Bailout of airlines criticized, defended

Sympathy expressed, even by many in the hands-off camp

September 19, 2001|By Jay Hancock | Jay Hancock,SUN STAFF

Last week's terrorist attacks and their aftermath caused large revenue losses for thousands of companies, from stock brokerages and TV networks to restaurants and department stores.

So some analysts are asking why airlines should be favored with a multibillion-dollar government bailout.

The airline industry, which has been warning that major carriers are within days of entering bankruptcy proceedings, says it is too important to the economy to have to fend for itself in the attacks' wake. Many economists agree.

Others wonder whether the airlines should get back on their feet in the same way as the delis in Lower Manhattan, without heavy government aid.

"Everybody has been hurt by this; my family's business has been hurt by this," said Gerald O'Driscoll, an economist at the conservative Heritage Foundation in Washington. "How do you single one person out" for aid? "Let's face it, the airlines will keep running. This is about bailing out investors."

The airlines' problems, which everyone agrees are grave, pose an unusual challenge for President Bush, who has ordered that a "comprehensive" rescue plan for the industry be developed.

He and his top aides generally favor hands-off, market-oriented approaches to economic challenges. But predictions of the economic harm that might result from airline insolvencies have been so numerous and so loud that the White House officials have been meeting with industry executives to discuss relief.

Details of a proposed package are being worked out. The airlines are hoping for more than $24 billion in tax relief, grants and loan guarantees.

"You don't want to subsidize ... bad business practices," senior presidential aide Karen Hughes said yesterday. But she added that "there may be some short-term things that absolutely need to be done."

Because all U.S. flights were grounded for most of last week and ticket sales are still down sharply, airlines have lost huge amounts of revenue since hijackers crashed jetliners into the World Trade Center and the Pentagon on Sept. 11.

Some analysts are skeptical of claims that the industry has been suffering net losses of up to $300 million a day, but nobody doubts that the financial damage is traumatic. Many airline costs - airplane financing and terminal leases, for example - continue consuming cash even when revenue falls.

"This isn't just one firm in an industry; I think the whole industry may go illiquid," said Michael E. Levine, a former regulator and airline executive who teaches at Harvard Law School. "There is a genuine public concern here that an important piece of the public infrastructure might get disrupted, not forever but for long enough to damage the economy badly."

Airlines are lifelines of the tourism industry, freight carriers for many businesses and shuttle buses for executives staying in touch with customers and colleagues. Airlines and related businesses also have more than a million employees.

Unlike previous business bailouts, an airline rescue package would be saving corporations from an unforeseeable, extraordinary blow, not from their own incompetence, advocates said.

"This is a situation where one can be sympathetic to the airlines," said Steven Morrison, an economist and airline industry specialist at Northeastern University. "This isn't the sort of thing they could have planned for, certainly not of this scale and magnitude."

A frequent point of comparison is the 1980 federal loan-guarantee bailout for Chrysler Corp., which had gotten into trouble by making cars that customers shunned, partly because the vehicles burned so much gasoline at a time when oil prices were soaring.

"The comparison to the Chrysler bailout is absolutely ludicrous," said Bob Aaronson, a Los Angeles aviation consultant. Chrysler was one of several U.S. auto manufacturers, he said, and "this is a case where not just one of the airlines but virtually all of them could be in bankruptcy within 60 days, absent some action."

U.S. airlines have made mistakes by expanding too rapidly and taking on too much debt. Even analysts who are sympathetic to the idea of a bailout want to make a distinction between throwing the industry an emergency lifeline and rewarding it for profligacy.

Sen. Ernest B. Hollings, a South Carolina Democrat and chairman of the Senate Finance Committee, wondered Monday whether a rescue package is justified when the airlines are "giving their executives $120 million in salaries and bonuses this year."

O'Driscoll conceded that an argument can be made for giving the airlines federal help in the name of economic stability. But the private marketplace, working through bankruptcy court, would ultimately do a better job of reviving the industry, he said.

"Part of the problem of the government going in is that they're going to support individual companies that may be unsustainable now," O'Driscoll said.

Levine rejected bankruptcy proceedings as a solution. The airlines are losing so much cash so fast, he said, that lenders might shy away from injecting capital, which is an essential element of Chapter 11 recoveries.

Bill Beach, another Heritage analyst, suggested that any government aid should be sent through the airlines' insurers - by making sure the companies are able to honor business-interruption policies, for example - and not lavished on the airlines.

The situation is unusual enough that even a top analyst at the libertarian Cato Institute, which seldom recommends government intervention, hadn't settled on a position on airline bailouts yesterday.

"In an ordinary situation, which this is not, then the government should not be bailing out companies," said Edward Hudgins, director of regulatory studies at Cato. "This is an extraordinary situation. A little bit different thinking, I think, is in order."

Sun staff writer Paul Adams contributed to this article.

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