Skinner Warns Airlines Not to Let Debt Burdens Compromise Safety
Transportation Secretary Samuel K. Skinner delivered a blunt warning Tuesday that “debt-ridden airlines . . . may unwittingly threaten the safety of the traveling public” and said he will not hesitate to revoke an airline’s permit to fly if a company is skimping on spending for safety measures.
Skinner, facing the prospect of an industry dominated by a handful of heavily leveraged carriers, said there is a special danger posed for the aviation industry.
Airlines “are not cookies, they are not hair spray,” the transportation secretary said in a speech to the International Aviation Club. “They are a vital national resource.”
Skinner did not announce what restrictions, if any, he will impose on the operations of Northwest Airlines, purchased for $4.05 billion in July by a group led by Los Angeles investor Alfred A. Checchi. KLM, the national airline of the Netherlands, is a partner and important source of financing for the Checchi group.
On the horizon is a proposed buyout of United Airlines’ parent firm by its pilots and British Airways in a transaction that would burden UAL Corp. with more than $6 billion in debt.
Skinner is worried both about the potential dangers of a heavy financial burden for airlines and about the influence of foreign interests in the operation of the U.S. airline industry.
When a foreign airline “is willing to contribute a large share of the equity capital in return for a small percentage of the voting stock, we need to examine all aspects of control,” Skinner said. “What does the foreign airline think it is buying?”
Skinner, who formerly worked as a lawyer putting together leveraged buyouts, said such transactions are socially useful in some circumstances. “New owners and fresh management may improve the corporate image, service and operating efficiency,” he said.
But he sounded an unmistakable note of warning about the applicability of this financial takeover technique to the special industry he now oversees. “So that there can be no doubt, I will not allow excessive debt in the airline industry to jeopardize the public interest-- especially in the area of safety,” he said.
The huge interest payments “associated with the significant debt involved in a leveraged buyout can increase the risk that an airline will not be able to meet its financial obligations,” he said. “Given the small number of major U.S. carriers, the failure of any of these carriers could reduce the level of competition in the industry.”
‘Unique Nature’
The Transportation Department wants “to be absolutely certain that any carrier is financially fit, and that safety will never be compromised,” he said. “If continuing fitness is called into question, rest assured that the department will not hesitate to make adjustments to the airline’s operating certificate, or if absolutely necessary . . . we will revoke the certificate.” The “unique nature of the airline industry” requires a cautious approach that normally would not apply to other buyouts in which companies take on large amounts of debt, according to Skinner. Air carriers need money for vital public purposes, he noted.
The airline business “stands on a different footing than other industries,” he said. Large amounts of money are needed to assure efficiency and safety in the industry, Skinner noted.
‘Cannot Afford to Scrimp’
“We are now detecting the extent of aircraft fatigue and corrosion problems,” he said. “Airlines today cannot afford to scrimp on the new costs of maintaining the safety of their senior aircraft.”
The industry “is now discovering the technology to meet the demand for effective noise abatement,” he said. “Airlines must have the resources to address environmental concerns.”
And the industry needs funds to “do everything possible to fight the despicable acts of terrorism. Airlines cannot afford to cut back on security costs,” he said.
