This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx /-------------------- advertisement -----------------------\ Explore more of Starbucks at Starbucks.com. http://www.starbucks.com/default.asp?ci=1015 \----------------------------------------------------------/ Inconsistency: New Hobgoblin for the Airlines May 3, 2003 By EDWARD WONG Breaking up may be hard to do, but it appears especially tough for the government and the airline industry. Since deregulating the industry a quarter-century ago, the government has struggled to map out a consistent approach for handling it. Should it let market forces dominate, even if that means a decline in the number of flights and an increase in fares as airlines fail or consolidate? Should it take a role in the industry's usually fractious labor negotiations? Should it let foreign investors own controlling interests in domestic airlines? These questions have taken on added urgency in the last few months as airlines have sought wage and benefit concessions from their employees and made cutbacks in an effort to reduce their costs. Two major airlines, United and US Airways, sought bankruptcy protection and a third, American, is still struggling to avoid it. Arguing that assistance was needed to avoid financial disaster, the industry persuaded the government to come up with a $3.8 billion aid package last month. But what has contributed to the crippling of the airlines is the inability of the government and the industry, like heartbroken lovers, to let go of each other, according to economists, executives and lawmakers. Few agree on what the government's policy should be, but they generally contend that officials should take a more sanguine view toward market forces. Government policy should remain consistent through downturns and boom years, they say, and avoid treating companies differently, whether they are reaping profits or in danger of collapsing. "It is largely start and stop right now," said Representative James L. Oberstar, a Democrat from Minnesota who is his party's ranking member on the House Transportation Committee. Clifford Winston, an economist at the Brookings Institution who studies the industry, said that "the idea would be these policies would be harmonized along with what deregulation was expected to do; the fundamental criticism is that government has failed to do that." The government's "residual presence" in the industry, he added, has created "a mind-set that you can use the government for your own purposes" and "has diverted the carriers' attentions from working out their problems themselves." Last month, President Bush approved, as part of the supplemental spending budget for the war in Iraq, the $3.8 billion in aid, with about $500 million of that coming in the form of a suspension of security taxes for four months ending in September. The Transportation Security Administration is now working to split that money among 71 airlines by May 16. But the debate over how much aid to hand out - and whether to give any at all - has been heated and could intensify as the government tries to figure out what to do about the taxes after September. The industry already received one aid package, when Congress approved $15 billion in cash and loan guarantees after the Sept. 11 attacks. Then, in the last six months, it began to look as if federal officials were coming around to adopting a liberalized attitude toward the airlines. Last December, they denied United Airlines a $1.8 billion loan guarantee, saying United had to repair its broken business model. On March 31, the Transportation Department approved a marketing partnership among Delta Air Lines, Northwest Airlines and Continental Airlines, after easing conditions it had initially required for the partnership. But the $3.8 billion in aid raises questions of whether the government is distorting market forces in an industry that experts say needs a good shaking out. Of the total package, $2.3 billion is partial reimbursement for security-related taxes and costs incurred by the industry after the Sept. 11 attacks - most of which came from a new $2.50-a-flight-leg tax that passengers paid, not the carriers. The airlines argue, though, that that tax made it harder for them to raise ticket prices. "It is Congress's responsibility post 9/11 to assume the security costs as a part of national defense," said Jim May, chief executive of the Air Transport Association, the industry's main trade group. "You can't pay for it, then when it's convenient lay it off on the airlines." Mr. May said the government should permanently rescind the security taxes even after the suspension period ends. But many critics of the tax relief say the airlines should contribute something to airport security costs. First, they say, it is spurious to argue that the protection of airlines is a national defense issue because many other industries - trucking, arms manufacturing and so on - could just as easily argue that their security measures should be financed by taxpayers to keep their products away from terrorists. Second, critics say the threat of terrorism will continue to be a fact of life in commercial aviation, and costs related to it should now be considered part of doing business, just like paying to have planes tuned. "They have to address those new risks and those new requirements in order to service their customers," said Kevin P. Mitchell, president of the Business Travel Coalition, an advocacy group for business travelers. "That seems to be an identifiable new part of the environment. Why are taxpayers funding that?" Mr. Oberstar was among the first lawmakers to propose an aid package for the airlines to alleviate effects from the United States-led invasion of Iraq but did not support the suspension of security taxes. "That's puzzling to me how that worked out," he said, adding that he thinks passengers are willing to pay the equivalent of two lattes at Starbucks to support security. Mr. Winston, the economist at Brookings, said the government's role in security was another example of its becoming "involved in areas where it doesn't have expertise." Instead, he said, airports should oversee security - they have more expertise than the government or the airlines, and they would have more market-driven incentive than the airlines to keep the premises safe. There are certain regulations that executives and industry analysts say are hampering the health of the airlines. They point to the Railway Labor Act, which they argue leads to prolonged negotiations that give the unions too much leverage. But this is a politically divisive issue, and there is no clear-cut opinion on it among experts. Few of them expect the act to be overhauled anytime soon. Many people in the industry agree, though, that the government should lift limits on foreign investment in domestic airlines. The law prevents foreign investors from owning more than 25 percent of the voting stock of an airline or 49 percent of total equity. Those restrictions originated in an era when federal officials were more concerned about national security issues related to foreign investment, experts say. "You can't allow people not to buy into U.S. airlines that operate subject to U.S. labor laws," said Michael E. Levine, a former airline executive who is now a professor at Yale Law School. "I don't see any reason why we should prevent them." Richard Branson, the British founder of Virgin Atlantic Airways, said foreign-owned airlines that compete with the traditional domestic companies might be the stimulus that the ailing industry needs. He said he was talking with one or two potential partners about starting an airline in this country and would prefer to own the majority of the company. "We'd like control over our destiny," he said. Despite all the talk of further liberalizing the industry, there are lawmakers who would like to see regulation restored to parts of it. Many of them say they fear that if airlines are allowed to cut back on unprofitable routes, then travelers might be forced to drive hundreds of miles for air service. Representative Peter A. DeFazio, a Democrat from Oregon, said the government should think about reregulating routes that are dominated by one airline to ensure that service continues between those cities under any circumstance. "At some point, you've got to think, `Do we want to keep giving them money, or take an equity position, or look at reregulation?' " Mr. DeFazio said. "You have to look at what makes sense to sustain a system of universal air service." http://www.nytimes.com/2003/05/03/business/03AIR.html?ex=1052978845&ei=1&en=9c628aacb265ec9b 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@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2003 The New York Times Company