Financial Aid For Airlines Calls For Careful Decision

Last September, after barely two weeks of debate, Congress enacted legislation to bail out the nation's airlines.

Intended to help repair the economic damage suffered by the industry in the wake of Sept. 11, the $15 billion aid package garnered banner headlines. Yet, many of the devilish details — including who gets what aid under what conditions — were left unresolved.

A federal board is now working out these questions, with one key decision announced just before New Year's, and another expected soon.

Although largely off the media radarscope, the issue is key for airline consumers, as well as taxpayers.

The bailout plan adopted by Congress included two elements: $5 billion in direct grants and $10 billion in loan guarantees. Decisions on the grants came relatively easy, and most have now been distributed, based on market share.

The tougher issue has been loan guarantees.

Here, Congress provided relatively little guidance, leaving much to a new Air Transportation Stabilization Board, with members from the Transportation Department, Treasury Department and Federal Reserve, to sort out.

The goal, most everyone agrees, is to help airlines weather difficulties caused by the Sept. 11 terrorism, while protecting taxpayer assets.

But that simple-sounding task has forced the board to thread a needle with the smallest of eyelets. Err in one direction, and healthy firms end up with taxpayer largesse. Err in another, and taxpayers lose their investment.

Another challenge involves determining whether an airline's distress really stems from Sept. 11.

Remember, this industry was having a notoriously bad year even before the 11th, with losses projected at $3 billion or more. An industry shake-out was widely predicted, and arguably much needed.

Such a shake-out would certainly be bad for the losers, but ultimately good for consumers, as it forces the least well-managed to improve or make way for others.

The first test case of how the board would thread these needles came on Dec. 28, when it voted 2-1 to tentatively approve guarantees for Phoenix-based America West Airlines.

The terms, however, were stricter than the airline hoped: of $445 million in loans, only 85 percent would be guaranteed, requiring that private lenders assume some risk.

It also required substantial fees, and stock warrants for one-third of America West's stock.

This last provision raises some serious red flags. For the first time since the CIA operated Air America in Laos, the U.S. government will take an ownership interest in an airline.

The potential conflicts are immeasurable. Will the firm have an advantage in regulatory disputes? Will it use its position to dictate where and how it provides service?

Nevertheless, the good news here is that the board showed it wouldn't be a pushover — the conditions were relatively strict (although even with those, the Treasury Department voted against the deal, expressing concern over potential taxpayer exposure).

Importantly, however, the conditions will likely mean no stampede of viable airlines asking for handouts. In fact, days after the decision, USAirways announced that — despite its financial difficulties — it wouldn't apply for guarantees.

But what about the worst-off carriers, especially those in trouble before Sept. 11? The answer to that may be soon in coming.

On Dec. 9, Vanguard Airlines, a small discount carrier based in Kansas City, applied for federal loan guarantees. Though clearly financially beleaguered, its problems began long ago. Since starting up in 1994, it has led a “perils of Pauline” existence, and has never reported a profit. In both 1999 and 2000, its auditors expressed doubts about its ability to continue.

Vanguard has evoked considerable political sympathy — as a plucky flying David going after the airline Goliaths. This puts pressure for the board to press — just a little, just this once — on the competitive scales to help out this small player.

They should resist the temptation. Protecting firms from the competitive process, under the guise of compensation for terrorism, would be industrial policy of the worst sort.

And, as other airlines receive similar government favor (with Vanguard as the precedent), consumers would be the ultimate losers — as the dynamic market that has provided so many benefits over the past 25 years is ever so slightly deadened.

There's no doubt that the airline industry has suffered economically in the wake of Sept. 11. Nevertheless, unless it moves carefully, government efforts to help may cause more harm than good for the industry and airline consumers.

James L. Gattuso is vice president for policy at the Competitive Enterprise Institute, a private, free-market public policy group in Washington, D.C.