Business Week
December 4, 2001
Readers Report
Business Week
1221 Avenue of the Americas, 43rd Floor
Dear Sir or Madam:
Many would disagree with Gary S. Becker’s article on “The Airline Bailout Sets a Bad Precedent” (Economic Viewpoint, Nov. 19, 2001). In his commentary, Mr. Becker states that the government financial assistance currently being provided to the airlines is “unwise”. He goes on to say that “stockholders, creditors, employees, and suppliers should have to bear most of the costs of the economic slump and the aftermath of the hijackings.” He also seems to favor bankruptcy for those airlines that fail by assuming these carriers will be able to “shed debt and gain greater financial strength” while under the protection of Chapter 11. Mr. Becker also feels that “market forces are much more efficient at determining who survives and in what form.” Under normal circumstances and in a stronger economy, this may be the case. However, the September 11 terrorist attacks created extraordinary circumstances that required an immediate, unprecedented, and bold solution. Regrettably, it will be sometime (if ever) when airline traffic returns to the levels seen in year 2000. This is mostly due to the continuing recession, an abrupt fear of flying, and an avoidance of air travel due to the hesitancy and inconvenience currently surrounding airport security. The government is sensibly attempting to avoid multiple airline bankruptcies by providing short-term liquidity and guaranteed loans to preserve the infrastructure and viability of the U.S. airline industry which, right now, is in our country’s best interest.
As Mr. Becker states, the airlines were already in a downturn due to the poor economy and declining passenger loads especially from the business sector. Unfortunately, most major carriers were unable to recover from the 4 or 5 day grounding of all flights, the residual disruption, and additional passenger traffic fallout that followed the terrorist attacks. Airlines are a cash business and the economics have always been cyclical. The yield is very low and volatile, fixed costs are extremely high (60% of total costs), and major airlines’ revenues are totally dependent on the higher paying business travelers. Simply stated, several major airlines and dozens of smaller carriers would have actually had to file for bankruptcy within 30 to 60 days of 9/11/01 were it not for the initial $5 billion committed to the airlines (85% of this has already been distributed to about 35 different airlines). These payments were part of the $15 billion Air Transportation Safety and Stabilization Act approved by congress on September 21, 2001. If immediate bankruptcy and market forces were the remedy (as Mr. Becker suggests), some of these bankrupt airlines would be unable to restructure, raise cash, and reduce costs in such a short time. Multiple airline failures would also place an undue burden on an already weak economy, have an enormous ripple effect (i.e. airports, hotels, car rental, travel agencies, etc.) and unnecessarily sacrifice an industry that provides such a vital business link to over 420 U.S. City Centers.
The remaining $10 billion of the government’s financial assistance is merely providing a safety net for the airlines by guaranteeing access to loans at reasonable rates. It is important to note that the government will not actually make the loans but will repay any loan if a carrier happens to default. Obviously, the government is going to establish some fairly rigid terms and conditions and will probably only guarantee loans to carriers who submit a viable restructuring model which includes a business plan, cost reduction strategies, and some realistic labor concessions. An Air Transportation Stabilization Board is being formed to establish the parameters for the loan program. In addition to Mr. Gramlich of the Federal Reserve Board (mentioned in Mr. Becker’s article), the board will also consist of Treasury secretary Paul O’Neill, Transportation secretary Norman Mineta, and comptroller general David Walker, or their designees. So far, only two carriers have actually applied for the loans and most major carriers are saying that they may not need to apply for the guaranteed loan.
As for Mr. Becker’s comments that shareholders, creditors, employees, and suppliers should bear most of the costs for this economic slump and the 9/11 aftermath – I believe they already have! Stocks for the nine major airlines as of November 30, 2001 were, on average, as much as 50% lower compared to the same period last year – some airline stocks were actually down more than 70% to 80%. Additionally, approximately 100,000 airline employees did bear the cost of this tragedy and weak economy – they lost their jobs!
Since September 11, airlines have cut payroll, reduced schedules by 20%, and retired many older, less efficient, airplanes. However, there is nothing better than a few higher paying passengers to fix the currently situation. Therefore, recovery of the industry is still going to be entirely dependent on how quickly business traffic rebounds. Airlines are going to have to rely on travelers feeling comfortable about flying again, regaining confidence in airport security, and hopefully no more terrorism or radical military action will occur. The recent passage of the Aviation Security Act which basically federalizes airport security and baggage screening (another action not favored by Mr. Becker) will do much to bring back airline traffic over time. By next year, there is no doubt that the airline industry is going to become smaller and perhaps change forever. Over the next few months, there may very well be carrier failures and perhaps additional consolidations but at least travelers, businesses, and communities will have more opportunity to adjust while reviewing other alternatives. Also, the government will have time to create some new options by changing some regulations such as overseas airline ownership, cross-boarder mergers, and foreign carrier operations within the U.S. – an area where Mr. Becker and I actually concur. The current government assistance plan gives airlines a little breathing room and will help jumpstart the entire airline industry into a new world aviation economy.
Sincerely,
Edward P. O’Connor
President
