$15 billion in bailouts, but United and US Air are still bankrupt?

Great Debates
1

I got this question via a newsletter, and it started me thinking…

If we used $15 billion in taxpayer money to bail out the airline industry after the Sept 11 attacks, why are United and US Air bankrupt?

AIUI, US Airways got $287 million and United got $724 million.

So what happened? Was the money poured down a rathole? Are US Air and United so badly mismanaged that they can’t even be rescued with taxpayer money? Could we have saved the $1.01 billion we gave these two airlines since they were going to go under anyway?

Am I missing something here?

2

Well, here is the opinion of Robert Kuttner in The American Prospect: http://www.prospect.org/print/V13/16/kuttner-r.html. Here is a one sentence summary:

I’m not sure if his hypothesis is right or not but it’s interesting.

3

No, you get some companies going out of bussiness. Which, if we just let them, wouldn’t be anywhere near as bad as people think. This culture of expected huge bailouts and go-down-easy bankruptcy is a real problem in itself.

There’s a fairly good arguement that airfare is for some reason too cheap to sustain the industry, but the question of if and why is dicey.

4

I guess the reasoning is the country would come to a screeching halt without airlines.

But you could argue that about other industries which didn’t receive a bailout. I guess my question is, if an industry is suffering, do we use taxpayer dollars to help them, or do we let the crisis serve to shake out the weaklings and leave the stronger companies alive? In this case, it looks like the millions US Air and United receive didn’t help them, except to keep them alive longer artificially.

5

How about farm subsidies? Everybody seems to accept those without question.

6

The trouble with bailouts is that you must prove an ability to lose money in order to obtain the bailout.

If you chase failure you’re likely to catch it.

7

I’m not in favor of any government subsidies. I believe the latest round of farm subsidies granted money to such hard working farmers as Ted Turner and Peter Jennings.

And aren’t sugar subsidies the reason Americans pay more for sugar than the rest of the world?

Don’t even get me started on “Funding for the Arts…”

I don’t suppose we (as taxpayers) can file suit in bankruptcy court demanding our bailout money back? :wink:

8

I don’t have the latest information, but the last I heard United had applied for a loan guarantee, these are not direct “bailouts”, of about 1.8 billion which had not yet been approved.

This Washington Post story is current to the end of June.

I’m not all that keen on such guarantees either, but I think these two companies need to use Chapter 11 because their loan guarantees haven’t been approved, they are out of cash. and can’t get loans. They can’t pay salaries, rent on ticket counters, fuel bills, repair bills. Only executive bonuses for doing such a good job, heh heh.

9

Okay…what’s the difference between a bailout and a loan guarantee?

10

A bailout is when you’re not expected to pay the money back. A loan guarantee is when you’re expected to pay back the money, but you don’t.

11

Weeel, Chrysler paid its government guaranteed loan back. I think the record on business loan guarantees is no worse than that of student loan guarantees.

The free market is wonderful but … if, say, United Airlines folds suddenly because they can’t pay for fuel to fly their planes the economic shock of the disappearance of such a major transportation resource would be pretty serious. Sure, in the long run another privately run group would pick up the slack, but in the meantime - look out!

12

Are there any consequences if you don’t pay the loan guarantee back?

Free market works…I don’t think it would take more than a day for the other airlines to step up to the plate…perhaps lowering airfare to entice the customers, or honoring of United airline tickets…it’s happened before on a smaller scale.

Business owners like to make money…they’re not going to pass up an opportunity if one presents itself.

13

The consequences are the same as with any loan that isn’t paid. Those in charge lose control of their company, the stockholders lose their invesment. Maybe the company is liquidated to pay as much to creditors as possible. What are the consequences if you don’t pay your house mortgage? You lose the house, but you don’t go to jail, your aren’t led in disgrace through the streets of the town or any other such punishment.

Free market would work, with various time delays, if the conditions required for one existed. The way I read the “Bible” of free markets, Wealth of Nations, is that this is a blueprint for how nice it would be if we could only get things organized that way.

If you want to believe there would be little or no serious dislocation if UA suddenly ceased operatinge, go to it. This question can’t be decided by what happened “on a smaller scale.” People who actually have the responsibility seem to not agree with you, hence government assistance for large businesses in trouble. The general opinion seems to be that their failure would probably cause severe economic problems.

In spite of things that are written on boards such as this, members of Congress and the Executive Department who come up with such programs are not all fools and knaves. And they are not in charge of a population of geniuses who know exactly what should be done and would do it if only they could get some authority. The loan guarantees arise because of a perceived need and that perception has come out of experience with previously not having done that or something like it. See the experience of 1929-1934.

I’m dubious about the overall effectiveness of such loan guarantees, but I’m even more dubious about the timely workings of the so-called “free market” assuming one exists or has ever actually existed. The only thing that you or I or political leaders can do is what seems like a good idea at the time.

14

“The free market works” only as long as there is serious competition, sustainable over a long time frame. But the pattern in the airline industry is consolidation and cartelization, with protected hub markets seeing much higher fares than the few remaining competitive routes. Over a hundred carriers have been founded in the US since deregulation, and they have all either failed, or are in deep trouble, or are in niche markets too small to sustain an airline’s high fixed costs long-term but incapable of generating the revenue to grow out of them.

In the competitive markets, the forces of competition have pushed average fares to or below the lowest sustainable level. That’s how the “free market” works - except, for an operation with fairly inelastic costs, like an airline, it means that profit margins are inevitably driven to zero and corners must be cut. Airline profitability has in fact been poor for a long time, and only the monopoly routes have been able to keep them going.

