For years, European investors and leaders have wanted the right to invest more in the U.S. aviation industry, but they have been stymied by a nearly 80-year-old law limiting to 25% the voting control foreign owners can have.
The U.S. government's cap on foreign control dates to the earliest days of the industry — 1926 — when Congress placed strict limits on foreign control as a defensive measure. In wartime, U.S. airlines are required by law to provide planes for troop transport. Lawmakers feared that if foreign interests had too much control of domestic airlines, they might refuse to back a war.
"A limit of 49% is the standard around the world," says Jeff Shane, the DOT's undersecretary for policy. The DOT supports the change, which would require approval by Congress.
British billionaire Richard Branson, who heads Virgin Atlantic Airways, has been at the center of this debate. Branson plans to launch a low-fare carrier in the USA soon. It would be easier to structure and run such a venture if he could control more than 25% of the shares. But he'll proceed no matter what.
"I've been waiting for 20 years, and I don't want to wait another 20 years," he said last summer.
Raising the limit has critics. At a time when outsourcing is almost a dirty word, it's unlikely Congress will vote to raise the cap this election year. And labor unions staunchly oppose raising it. They fear that airline jobs could be lost to foreigners or that labor protections could be watered down if foreign interests had significant control of some U.S. airlines.
Federal officials have been lobbied more quietly on another sensitive topic: airline consolidation. Faced with the possibility of financial failure, US Airways has been building a case in Washington that an airline merger wouldn't be a bad thing.
"We've been very frank with regulators and legislators that consolidation is the inevitable next step," says US Airways executive Chris Chiames.
US Airways is in far worse shape than it was three years ago when Justice nixed its deal with United, citing the likelihood of higher fares and reduced competition. The airline hasn't made money since leaving bankruptcy protection last year. Its CEO and chief financial officer recently resigned, and the airline suggested in a securities filing this month that it might be headed back into Chapter 11.
In the case of US Airways, a prospective buyer could use the "failing firm" argument to win Justice's approval. That means the company being acquired can't survive on its own, and letting it disappear from the marketplace would be worse for consumers than a merger. In the only big airline acquisition in recent years, American Airlines used that defense against antitrust action when it bought TWA in 2001. TWA was entering bankruptcy court for the third time.
Gerchik, the former DOT official, says federal policymakers should recognize that the environment has changed for airlines, and that some consolidation may be unavoidable. "For the next two, three or four years, this industry will have a lot going on," he says. "Airlines are going to need a lot of support."
Contributing: Dan Reed
U.S. deliberates airlines' future as losses pile up
By Marilyn Adams, USA TODAY
Amid the airline industry's worst financial downturn, the federal government is poised to play its biggest role in the industry since deregulation in 1978. Decisions by federal officials — some this election year — are expected to help shape the future of the industry, now in its fourth year of multibillion-dollar losses.
United argues its request for a $1.6 billion loan guarantee is needed. Others say its risky for taxpayers.
For the industry, those decisions might help determine which carriers survive and which become takeover targets — or simply fade away. For consumers, the decisions could affect whether their hometown gains or loses air service, and how much they'll pay for air travel.
"Over the next few months and years, the government's intervention or absence of intervention could substantially alter the industry," says Washington-based aviation adviser Jon Ash, who has followed the industry for 30 years.
On the transportation docket:
•Loan guarantees. A three-member federal panel is weighing whether United Airlines will get a $1.6 billion federal loan guarantee. The No. 2 carrier says it needs the guarantee to emerge from bankruptcy reorganization and survive.
•Foreign ownership. In talks with the European Union, U.S. negotiators are under pressure to raise to 49% the voting stake a foreign carrier can have in a U.S. airline. The current limit is 25%. The change would encourage the flow of capital into U.S. airlines. It also could lead foreign investors to start carriers here.
•Mergers. With most big airlines hemorrhaging cash, antitrust officials at the Justice Department might be drawn again into an airline acquisition proposal. The most likely takeover candidate is No. 7 US Airways. In 2001, Justice blocked United's bid to buy the Arlington, Va.-based carrier.
Each decision is fraught with controversy. Big airlines say their financial messes result in part from the Sept. 11 terrorist attacks. United and American each lost two jets that day. The drop in air travel that followed slammed the whole industry.
Furthermore, airlines say, the deregulation that freed them 25 years ago to compete on fares and routes did little to remove government from their daily lives. They say they're burdened by constraints on mergers, by federal taxes and by other demands other industries don't face.
Some say the time has come for government to step aside and let the free market rule. That would lead to a natural restructuring of the industry.
