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The Honolulu Advertiser
Posted on: Tuesday, March 19, 2002

Experts now fear airline bailout may have encouraged weakness

By Brad Foss
Associated Press

Only America West has tapped loan guarantees offered with conditions as part of the post-Sept. 11 industry bailout; the rest of the package was a quick financial shot in the arm.

Advertiser library photo • Dec. 7, 2000

Five days after the terrorist attacks, at a private meeting on Capitol Hill, aviation expert Darryl Jenkins gave congressional leaders his stamp of approval on a multibillion-dollar bailout being lobbied for by the airline industry.

The massive cash infusion would be a shot in the arm for the ailing industry, he reasoned, and would send a message to terrorists that America would not allow them to knock out such a vital industry.

But six months later, Jenkins, other industry experts and some economists believe the $5 billion payout to compensate carriers for lost business shouldn't have been rushed through without more strings attached.

The $10 billion in loan guarantees made available was tied to strict preconditions, but so far only one major carrier, America West, has tapped that fund.

"Should we have been a little more circumspect and argumentative? With what we know now, we probably did act too hastily," said Jenkins, director of the Aviation Institute at George Washington University.

"Longtime structural problems could have been better addressed through Chapter 11 than a bailout," he said.

Jenkins worries that major carriers have less incentive and leverage to tackle fundamental problems, such as the high cost of labor, now that the intense financial pressure has been lifted. Knowing that their employers received hundreds of millions of dollars apiece, unionized workers at United, US Airways and other airlines have become less likely to accept wage reductions in labor negotiations, he said.

Wall Street analysts argue that while the emergency aid bolstered a few of the weakest carriers, it only delayed recovery for the rest of the industry. A Chapter 11 bankruptcy here or there, or even some consolidation, would have increased the remaining carriers' market share and returned them to profitability sooner, analysts said.

The impact on consumers is another story.

"One big bankruptcy I think the customers would survive just fine," said Michael E. Levine, a professor at Harvard Law School and a former airline executive. "Two big ones, and you're beginning to push pretty hard on the level of competition in the industry."

But in the immediate aftermath of the 48-hour shutdown of the nation's air space, and as concerns about the safety of air travel mounted, airline executives pleaded with Congress for a bailout, saying it was the only action that could prevent widespread bankruptcies.

"In those dark days after Sept. 11, we were all scared," Jenkins conceded. "None of us thought we'd ever recover from all of this."

Indeed, the rush to bail out the airlines also had patriotic roots, said Clifford Winston, an economist at the Brookings Institution in Washington who also was invited to the Sept. 16 meeting on Capitol Hill.

"We were going to make a statement to the world that we will not allow terrorist attacks to damage our industries," he said. "That's what I think was motivating it."

Although Winston is not opposed to economic decisions made with a social goal in mind, he said Congress may have gone about it the wrong way. Instead of giving away cash, the government should have cut airfare taxes, he said. That would have spurred revenues by enabling carriers to squeeze more profits out of each ticket sold, he said.

Certainly the airlines believe they've made significant strides in reducing their high fixed costs since Sept. 11: About 100,000 employees were let go, flight schedules were reduced and smaller planes were substituted for larger ones. And late last week Delta Air Lines became the first major carrier to eliminate base commissions to travel agents.

Still, airline officials say the industry's persistent malaise is evidence of just how badly they needed the federal aid.

"The prospect of carriers going bankrupt wasn't just one or two, but more like half the industry," said David Swerienga, chief economist of the Air Transport Association, an industry trade group based in Washington.

Michael Boyd, a Colorado-based airline consultant, said travelers who rely on smaller airports were the real beneficiaries. If an airline serving a tiny community went bankrupt, there is no guarantee a competitor would take over the route.

"With some of these communities, when they lose air service, they lose economic growth," Boyd said.

But critics of the bailout say there is nothing to prevent airlines from leaving less profitable airports anyway. That is exactly the type of precondition that Rep.

Peter DeFazio, a Democratic congressman from Oregon who voted against the bailout package, would have liked to have seen written into the airline stabilization act.

Passenger demand has gradually improved over the past six months, yet it remains about 10 percent below year-ago levels, even with a 15 percent decrease in the average price of a domestic ticket.

Wall Street analysts predict major carriers will post losses of as much as $3.5 billion this year — roughly the same outlook for the industry in 2001 before Sept. 11. No major carriers have filed for bankruptcy in the past six months, and analysts do not expect any in the immediate future.