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Posted on: Friday, June 4, 2004

Airline chiefs say only fittest should survive

By Melissa Allison
Chicago Tribune

 •  "We should ... let inefficient carriers, be they low-cost or high-cost, simply fail."

— Joseph Leonard
AirTran Airways CEO
WASHINGTON — Airline executives painted a bleak picture of the industry to lawmakers yesterday, saying high fuel prices and crushing competition are wreaking havoc on their recovery three years after the terrorist attacks of Sept. 11 sent carriers into a downward spiral.

But they also were quick to add that competition, rather than the federal government, should determine which carriers survive in an industry that has lost almost $25 billion since Sept. 11.

That could mean trouble for United Airlines, which is counting on a $1.6 billion federal loan guarantee to propel it out of bankruptcy later this year.

The three-member Air Transportation Stabilization Board could make its decision about United's loan guarantee in the next few weeks. It is the board's last pending application.

Even some airlines that received government guarantees after Sept. 11 called for an end to that type of government aid.

Douglas Parker, chief executive of America West Airlines, said the program was necessary to stabilize airlines after the terrorist attacks devastated the nation's air travel system. America West benefited from a $380 million guarantee on a $429 million loan in early 2002.

"It worked. Now let the free market take hold," Parker told the House subcommittee on aviation, which heard testimony from six airline CEOs, including United CEO Glenn Tilton, and other industry experts.

In his testimony, Parker admitted it was "ironic for an airline that survived due to a federal loan guarantee to declare that the market should be allowed to work."

But he believes the market is strong enough now to work on its own. He said his airline posted a profit for the past four quarters and has begun to repay its loan.

Parker's comments were mild compared to the loud lobbying by some airlines against United's application for a similar guarantee in 2002. United filed for bankruptcy shortly after being turned down for that guarantee.

At the hearing yesterday, Tilton was unruffled by comments by Parker and others.

"I took it as flattery," Tilton said. "At the end of the day, the market is taking its course, and this is the market that we're in. The post-9/11 market is our reality. You have, obviously, two of my colleagues on the panel having benefited from the loan guarantee program. They also took pains to establish that it was a very worthy program and was important to them, and I couldn't agree with them more."

Allowing unsuccessful carriers to fail would reduce capacity and bring greater stability to the industry, said AirTran Airways CEO Joseph Leonard.

"The government seems determined to stop the marketplace from choosing what it wants. We should keep the exit doors open and let inefficient carriers, be they low-cost or high-cost, simply fail," Leonard said.

The pleas of low-cost carriers such as AirTran are understandable, given their relatively strong position compared to legacy carriers such as United. They have a competitive advantage and do not want aid going to airlines they believe are not equipped for post-Sept. 11 competition.

Indeed, most of the U.S. carriers facing serious financial trouble are so-called legacy carriers, which have been around for decades.

United, the world's second-largest airline, is a legacy carrier. So is American Airlines, which narrowly avoided bankruptcy last year, largely through concessions from its labor unions.

One of the healthiest legacy carriers, Continental, said recently that it might have to lay off more workers and request wage and benefit cuts to offset crippling oil prices.

Delta Air Lines, the strongest carrier just before Sept. 11, has warned it might file for bankruptcy, and U.S. Airways might be forced into bankruptcy for the second time since 2001 if it cannot get costs under control.

Airline industry debt totals more than $100 billion, much of it due in the next two years, according to the House aviation subcommittee.

And the debt of 11 of 12 passenger airlines are rated as "junk bonds" by Standard & Poor's.

Philip Baggaley, managing director of Standard & Poor's, told lawmakers that the cost advantage for low-cost carriers, compared to legacy airlines, is "immense."

United is "moving up from the bottom of the pack," Baggaley said during an interview after the hearing. But, he said, the airline's performance has not improved "as much as one might have hoped" during bankruptcy.