The airline industry is a little different than most in that it was the only one actually required by the government to shut down for an extended period after 9/11. That’s worth a little consideration, but it doesn’t really affect fundamental weaknesses in the industry that have been around for awhile.

No doubt USAir and United could have managed things much better in recent years, but they’re just in the worst shape of all. Neither has been any more successful than the others in forming an appropriate business model for the new economy, but they’re not unique. USAir specifically has an inherently high cost structure with all of its short routes, and United has been generally screwed up for years since getting caught in the Reagan-era hostile takeover boom that fatally crippled TWA and others. They all have their own stories, but they’re not unique.

15

As I pointed out in another thread, any company that has as much executive overhead as the airlines do, is in serious trouble. American Airlines and its subsidies have 62 executives of Vice President or higher level along with their resultant payscales. Southwest, which is actually doing pretty well, has 3.

If the government stays out of it, those average fares would return to sustainable levels, as free market forces work. In fact I’d say that the biggest limit to the profitablity of those smaller airlines is the fact that the most popular destinations are the so called ‘monopoly routes’ where one of these now in trouble large carriers have special dispensations to use. Do you think that Delta pays as much for its use of Hartsfield as other airlines do, even taking volume into account. That difference in fees is passed on to the other airlines that use Hartsfield and they are hefty. All the major airfields have similar deals, and they are setup by the federal and local governments, and are there to limit that selfsame competition that would fix many of the current problems.

16

Well, what is the difference in fees for Delta as compared to other airlines?

And if there is a difference do you think that “the government” decided on special dispensation for Delta out of the blue, or was it thought up by the “free marketeers” who manage Delta? And does the federal government decide what fees a local airport charges the various airlines?

I think that those who believe large businesses are going to permit political influence in their favor to be kept out of the “market place” are living in never-never land.

17

And those who argue that are just nuts. Let’s look at the scenario in which all six of the major airlines declare bankruptcy and shut down tomorrow. The result would be thousands of airplanes the airlines need to sell at fire-sale prices in order to raise money to pay their creditors, and hundreds of thousands of people looking for a flight. Southwest, Jet Blue and AirTrans would scoop up a mess of airplanes and expand their routes within two weeks. New airlines - buying the rest of planes - would be flying within a month.

And maybe the new airlines would realize that tickets obey the same rules of supply and demand as the rest of the world and would price them accordingly.

As for Kuttner, why doesn’t he recognize that “a crazy quilt of scams, monopolies, bankruptcies, random bargains and opportunistic price-gouging,” is not “pure competition,” but instead demonstrative evidence that the feds have failed to properly deregulate the airline industry? Monopolies and the like are not permissible without the acquiesance of government.

Sua

18

Chomsky’s take:

Read the last paragraph

Aren’t the airlines always heavily subsidized? Boeing planes are developed on public money and taxpayers pay for airports. Isn’t this really just business as usual? I’ve heard (can’t remember where) that the national airlines of Europe (British Airway, Air France) have been repeatedly bailed out by their governments.

Is it even possible to run a profitable airlines?

(I know zero about business, by the way. Guess I’m adding rather than answering questions. Sorry.)

19

Southwest has managed to stay profitable and cheap. Good airline.

20

I don’t think anyone on this board has made that claim.

It seems to me that the OP contained the fallacious premise $15 billion had been given to the airlines. Here is a quote from it:
*
"I got this question via a newsletter, and it started me thinking…

If we used $15 billion in taxpayer money to bail out the airline industry after the Sept 11 attacks, why are United and US Air bankrupt?

AIUI, US Airways got $287 million and United got $724 million.

So what happened? Was the money poured down a rathole? Are US Air and United so badly mismanaged that they can’t even be rescued with taxpayer money? Could we have saved the $1.01 billion we gave these two airlines since they were going to go under anyway?"*

It needs to be pointed out that no “taxpayer money” has been spent and it might be that none ever will be, or if some is it will be a relatively small sum.

The $15 billion under discussion was in an authorization bill. That is, the executive department was authorized to guarantee loans to airlines, who met certain conditions, up to that total amount for all such loans.

If a loan guarantee is made, still no “taxpayer money” is spent. If the loan is repayed there will still be no “taxpayer money” spent. If, and only if, the loan is in default in whole or in part will any “taxpaper money” be spent. In that case the lender will notify the executive department of the default and make application for the guarantee to be honored. Then the money to cover the default will be appropriated by Congress. Some amount of money was appropriated for administrative use by the executive department but none of that went to any airline.

After having jumped through the hoops of getting the executive department to approve a loan guarantee, the airline still has to go through another set of hoops to get someone to lend them them money. Lenders want their money repayed, if possible, without the hassle of making application to the government and having Congress pass a bill. Such bills are usually passed without much problem, but if it happens to be brought up when Congress’ attention is focused on something else, like an election, it could take awhile. Meanwhile the lender is out the money.

An article in this morning’s Los Angeles Times pointed out that United Airlines has made application for loan guarantees of $1.8 billion but that such guarantees have not yet been approved. Approval is being withheld because UA so far hasn’t demonstrated a method by which they intend to get their financial house in order.

As to the question of letting the “free market” work vs. loan guarantees, there are doubtless several methods by which the problems of the airlines can be addressed. To throw out the loan guarantee in favor of the “free market” based on the assumption that the operations of a carrier the size of UA could be picked up by other, and much smaller, airlines in a month with little or no disruption seems overoptimistic to me. However, as I have said, loan guarantees seem to me to be an acceptable selection from among a bunch of unpalatable options.