"Getting rid of some carriers would be a good thing" for consumers, says economist Clifford Winston of the Brookings Institution.
Continental Airlines CEO Gordon Bethune said recently it's "foolish" to believe all six traditional hub-and-spoke carriers — American, United, Delta, Continental, Northwest and US Airways — will survive. "You don't need six of those networks."
Since the Sept. 11 attacks, Congress has funneled nearly $10 billion in cash relief to the industry: $5 billion in late 2001 to bail out cash-strapped carriers and about $5 billion last year to reimburse carriers for security costs and losses during the Iraq war. Congress also granted loan guarantees to several airlines.
The legislation, which also helped steel firms, reduces required payments for two years. Airlines will seek permanent pension reform after that.
In fact, it will hurt them, says AirTran CEO Joe Leonard, whose airline competes with Delta in Atlanta. Leonard says airlines like Delta will "use government money to try to run us (discount carriers) out of business." He says Delta and United will use savings to help their discount airlines: Song and Ted, respectively. "It gets to the question of whether the government is deciding winners and losers."
Perhaps the most controversial federal action — expected in the next few weeks — will be the three-member Air Transportation Stabilization Board's decision on a loan guarantee for United. The guarantee would require taxpayers to repay United's loan if the airline can't.
United's application has galvanized competitors as well as critics of federal meddling, including Citizens Against Government Waste. Tom Schatz, head of the watchdog group, says airlines have been coddled enough and that such a guarantee would be risky for taxpayers.
"It's clear the problems at United are from bad management, not the terrorist attacks," Schatz says. "I know a bailout when I see it." AirTran's Leonard agrees. "I know it's an election year and no one wants to see job losses, but this is bad policy."
But Tilton, United's CEO, points out that his airline's business plan and circumstances meet the criteria. The guarantee, he says, should be granted "on its merits."
Europeans want in
This week in Washington, U.S. and European Union officials have been meeting about an equally thorny issue: loosening restrictions on flights between the USA and Europe to achieve "open skies."
For years, European investors and leaders have wanted the right to invest more in the U.S. aviation industry, but they have been stymied by a nearly 80-year-old law limiting to 25% the voting control foreign owners can have.
The U.S. government's cap on foreign control dates to the earliest days of the industry — 1926 — when Congress placed strict limits on foreign control as a defensive measure. In wartime, U.S. airlines are required by law to provide planes for troop transport. Lawmakers feared that if foreign interests had too much control of domestic airlines, they might refuse to back a war.
"A limit of 49% is the standard around the world," says Jeff Shane, the DOT's undersecretary for policy. The DOT supports the change, which would require approval by Congress.
British billionaire Richard Branson, who heads Virgin Atlantic Airways, has been at the center of this debate. Branson plans to launch a low-fare carrier in the USA soon. It would be easier to structure and run such a venture if he could control more than 25% of the shares. But he'll proceed no matter what.
"I've been waiting for 20 years, and I don't want to wait another 20 years," he said last summer.
Raising the limit has critics. At a time when outsourcing is almost a dirty word, it's unlikely Congress will vote to raise the cap this election year. And labor unions staunchly oppose raising it. They fear that airline jobs could be lost to foreigners or that labor protections could be watered down if foreign interests had significant control of some U.S. airlines.
Federal officials have been lobbied more quietly on another sensitive topic: airline consolidation. Faced with the possibility of financial failure, US Airways has been building a case in Washington that an airline merger wouldn't be a bad thing.
"We've been very frank with regulators and legislators that consolidation is the inevitable next step," says US Airways executive Chris Chiames.
US Airways is in far worse shape than it was three years ago when Justice nixed its deal with United, citing the likelihood of higher fares and reduced competition. The airline hasn't made money since leaving bankruptcy protection last year. Its CEO and chief financial officer recently resigned, and the airline suggested in a securities filing this month that it might be headed back into Chapter 11.
In the case of US Airways, a prospective buyer could use the "failing firm" argument to win Justice's approval. That means the company being acquired can't survive on its own, and letting it disappear from the marketplace would be worse for consumers than a merger. In the only big airline acquisition in recent years, American Airlines used that defense against antitrust action when it bought TWA in 2001. TWA was entering bankruptcy court for the third time.
Gerchik, the former DOT official, says federal policymakers should recognize that the environment has changed for airlines, and that some consolidation may be unavoidable. "For the next two, three or four years, this industry will have a lot going on," he says. "Airlines are going to need a lot of support."
Contributing: Dan Reed
