This article from NYTimes.com has been sent to you by psa188@juno.com. US Airways to Be Test of Bankruptcy Role August 13, 2002 By STEPHEN LABATON WASHINGTON, Aug. 12 - Until this week, the government board overseeing the bailout of the airline industry had acted like a bankruptcy court in miniature, requiring all applicants for financial aid to cut costs and wring major concessions from unions. Now, with the Chapter 11 filing of US Airways, which had applied for a $900 million loan guarantee to secure a $1 billion loan, the board takes on a new role as a potential financier of companies actually arising from bankruptcy. In recent weeks, some aviation experts and bankruptcy consultants had privately urged the Air Transportation Stabilization Board, the government organization overseeing the bailout, at least to signal its approval of the bankruptcy filing in advance. They had noted that a Chapter 11 filing would make US Airways financially stronger and thus more capable of avoiding taxpayer losses. But a top official said today that the government did nothing to encourage the bankruptcy filing. "The board did not play and would not play a role that would encourage a company to file for reorganization protection," Daniel Montgomery, the executive director of the board, said. "It is not the board's position to encourage a bankruptcy." However, he stressed that federal regulations explicitly permitted the board to provide financial assistance to companies arising from bankruptcy. Still, the airline, the nation's sixth largest, was careful to notify the board beforehand that it would seek bankruptcy protection. And within hours of the carrier's bankruptcy filing on Sunday, the board issued a statement saying that its decision last month to grant conditional approval of the loan guarantee remained in effect. Mr. Montgomery said that the board would consider granting the loan guarantee as part of "exit financing" from the bankruptcy proceeding - after the company presents a business plan to the court and its creditors, a process that will take many months. The board apparently decided not to take a formal position on bankruptcy because the Chapter 11 filing threatens to result in huge layoffs, as well as wipe out the investments of investors and some debt holders. The board has adopted a neutral approach toward bankruptcies. But by offering the possibility of financial assistance after bankruptcy, the board could nonetheless be perceived as playing a vital role in the bankruptcy process that defines clear winners and losers. The potential winners include lenders like the Texas Pacific Group, which will be providing a new round of financing in exchange for a large interest in the company. The losers include the carrier's shareholders and its unions, which will now be forced to take another round of large cuts in pay and personnel. While it is unusual for the government to play a significant role in most bankruptcy cases, experts said that it was well within the government's authority to play the role it will in this case - agreeing to the plan that comes out of the bankruptcy proceeding - because the board's main interest is in restoring the industry to financial health. Like the costly bailout of the savings and loan industry more than a decade ago, they say, when taxpayers are on the hook it is reasonable from a policy perspective to take necessary steps to minimize losses. "If the board thinks that Chapter 11 or a particular kind of restructuring most adequately assures them that the loan will be repaid, then it is legitimate," said John Heimlich, director of economic and market research for the Air Transport Association, the airline industry's trade group. "This is a unique governmental body. No one debated that it was given broad discretion from the outset." From the day it was created over the objections of the Bush administration, the stabilization board has struggled to identify and complete its delicate mission. It is supposed to help companies crippled by the decline in travel after the Sept. 11 attacks without giving aid to companies that have no chance of survival, that can find money elsewhere or that were struggling long before the attacks. But it has faced Congressional efforts to cut back its $10 billion program and intensive lobbying from some of the industry's healthier airlines that have sought to block loan guarantees to others and have argued that they could be hurt as their rivals are helped. The board is headed by Edward M. Gramlich, a governor at the Federal Reserve, and is made up of Treasury Under Secretary Peter R. Fisher and Kirk Van Tine, general counsel of the Transportation Department. David M. Walker, the comptroller general, is a nonvoting member. One previous applicant, America West, has successfully completed the application process, winning $380 million in loan guarantees for a $429 million loan. The board has denied applications from Vanguard Airlines and Frontier Flying Service. Now, as a possible financier for carriers that have already gone through a formal Chapter 11 proceeding, officials say the Air Transportation Stabilization Board is hoping to better protect taxpayers from losses while it assists the industry. This lesson cannot be lost on United Airlines, the nation's second-largest carrier, which is also considering seeking the shelter of a Federal bankruptcy court and has applied for a $1.8 billion guarantee for $2 billion in loans. But the effort of providing assistance after a bankruptcy filing may further discourage consolidation in an industry widely viewed as suffering from overcapacity. "Obviously, there is too much capacity in the industry," said Steven A. Morrison, an economics professor at Northeastern University who has written about the industry. "These bailouts may help to continue that and bring down other carriers or cause financial stress for otherwise healthy companies. So right now, we have each carrier cutting back 10 percent but maybe what you need is some carriers cutting back 100 percent." Professor Morrison, while generally praising what he called the board's judicious decisions to grant some loan guarantees and deny others, questioned whether the government would be able to provide financing for a company with the same level of competence as the private sector. "They just don't have the expertise," he said. http://www.nytimes.com/2002/08/13/business/13BAIL.html?ex=1030244366&ei=1&en=be332e046ff7c498 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company