Airlines: What Kind of Rescue?

Cash won't solve air carriers' long-term woes

One week after the crashes of four jetliners on Sept. 11 that led to the deaths of as many as 5,000 people, the airways above America's skies are open for business. But while their planes are again taking off, carriers' financial prospects are grim.

Even after reducing schedules by 20%, most carriers are flying with only about 50% of their seats filled more than a week after the nationwide shutdown sparked by the terrorist attacks in New York and Washington. Airline shares have lost a third of their value on Wall Street, and carriers have lost roughly $5 billion so far. In a desperate attempt to make ends meet, American Airlines (AMR ), America West Airlines (AWA ), Continental Airlines (CAL ), United Airlines (UAL ), and US Airways have announced layoffs of roughly 65,000 workers--the first wave of up to 100,000 employees to be let go industrywide. Meanwhile, Boeing Co. (BA ) has announced an additional 30,000 cuts.

As the fortunes and finances of the airlines plummet, Washington is being prodded to help save a sector that was foundering well before last Tuesday. "We are talking about the safety and the security and the stability of an industry," says Transportation Secretary Norman Mineta. "Not of one or two or three or four companies, but an entire industry."

That's why even a Congress afraid of setting a precedent of bailing out troubled industries is rushing to aid the air carriers. Details are fuzzy, but the Bush Administration and congressional leaders have agreed on the rough outline of a two-tiered bailout package. First, lawmakers may provide up to $5 billion in immediate cash to compensate for losses airlines suffered while grounded under federal orders in the days immediately following the terrorist attacks. They also are weighing $12.5 billion in loans and loan guarantees. The aid would be given to carriers based on the amounts each lost during the three-day shutdown, minus savings on fuel and operating costs.

Following a White House meeting on Sept. 19, House Speaker J. Dennis Hastert said the package should alleviate airlines' cash crunch. That's a blow to the airlines, which had initially lobbied for a $24 billion package of cash, loan guarantees, and tax breaks. Also left hanging was a plea to protect carriers from legal liability from the crashes.

Policymakers' reluctance to quickly rubber stamp an airline wish list shows how strong resistance is among some in Washington to bail out a highly leveraged industry that was already set to lose up to $2 billion this year. "We don't want to make them better off than they would have been prior to Sept. 11," says Representative Roy Blunt (R-Mo.), GOP point man on the bailout. Treasury Secretary Paul O'Neill pointedly notes that US Airways Chairman Stephen Wolf told him 18 months ago that his airline couldn't survive alone. "Some airlines were a mess before any of this happened," O'Neill says.

It's only getting worse. U.S. airlines had $9 billion in cash on Aug. 31, but with revenue expected to plunge 60% in September and 40% through the fourth quarter, the industry would be $1.1 billion in the hole by November, according to Air Transport Assn. forecasts. Even worse, effective Sept. 24, insurers canceled "war risk" policies, offering U.S. carriers reduced coverage at higher premiums. Argues Delta Air Lines (DAL ) CEO Leo F. Mullin: "Without immediate financial support from the government, a number of carriers could be driven to bankruptcy within 60 days, and the future of aviation could be severely threatened."

This notoriously boom-or-bust industry is no stranger to bankruptcy court. Two of the top 10 carriers--Continental and America West--already logged trips there in the 1990s but emerged to fly again. Today, however, lenders view airlines far more pessimistically, thanks to declining revenues, costly aircraft-order plans, escalating labor costs, and sure-to-rise security expenses. "Our ability to obtain additional financing is nonexistent right now," says America West CEO Douglas Parker.

Indeed, on Sept. 19, Moody's Investors Service downgraded ratings on $39 billion in unsecured debt of American, United, and Delta to junk levels. So today, not even one of the Big Three carriers may be able to emerge from bankruptcy intact, leaving lawmakers facing the politically ugly prospect of air-service disruptions for communities nationwide.

That has left policymakers little choice but to act. "I don't think the country has any particular interest in letting this situation get as bad as it can before we try to be helpful," says Blunt, who worries that the cascading effect of layoffs and abrogated contracts from a string of airline bankruptcies would surely hurt the U.S. economy.

Even if a bailout helps in the short term, it won't solve airlines' long-term woes. Leverage is heavy, with debt as a percentage of total capital at Northwest (NWAC ), Continental, and US Airways exceeding 85%. And in the past year, big carriers such as United have signed expensive labor contracts with their unions--contracts they will have a hard time paying for in the current air-travel depression. "[The bailout] may very well be not enough for everyone," concedes John Heimlich, an economist at the Air Transport Assn.

Indeed, layoffs, retrenchments, and even bailouts can't give the airlines the one thing that is most critical to a return to financial health: a steady stream of paying customers. Says Southwest Airlines (LUV ) CFO Gary Kelly: "We're better prepared than any other airline, but we can't operate like this indefinitely. We need some revenue coming in the door." But how soon passengers will feel safe enough to fly again is anybody's guess.

By Michael Arndt in Chicago, Lorraine Woellert in Washington, and bureau reports

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