Federal Board May Decide Which Airlines Will Survive

With U.S. airlines teetering on the edge of financial collapse, the Bush administration Friday gave wide discretion to a federal board to disburse government-backed loans that could determine which carriers survive the current slump.

The guidelines, released by the Office of Management and Budget, will help decide which airlines can participate in a $10-billion loan guarantee program approved by Congress last month.

Responding to concerns that stringent guidelines might put the government in the awkward position of choosing which airlines survive the industry shakeout, administration officials put surprisingly few formal conditions on the loan guarantee program. Instead, the rules give a newly created government board wide discretion to compare applications and judge requests case by case.

“The rules we have written are inclusionary and neutral,” said OMB Director Mitchell E. Daniels Jr. “All of today’s carriers are eligible and welcome to apply. The board . . . will not pick winners or losers.”

Details of the loan guarantee program were unveiled as the General Accounting Office, Congress’ investigative arm, projected that the airline industry’s losses for 2001 would be a staggering $6.5 billion to $10.5 billion.

The actual losses will depend on how long the carriers can endure a severe drop in passenger traffic, while managing the price of jet fuel, labor costs and other operating expenses through the rest of the year, the agency said.

Even before Sept. 11, the airline industry was expected to report combined losses of at least $1 billion because of the weak U.S. economy and a sudden decline in business travel. Now “there is a reasonable basis to assume that the airline industry will incur losses resulting from the terrorist attacks of at least $5 billion and possibly more through Dec. 31,” the GAO said.

The OMB deferred many of the most controversial issues, such as whether airlines should give the government stock warrants as compensation for the guarantees; whether loans should be secured by collateral; whether airline labor unions should make concessions; and whether private-sector entities should participate in the loan.

“They punted on all the important issues,” said James Gattuso, vice president for policy at the Competitive Enterprise Institute, a conservative think tank in Washington. “The hardest decisions will be pushed over to the board. That invites all sorts of politics.”

Daniels said the rules were kept flexible on purpose to encourage airlines to compete against one another for the limited pool of guarantees. Those airlines that submit the strongest applications and offer the most attractive terms to the government will have the best shot at approval, he said.

Because the $10-billion program is not expected to be enough to bail out the entire industry, carriers that don’t qualify might not survive.

“It sounds like an auction,” said Robert Z. Aliber, business professor at the University of Chicago. “That’s a marvelous approach.”

The rules also specifically anticipate that the loan guarantees will be used for mergers and takeovers among airlines, which have been struggling with a devastating slump in air travel since Sept. 11. Even airlines that have filed for Bankruptcy Court protection may apply for the program, as long as they can demonstrate a viable business plan to repay the money.

Applications will be reviewed by the new Air Transportation Stabilization Board, a four-member panel of representatives from the Federal Reserve Board, Treasury Department, Transportation Department and Comptroller General. Some complained that the rules issued Friday will give the board too much power over the airline industry.

“The board now has enormous discretion to make decisions that are going to determine what this industry is going to look like for years to come,” Sen. Ron Wyden (D-Ore.) said Friday. “I remain very concerned that we’re going to have more concentration, reduced choice, higher prices and more passenger service horrors if the board doesn’t keep in mind that the use of its discretion is going to be one of the most important transportation decisions for many years.”

The loan guarantee program was part of a hastily approved $15-billion airline bailout package approved by Congress late last month that also included $5 billion in grants. About half that money already has been dispersed.

Amid the slump--which was underway even before Sept. 11--major carriers have slashed 20% of their operations, eliminated hundreds of flights and laid off about 100,000 workers.

At the same time, private-sector lending to airlines has dried up, leaving many carriers with a severe cash crunch.

Smaller airlines, which feared the loan-guarantee guidelines would give preference to stronger, larger carriers, applauded the administration Friday.

“President Bush and his administration are to be commended for developing regulations that will permit fair consideration of all airlines,” said America West Chief Executive W. Douglas Parker, whose struggling company is expected to be one of the first to apply for the program. A spokesman for American Airlines, the world’s biggest airline, said the company was satisfied with the guidelines, but would not comment on whether it planned to apply for a loan.

Loans must be repaid within seven years. The federal government will guarantee only up to 99% of the loan amount, which is meant to encourage private-sector participation in the loan.

Applications are due by June 28, 2002, but many airlines are expected to file requests within the next few weeks, Daniels said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Making Airline Loans Fly

The U.S. government issued its guidelines for guaranteeing up to $10 billion in loans for the cash-strapped airlines, which already are receiving $5 billion in direct aid. Here are some of the guidelines and the criteria Uncle Sam will use to decide which loans to back:

* The loan must be paid off within seven years; the interest rate will be set by the new Air Transportation Stabilization Board.

* The airline must present a business plan that demonstrates it will be able to continue operations if the loan is guaranteed.

* The airline also must describe how it plans to use the loan proceeds.

* Criteria for a loan guarantee include an airline’s ability to provide collateral as security for the loan, and to get the maximum amount of private--rather than public--financing for the loan.

* The criteria also include an airline’s ability to get concessions from employees and investors to improve the carrier’s financial health, so that it can repay the loan on time.

Source: Office of Management and Budget

*

Times staff writers Richard Simon and James F. Peltz contributed to this report.