Watch out for “stabilization”

One thing I’m surprised about in today’s hostile airline climate is that I’ve heard nothing about the Air Transportation Stabilization Board (ATSB), the body authorized by Congress in 2001 to distribute up to $10 billion in loan guarantees to airlines after the 9/11 attacks. With all the talk of airlines being in a crisis rivaling 9/11’s impact on the industry; a massive wave of capacity and personnel cuts at United, American, Continental, and (next) Delta; the uncertainty of when (or whether) the price of oil will fall; the credit crunch; and half-a-dozen U.S. scheduled carrier bankruptcies, don’t be surprised to hear chatter about reviving the ATSB — especially if a major carrier goes under.

The board was created to provide loan guarantees for airlines that could not otherwise access the credit markets in the tough months following 9/11, when many airlines threatened bankruptcy. Congress hastily passed the Air Transportation Safety and System Stabilization Act. Less than $1.2 billion was eventually approved for America West, US Airways, Frontier Airlines, ATA, Aloha Airlines, and two smaller carriers. None of these were or are especially healthy airlines: US Airways went into bankruptcy before merging with America West (a merger partially financed by the ATSB loan guarantee); Frontier is in Chapter 11 now, and ATA and Aloha shut down this spring. Many airlines preferred not to seek ATSB guarantees. In order to protect the government, the board negotiated options to purchase stock from guarantee recipients at below-market prices, which yielded profits during the more stable years between 2004 and 2007.

But there’s no guarantee that such activity will always generate revenue in the end, especially in the volatile airline industry. Beyond that, a bailout entails other risks. One is political intervention. Who wins, who loses? As airline deregulation expert Mike Levine points out (see page 20 of the PDF), the loan guarantee to Arizona-based America West was not John McCain’s finest moment. There’s also moral hazard. Because they can access the credit markets, well-managed airlines — like Southwest, which hedged fuel extensively — would be unable to get ATSB guarantees.

An ATSB revival would also be inappropriate because of big differences between the 2001 crisis and now. Back then, a single event (9/11) followed by several days of grounding constituted a single shock. The pressure of today’s high fuel prices leaves the future profitability of the industry an open question. Reviving the ATSB today could expose taxpayers to huge losses.