Center for American Progress

A National Transportation System Requires Public Support in Times of Crisis
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A National Transportation System Requires Public Support in Times of Crisis

In the weeks following Sept. 11, 2001, Congress passed the Air Transportation Safety and Stabilization Act, which in addition to setting aside $5 billion to compensate airlines for the government's unprecedented shut-down of commercial airspace, also created a loan guarantee program. The Air Transportation Stabilization Board (ATSB) was created and tasked with providing assistance to airlines that were financially crippled by the attacks and their aftermath.

This was done based on recognition of the fact that the capital markets would, for all practical purposes, be closed off to airlines in the wake of the attacks – an understanding that was based on more than two decades of experience under deregulation.

The months following 9/11 saw a steep drop-off in passenger travel that has not yet reversed. As they have done in every recession since deregulation, airlines have engaged in cutthroat fare wars in a self-defeating attempt to maintain market share. The result has been a continuation and worsening of the deflationary spiral that has trapped the industry for the past 20 years. The red ink flowed quickly and heavily, and the damage continues to be reflected on airline balance sheets.

Congress gave the ATSB a mandate to grant loan guarantees to maintain "a safe, efficient and viable aviation transportation system." The board, comprised of appointees from the Federal Reserve Bank, Treasury Department, and the Department of Transportation, was not to make direct loans, but rather to provide backing to private sector lending. The ATSB only guaranteed 90 percent of lenders' exposure, requiring that banks making loans to accept some risk.

Since its establishment, the ATSB has interpreted its mandate narrowly – acting more like a bank or investor and less like a government agency entrusted with the role of overseeing the rebuilding of America's national transportation system.

There have been rumblings that the airline loan guarantee program has run its course and should be dismantled. Such suggestions are borne out of a wrong-headed stereotype of the ATSB loan guarantee program. There is a false perception that the program provides a no-strings-attached, give-away scheme to prop up poorly run, "big old unionized" carriers to the detriment of smaller, newer, or low-fare airlines.

If the ATSB has been favoring traditional network carriers, you wouldn't know it from its record. To date, only one such carrier has been the beneficiary of this program, US Airways. National carriers and low-fare airlines, on the other hand, have fared much better. America West, Frontier, ATA, and Aloha Airlines all had their applications for loan guarantees approved.

The fact is the board has been more frequently faulted for being too tight with the purse strings than too loose. As the Wall Street Journal recently reported, the board's members "have turned away as many airlines as they have voted to help." The $1.5 billion in guarantees granted so far makes the Board look stingy in comparison with the $10 billion Congress allocated to the program.

The airline loan guarantees were and still are necessary. Even though the implementation of this program has fallen short of the hopes of many in the industry, now is not the time to pull the plug. Without further help from the ATSB, the most important pillar of America's national transportation system is still in danger of crumbling.

The board has been advised by some of the most well known Wall Street firms and required carriers to submit detailed business plans backed up by financial projections that demonstrate that loans will be paid back – in full and on time. Where it has agreed to back loans, the ATSB has received a financial stake in the airline so that the U.S. taxpayer gets an upside for the risk being underwritten. All of these are appropriate checks considering the fact that public monies are being put into private companies.

However, many have questioned whether the board has truly acted consistently with its mandate. Where it has not been satisfied that its strict criteria have been met, the Board has rejected applications. In fact, six airlines have been rejected to date. In some cases, these rejections have forced bankruptcies and even outright liquidations.

The most high profile example was at United Airlines, where it was the board's rejection of the airline's initial loan guarantee application that forced the airline immediately into bankruptcy. That wrenching process has caused greater job losses and required employees to take even deeper wage cuts than would have otherwise been required. United's vendors, lessors, and municipalities where the airline does business have also felt the sting of the bankruptcy process. Far from sheltering troubled carriers from "new market realities," the ATSB has figured prominently in the airlines' demands for painful cuts in labor and other costs.

The industry's troubles continue in spite of the loan guarantee program, which demonstrates not that the program was unnecessary or ill-conceived, but rather points to shortcomings in the implementation of the program against a backdrop of economic and foreign policies that did little to help and much to harm. Airlines are still trying to climb out of a deep hole in spite of the targeted help Congress granted after the attacks of 9/11, largely because the broader policies pursued in Washington since that time have done little to rebuild prosperity in the industry.

The anemic economic recovery has undermined profitability at all carriers, including the often touted Southwest and JetBlue. The war in Iraq has done nothing to quell fears of terrorism, and has contributed to sky-high fuel prices. Domestic policy and foreign policy decisions have both conspired to leave even carriers that were relatively healthy before 9/11 on the verge of insolvency.

The Board has been an imperfect solution to more fundamental problems that have faced airlines during this most recent industry crisis. The solution is not to disband the ATSB, but rather to encourage it to fulfill its original mandate. In a country as large and wealthy as the United States, airlines are the de facto national transportation system.

The "big old unionized airlines" that some criticize are the most economically significant mode by which people and goods move around this country. Congress recognized this after 9/11 and the ATSB should be encouraged to do so as well. In the short term, policy makers should ensure that the ATSB takes its role to support airlines more seriously than it has in the past. In the longer term, the industry's experience tells us it may also be time to revisit the logic of deregulation in light of a quarter century of experience with it.

  • Pricing Pressures are a Long-Term Problem for the Airline Industry
    While prices in the economy have risen by more than 120% from 1980 to 2003, airline yields, the price that airlines charge for their tickets, have gone up by only 6% at the same time. That is, fierce competition has kept airline prices stable, thus prohibiting firms to build up enough reserves to withstand even cyclical downturns.
    Source: Author's analysis of data from the Bureau of Labor Statistics, Washington, D.c= , and the Air Transportation Association's 'Monthly Passenger Yield Report', Washington , D.C. , www.airlines.org

Robert Roach, Jr., is the general vice president for Transportation, International Association of Machinists and Aerospace Workers (IAM). The IAM is the largest airline union in North America.

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