Washington - In the aftermath of Sept. 11, the federal government is taking a much more active role in the airline industry, enacting and proposing new rules and guidelines crafted as recovery mechanisms. Those actions also will result in further regulation and oversight for an industry that always has been more or less regulated and closely watched.
From enhanced security requirements to financial aid, the government has made clear its intention to keep U.S. carriers fiscally healthy, operational and competitive. In the weeks and months ahead, its decisions will define a new era of airport and airline security, the pace and form of potential industry consolidation and even which carriers survive and which ones succumb to economic pressures.
Others throughout the industry recently have noted formalized guidelines for the Air Carrier Guarantee Loan Program, even as the House of Representatives continues to debate airport security federalization (see story, this page). The Senate passed its bill 100-0, but some Republican leaders in the House are arguing against expanding government directly into the realm of airports.
The question of whether the government ought to bail out any airline in a free market is answered, for many, by the extenuating circumstances that tragically arose last month. But following the government's quick $5 billion cash injection, it remains unclear which airlines will be given chunks of the $10 billion earmarked for guaranteed loans and what the possible ramifications may be. Though the guidelines were set to make the process as evenhanded as possible, the Air Transportation Stabilization Board nevertheless will be making decisions that decide the fate of certain carriers, a potential can of worms that could impact the industry's competitive balance.
The board is comprised of individuals at the highest levels of government, Federal Reserve Board chairman Alan Greenspan, Treasury secretary Paul O'Neill, Transportation secretary Norman Mineta and comptroller general David Walker, or their designees. While they may not have the most in-depth knowledge of the aviation industry, they are expected to rely heavily on industry expertise.
The rules of the program, established by the Office of Management and Budget, state that any carrier can present its case by June 28, 2002, and that there is no limit on the amount of guarantees a single carrier may receive. Bankrupt airlines are not precluded from applying but may be approved only if they have a court-approved restructuring plan. The federal government will not actually make loans but will repay any loans it guarantees if the carrier defaults. The maximum length of the loan guarantees will be seven years and carriers will be charged a fee that will be higher for longer-term and higher-risk guarantees.
According to Mitch Daniels, director of OMB, the central focus of the applications must be a "persuasive" business plan. However, the guidelines also state that preference would go to carriers that, among other things, "demonstrate a reduction in the risk of default to the government by pledges of collateral and by other financial structures." According to Title I of the Air Transportation Safety and Stabilization Act, which covers the loan program, the federal government will share "in the gains of the participating corporation or its security holders through the use of such instruments as warrants, stock options, common or preferred stock, or other appropriate equity instruments."
That the government would have equity stakes in multiple carriers while also being responsible for aviation policy could be construed as a conflict of interest, even if future regulatory decisions are not guided by ownership positions. The fact that the Justice, Transportation and Treasury departments operate as separate entities does not fully assuage many concerns.
"It would be terrible if the government actually took stakes to influence airlines. My understanding is that it is meant to make sure that if we put taxpayer money in, there is a return that an investor would expect," said Michael Levine, a former senior airline executive and current adjunct professor at Harvard Law School who was influential during the deregulation debate of the 1970s. "The danger, however, is that carriers receiving loans will not do well and the government will use its ownership share in order to micromanage."
But he doubted such a turn of events. "The government can use the loan program to provide liquidity under the same sort of terms used in private markets," Levine said. "The government's role simply should be to avoid multiple bankruptcies if that private market investment does not hold up."
Others, however, see significant changes on the horizon. "The government will be interfering, dictating to airlines' management what should be done if the airlines are doing things insensitive to the marketplace," said Rolfe Shellenberger, senior consultant for Runzheimer International. "There will be public outcries that taxpayers need to be protected. It is such a huge amount of money."
As a result, Shellenberger said there would be "ipso facto regulation" on fares due, in part, to the success of Southwest Airlines. "Congress will continue to be very worried about the airline industry and the only model that works consistently is Southwest's. It is doing something other airlines aren't in terms of stimulating demand, and price is the most obvious thing," he said. "Airlines do not have to work on such slim margins and no one as yet asked that question strongly enough. But the government will."
Of course, there is the sticky issue of who gets loan guarantees in the first place. Brent Garback, CEO of Total Travel Management in Troy, Mich., suggested the board would use the application review process as a means of change on the front end, encouraging carriers to adopt new ideas in exchange for approval. "It has that power and ability to interject themselves on any airline issue, whether it be idiosyncrasies of airline pricing, the bipolar relationship with travel agencies or the disconnect with consumers," he said. "The review board will become, for all intents and purposes, an organization as strong as the Civil Aeronautics Board ever was, in terms of exercising influence."
Garback predicted that, to mollify their own bankers, most carriers will ask for loan guarantees and, therefore, fall under the board's purview. That, he said, will trigger a chain of events leading to full industry regulation within four years—following more than 25 years of so-called deregulation.
Meanwhile, Sens. John McCain (R-Ariz.) and Jon Kyl (R-Ariz.) sent a joint letter to OMB, expressing concern that the federal government should not become "the architect of a new aviation economy, effectively picking winners and losers, and in doing so contributing to the further consolidation of the airline industry." The two senators said they wrote the letter, which was co-signed by Democratic leaders, "primarily due to a concern that the loan guarantee program may be extended only to airlines determined to be more financially stable."
But Levine said industry concentration, which would limit competition, would be bad for the flying public and, therefore, is not an intended consequence. "The government has an interest in maintaining airlines' liquidity to allow them to reorganize and remain competitive," he said.
The federal government also will find itself inexorably entangled in other regulatory issues, which may or may not be impacted and influenced by its enhanced role, including possible slot reallocation, international route authorizations and other controversies surfacing in a changing industry. However, Kevin Mitchell, chairman of the Business Travel Coalition, said that decisions will favor industry viability over government profit. "DOT and DOJ will proceed based on facts presented and in the long-term interest of competition rather than the short-term interest of a few million dollars," he said. "Nevertheless there will be questions about the forms of ownership and the forms of influence."
Many of those questions will be affected by developing events in an uncertain environment. "If there is even one or two more tragedies, I believe investors would run for the hills," Mitchell said. "The government would not let the industry fail and by default would become owners."
In almost any scenario, Garback's outlook is that the initial guaranteed loan program will not be the end of federal funding and taxpayers should expect additional rounds of financing for "the essential infrastructure" of the airline industry. Should that happen, he said, it would further tie carriers to government oversight and lead to far-reaching changes. "Airlines will be hard-pressed to turn things around substantively until the war on terrorism is finished," he said. "And you cannot ask the American public to have literally saved your industry without there being a new social contract."
Taking into account nightmarish financial losses, the extent of which will begin showing in carrier earnings reports this week, as well as labor issues and economic liability stemming from massive furloughs worldwide, it is in the government's interest to somehow kickstart the industry. Exactly how, and to what extent, that is attempted remains unclear. But the elements of change are now in place.
With all that in mind, Shellenberger, too, expects plenty of additional governmental oversight and concluded, "A truly efficient airline system is not going to erupt from a free market."
~Barbara Cook contributed to this article