Airline Loan-Guarantee Deal
When Congress offered the airline industry $10 billion in loan guarantees in 2001, lawmakers were criticized for wasting taxpayer money on sick and even dying airlines, delaying an inevitable industry restructuring.
As it turns out, taxpayers made money on the deal. Lots of money.
The Air Transport Stabilization Board is almost done with its work, and the airline-loan-guarantee program will end with a profit of more than $300 million, according to executive director Mark Dayton. “The taxpayer bore a real risk to earn that money,” he said. One reason for the large payday is that airlines only received a fraction of that $10 billion: In the end, the program guaranteed only $1.6 billion in loans.
Besides a $300 million bonus for the U.S. Treasury, consumers will continue to enjoy benefits from the ATSB. The board rescued America West Airlines and US Airways Group Inc. and helped facilitate a merger of the two. That created a big, national low-cost airline that helps keep ticket prices relatively low and increases pressure on competitors like Delta Air Lines to cut costs and restructure.
While rival airlines might have preferred to see a big airline or two go out of business so they could expand and raise fares, consumers benefit from having more carriers fighting each other.
“Without the ATSB loan, America West probably wouldn’t have survived and without America West, US Airways probably wouldn’t have survived,” says US Airways Chief Executive W. Douglas Parker. “Now merged, we employ 35,000 people and we just reported a profit in the first quarter.”
It didn’t always look like the loan program would work out so well. In late 2004, three of the six airlines that received federally guaranteed loans — US Airways, ATA Airlines and Aloha Airlines — filed for bankruptcy-court protection. About $1 billion in loans guaranteed by the government were at risk.
All three airlines survived and the ATSB will likely escape with a loss of only $10 million to $15 million on loan guarantees to ATA. Fees and earnings from stock sales at other airlines more than compensate, giving the taxpayer a solid return on its airline investments.
It’s not often that investors make money in airlines, though it certainly can be done. Financier David Bonderman turned a $66 million investment in Continental Airlines in 1993 into $780 million by 1998. More recently, America West and US Airways soared from a combined market value of $150 million a year ago to $3.8 billion now.
Congress was after stability not earnings when it created the ATSB on Sept. 22, 2001, 11 days after terrorist attacks. The government paid out $5 billion in cash to airlines to compensate for losses while the air-transport system was shut down. And it included the $10 billion loan program in case commercial loans weren’t available. The aid sent a signal that the government wouldn’t let the industry collapse.
But the program was controversial from the start. The ATSB drew fire from some as being too stingy and not helping enough airlines; it was criticized by others for helping too many airlines.
“The ATSB is choosing winners and losers in the industry,” Michael J. Conway, chief executive of National Airlines, said the day his airline shut down after being rejected for a guaranteed loan.
Jeffrey Shane, the Department of Transportation’s under secretary for policy and one of three members of the ATSB, says it’s not fair to criticize Congress for creating the loan program in the aftermath of 9/11, “but programs like that always end up distorting the market.”
Mr. Shane says that the loan program distracted airlines, diverting energy that could have been better spent addressing their financial and operational problems. Pursuit of an ATSB loan guarantee “sucked a lot of oxygen out of the executive suites of airlines,” he said. “Managers might have used their time more productively had the program not existed.”
Healthier airlines and others charged that ATSB was merely delaying consolidation and restructuring necessary for the industry to regain financial health. “Unlike prior business cycles when the likes of Eastern and Pan Am failed, it is chiefly the ATSB loan guarantee process that has placed on hold Charles Darwin’s evolutionary demise of the weakest,” consultant Robert W. Mann wrote in Aviation Daily, an industry trade publication.
The ATSB told airlines that to win guarantees, they had to present what the board considered to be viable business plans, and carriers had to show they didn’t have access to commercial capital markets. Applications were voted on by a representative from each of the DOT, Treasury and the Federal Reserve. The board did turn out to be a tough sell, one of the major reasons it ended up with a profit. Of the $10 billion of guarantees Congress authorized, the ATSB issued only $1.6 billion of guarantees.
Applications from seven airlines were rejected, including UAL Corp.’s United Airlines, which applied twice. Three carriers turned down ended up shutting down: Vanguard Airlines, Great Plains Airlines and Mr. Conway’s National. Some big carriers that have faced financial troubles recently, such as Delta and Northwest Airlines, didn’t apply for the loan program.
The guarantees also weren’t cheap. The ATSB decided that it should be compensated for the guarantees, collecting $220 million in fees from deals that were favorable to lenders because the government made them risk-free.
What’s more, the ATSB insisted on owning a piece of the airlines. In most cases, the board wanted a 10% ownership stake through stock warrants; in the case of America West, the government laid claim to 30% of the company’s common stock because the loans weren’t secured by any assets, so the risk of default was greater.
Bankruptcy wiped out stock ownership in US Airways, ATA and Aloha, but the ATSB sold its America West stake for a $110 million gain and expects an additional $25 million in gains from the sale of its World Airways and Frontier Airlines stock warrants, Mr. Dayton said. After expenses and its losses on the ATA loan, the net gain for taxpayers will be about $312 million — a 20% gain on the $1.6 billion taxpayers had at risk.
Mr. Shane says the terms were purposely tough to force carriers to fix their businesses and give executives incentive to refinance sooner rather than later to get out from under the government. “That’s why the ATSB should be able to close its doors as early as this summer,” he said. Then, “Uncle Sam will be out of the airline-finance business — I hope forever.”
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