Bankruptcy, not bailouts

I bet you’re thinking, how would a bailout of the “big three” U.S.-based automakers — General Motors, Ford, and Chrysler — affect a bailout of the airline industry? Tellingly, a few observers have compared the situation with the car-makers (Scene: Washington. Detroit: Give us big money money; our bankruptcy is your DOOM. Congress: Sure, always happy to help the UAW, but let’s install a car czar to apply industrial policy and oversee green car production.) with the airline bailout in 2001. A while back, I warned that as troubles persist in the airline industry, we should look out for a revival of the Air Transportation Stabilization Board. A recent Wall Street Journal article by Paul Ingrassia holds up the ATSB as a model for Detroit:

If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.

That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. uniThe Stabilization Board did its job — selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers — and even returned money to the government.

William Swelbar provides a little more background:

On multiple occasions, United applied for an ATSB-backed loan prior to its decision to file for bankruptcy protection in late 2002. The ATSB continually found that United had failed to file a business plan that was sustainable. Ultimately United filed for bankruptcy protection and continues its restructuring today. The ATSB simply was not prepared to provide United a bridge loan to nowhere. Today, United is in a much better place as a result. Not out of the woods completely, but the prospects for tomorrow are much brighter.

The travel industry disintegration after 9/11 was an unexpected external shock, but for airlines like United, it unmasked the unsustainable labor obligations and management decisions that were obscured in the heady boom time of 1999-2001. Some airlines, the ATSB determined, could do with a small loan guarantee in order to get through a rough time not of the airlines’ making. But for legacy carriers with legacy cost structures, a bailout would only postpone the reckoning to come, possibly making the pain worse later. United, Delta, and Northwest all needed a run through bankruptcy court. (I’ll say that United did not do enough to help itself in bankruptcy court. For example, management threw out silly ideas like Ted and didn’t simplify its fleet sufficiently.)

What does this have to do with Detroit? As I said back in June, the times today do not call for an airline bailout. Nor do they call for a bailout for Detroit. The big three’s special pleading notwithstanding, its problems are due entirely to bad management and extraordinary concessions to labor unions. As Swelbar adds, “It is my hope that we do nothing unless a radical transformation of the legacy issues that make the auto industry non-competitive are insisted upon.”

So where does that leave the big three? Exactly where legacy airlines were left: in bankruptcy court. Michael Levine — an aviation policy expert, natch — points out in today’s Wall Street Journal, “GM as it is cannot survive without long-term government life support. If it gets that support, it can’t change enough and won’t change fast enough. Contrary to [GM CEO Rick] Wagoner’s brave declaration, bankruptcy is an option. In fact, it’s the only option that merits public support and actually has a chance at succeeding.”

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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.

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