The Plane Truth About Airline Woes; It's not fallout from the 9/11 attacks that is causing the airline industry to crash, aviation experts contend, but government overregulation and loose bankruptcy laws

0 Comments | Insight on the News, March 29, 2004

So shaky is United's financial health that its successful exit from bankruptcy depends in part on gaining federal relief from its pension obligations. Under the bizarre logic of postderegulation airline economics, United seeks to qualify for a $2 billion loan from the Air Transportation Stabilization Board, an appendage of the Treasury Department created after 9/11 with authority to issue up to $10 billion in federal loan guarantees. But to do this, United must have another arm of the Treasury forgive part of its pension obligations.

Early in February, the Senate passed a bill that would reduce by $80 billion the money that employers have to pay into their defined-benefit pension plans this year and next, part of Washington's election-year present to the Fortune 500. The Senate bill also would provide $16 billion in relief during the two years to airlines and others required to make catch-up payments to underfunded pension plans. Such is the degree of government involvement in the finances of the ostensibly "private" airlines that a group of senators led by Ted Kennedy (D-Mass.) wrote to United demanding that the bankrupt airline not curtail health benefits for its 72,000 employees.

Sen. Trent Lott (R-Miss.) said during the debate over the pension-fund bailout: "Some will argue that [the pension legislation] gives the major airlines an advantage over the smaller airlines. I certainly am not in a position to want to do that. I want all of our airlines to be able to meet the responsibilities and commitments of their pension plans, but also to be able to stay in business and provide service. We need the shorter routes, the ones that fly from point to point, and the hub airlines. I want a healthy airline industry. This is one step in that process."

Unfortunately, none of Washington's policy prescriptions seems to be helping the airlines small or large actually achieve lasting profitability. A senior Bush administration official closely involved with the post-9/11 bailout of the airlines concedes that the industry is not responding to the latest federal largesse. He reports that former Treasury secretary Paul O'Neill wanted to make outright grants to the airlines after terrorist attacks sharply reduced air travel. The official acknowledges that lending United money on the one hand while subsidizing the company's pension liabilities on the other is not an optimal policy, but argues that Congress prescribed this convoluted arrangement. "There clearly needs to be a restructuring in the airline industry," says the official, who like many others in election-year Washington is afraid to be quoted on the record.

Operatives inside the Bush administration and among Republican staffers on Capitol Hill readily concede that throwing more federal subsidies at already bankrupt airlines is not a free-market solution, but none is able to suggest an alternative. Conservatives point to the labor issue and the work practices in the airline industry as the single biggest obstacle to making airlines more profitable. They note, with some justification, that airline labor contracts never die, that unions have acquired special protection in bankruptcy, giving big labor a huge degree of leverage when an airline is restructured. Indeed, in the case of United, the unions seem to have the upper hand and are accusing management of financial fraud, among other things. But United's predicament is hardly unique.