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Watch the trailer at: http://www.foxsearchlight.com/theclearing/index_nyt.html \----------------------------------------------------------/ Airline Bailout Fails to Do the Job, Some Experts Contend May 14, 2004 By MICHELINE MAYNARD WASHINGTON - In the dark days after Sept. 11, 2001, Congress raced to approve a $15 billion bailout program meant to ensure the survival of the devastated airline industry with grants and loan guarantees. But the bailout program has not accomplished anything like that, according to a variety of experts, including industry executives, labor leaders, and members of Congress. Instead of tiding otherwise sound airlines over until depressed air traffic could pick up again, the program has been used in part as a life-support system for weak airlines that were struggling before Sept. 11 and are still struggling. Though demand for air travel has recovered nearly to pre-attack levels, the industry as a whole faces yet another financial crisis, because of low-cost competition and rising fuel costs. The bailout program may actually have made matters worse, some experts say, by forestalling a badly needed shakeout in the industry, keeping the weakest carriers alive at the expense of the others and perpetuating a glut of flights and seats. "I'll be honest with you, if you look at it from a strictly conceptual point of view, it does have a distortional impact on the industry," Herbert D. Kelleher, the chairman of Southwest Airlines, said in an interview this week. In the last two weeks, two major airlines - Delta, which did not seek federal loan guarantees under the program, and US Airways, which received a $1 billion package - have warned that they may have to file for bankruptcy protection unless their employees agree to wage cuts and other concessions. For US Airways, a bankruptcy filing would be its second since Sept. 11, and one of its major creditors this time would be the federal government, which holds a 10 percent stake in the company as collateral. The chief executive of United Airlines, Glenn F. Tilton, is, meanwhile, conducting a dogged campaign to win public support for his company's application for $1.6 billion in loan guarantees from the government. United has been in bankruptcy protection since December 2002, after its first application, for a $1.8 billion package, was rejected by the Air Transportation Stabilization Board. The board, created by Congress to oversee the bailout, includes representatives from the Federal Reserve and the Treasury and Transportation Departments. It has no deadline for deciding on United's request, but the airline expects a ruling soon. Airline industry executives uniformly supported the bailout program - which its trade group maintains was crucial for the industry's survival - when it was put together in the week after Sept. 11 though the companies disagreed on its content. The $5 billion in cash grants were welcome after airports were shut for nearly a week, Mr. Kelleher of Southwest said. Despite misgivings, he was loath to criticize the loan guarantees then. "I told people, 'This is a time for patriotism,' " he said. "That doesn't necessarily mean that I thought it was a good idea." Neither did most airlines. Though they were far from healthy financially, American, Delta, Continental, Northwest and Southwest decided not to apply for loan guarantees. In interviews over the last few weeks, some executives at those airlines said they opted out mainly because of the requirement that the airlines put up stock as collateral. Others said the original deadline for applications - June 28, 2002 - left them too little time to develop a valid business plan. The deadline turned out to be a flexible one. Two carriers that won approval for loan packages, America West Airlines and US Airways, were later allowed to renegotiate them after running into trouble meeting the original terms. US Airways, in fact, was technically in default on its package early this year. And after United's first request was rejected, the loan board invited it to reapply, which it did last December. "There's a huge fairness issue," said Robert B. Reich, the former labor secretary, a critic of the loan guarantee program. "The airlines that didn't take advantage of it are left holding the bag." Rival airlines complain in particular about the case of United Airlines. One competitor circulated an analysis this week disputing United's claim in its second application that it had achieved $2.5 billion a year in labor-cost savings; the analysis says that United has fallen $800 million short, in part because it has not saved as much on pension contributions as it expected, despite legislation meant specifically to help it. United said that it stood by its reckoning of the savings and that it would post an operating profit in 2005 (a goal pushed back from this year) and a net profit in 2006. There is also the question of political influence. The Congressional district represented by J. Dennis Hastert, the speaker of the House, is in Illinois, United's home state, and Mr. Hastert has spent months lobbying tirelessly for United's application. United executives and employees donated $10,200 to Mr. Hastert's 2002 re-election campaign, according to Opensecrets.org, a Web site that tracks political contributions. "There's an immense amount of political pressure being applied,'' said Senator Peter G. Fitzgerald of Illinois, who like Mr. Hastert is a Republican. Senator Fitzgerald cast the only vote against the bailout package in the Senate in 2001. The political atmosphere surrounding the United application "is exactly why we don't want the government bailing out individual businesses," Mr. Reich said. "The politics take over." Instead, he said, "there is a perfectly logical and economically sound process that airlines can use, and that's reorganization under bankruptcy." In the 1980's and 1990's, a number of well-known airlines that ran into financial trouble went out of business or were absorbed by other carriers, including Pan Am, Trans World Airways and Braniff. But Mr. Reich, Mr. Kelleher and others say the bailout program has blocked that process from working normally. "It is, in essence, an interruption of the free market system," Mr. Kelleher said. Some carriers, like National and Vanguard, disappeared after they were turned down for loan guarantees by the loan board. Others, like America West and Frontier, are still in business largely because the board said yes. Frontier has already repaid the $63 million it borrowed in 2002. But US Airways still faces a hard struggle to pare its operations, to extract more cuts from its unions and to try to sell assets like its East Coast shuttle. Similarly, there is no guarantee that United, which has so far kept its global route structure largely intact in bankruptcy, can escape having to make more cuts even if its application is approved. United said recently that it expected its cost for jet fuel to be $450 million higher this year than it forecast in the business plan submitted to the loan board in December. Because it is in bankruptcy, the airline has been unable to hedge its fuel costs with futures contracts, and the pension-cost relief under the new law, considered crucial to its loan application, will be eaten into by the fuel bills. Mr. Kelleher, watching the situation from the security of a solvent carrier, said he did not believe the bailout plan would do lasting good for the industry. "From a reasoned point of view, it doesn't make sense," he said. http://www.nytimes.com/2004/05/14/business/14air.html?ex=1085540734&ei=1&en=2ddb9c8c36cc8f4b --------------------------------- Get Home Delivery of The New York Times Newspaper. Imagine reading The New York Times any time & anywhere you like! Leisurely catch up on events & expand your horizons. Enjoy now for 50% off Home Delivery! 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