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With Bailout, U.S. Airline Industry Should Recover

5 MINS READSep 24, 2001 | 05:00 GMT
Summary

The terror attacks of Sept. 11 have thrown America's airline industry into disarray. Fortunately for both the industry and the American economy, the U.S. government has the capacity to quickly address the issue with a mammoth bailout package.

Analysis

U.S. President George W. Bush signed a $15 billion airline relief bill into law Sept. 23 after largely superficial debate in both houses of Congress.

Airlines the world over face a bleak future. The global slowdown and rising fuel costs had already pushed much of the sector to the brink of bankruptcy. American carriers alone were on track for a total industry loss of $3 billion before the Sept. 11 suicide hijackings. Losses now could mount to $6 billion or more, Reuters reported Sept. 24. The federal government's speedy action underscores the industry's importance to the American economy. The bailout should provide the financial bulwark to prevent a collapse.

Until the measure became law, there was little light on the runway. During congressional testimony, airline executives declared they expect to lose $4.7 billion from the date of the attacks through the end of September. United Airlines projects that added insurance costs for airlines will jump by an extra $1 billion in the short term.

Consumer confidence in the industry is also at a low. Planes belonging to the country's two largest carriers, American Airlines and United Airlines, took down the World Trade Center towers and slammed into the Pentagon. In the aftermath of the attacks, Bush gave orders to shoot down any passenger flights that did not respond to air traffic controllers. Despite the necessity of the order, it is hardly what the one-third of travelers who are vacationers want to hear as they plan their trips.

Restoring travelers' confidence will hit airlines in the checkbook. Stricter security checks will entail additional guards at airports and armed air marshals on every flight and could even extend to minor redesigns of planes themselves to limit cockpit access. All of this costs money that the airlines currently do not have, and the costs will be passed along to passengers. The situation is so severe that the Air Transport Association predicts most airlines will seek Chapter 11 protection "within 90 days."

The economic woes of air travel are not limited to the airlines. Airliner holds are used to carry about 75 percent of the United States' first-class mail, according to Knight Ridder. The American Society of Travel Agents believes that 29,000 of the country's travel agencies will crumble in the weeks ahead as people cut back on vacations. The tourist industry and affiliate sectors — such as hotels and restaurants — will reel predictably.

Meanwhile, Boeing — the country's single-largest exporter and manufacturer of the bulk of the U.S. airline fleet — has already drastically reduced its multi-year production schedule and plans to lay off 30,000 employees. All told, about 125,000 jobs have already fallen prey to layoffs in the United States alone.

As the full extent of the crisis becomes clear, additional waves of layoffs are likely. For example, short commuter flights — once among some of the most profitable for airlines — may be all but phased out. The new security precautions necessitate two- to three-hour advance check-in times. For short hops, such as the hourly Delta Airlines shuttle from Washington to New York, travelers may now find it faster to take a three-hour train ride than to wait in the airports for security checks to clear.

Rail networks also are suffering, though from increased ridership rather than shattered confidence. Amtrak, the U.S. rail provider, is asking the federal government for $3 billion in emergency funds to handle the sudden traffic surge.

All of these changes — security revamps, fewer flights and higher ticket prices — impact the country as a whole. Two-thirds of all airline passengers are business travelers, and quick, cheap air travel helps fuel the United States' high productivity rates. As prices and delays rise, productivity will fall. Such losses in productivity strike directly at the core of America's international competitiveness.

The response in Washington came swiftly. Aside from the economic importance of a functional national air grid, every Congress member has at least one of the country's 15,000 airports in his or her home district or state. Bailing out the industry, therefore, is popular as well as necessary.

Shortly after midnight Sept. 21, the Bush administration reached preliminary agreement with Congressional leaders for a bailout package. The measure quickly sailed through both chambers.

· The first phase is an immediate $5 billion handout to compensate for the Sept. 11-13 shutdown and expected revenue losses as travelers either abandon plans or choose other modes of transport.
· Next comes $10 billion in guaranteed loans. This is essential, as American credit agencies have slashed the debt ratings for all of America's carriers. For example, Moody's has cut senior unsecured debt ratings for American and Delta to junk status.
· Some $3 billion of the $40 billion recovery and military buildup package Congress passed shortly after the attacks is earmarked for upgrading airplane and airport security.
· The federal government will establish a victims compensation fund for families of those killed in the Sept. 11 attacks. This should limit liability for any lawsuits that arise from the hijackings. The fund could total as much as $10 billion, according to MSNBC.
· Most important, the government itself will provide liability insurance to the airlines. Private insurers have deemed that sort of coverage, which is required to fly at all, simply too risky.

The bailout is hugely expensive, and several companies will probably join Midway Airlines in bankruptcy proceedings. But the package should form the cornerstone of recovery for the airline industry.

In essence, the United States is "socializing" the airline insurance industry, in the words of U.S. Treasury Secretary Paul O'Neill. Anything less would ground the entire fleet.

For European airlines, however, the future is less assured.

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