DEPARTURES --
Opinions On Current Issues In Aviation
Is Political Influence
Placing Darwin On Hold?
(Published 6/24/2004)
by Robert W. Mann, Jr., President, R.W. Mann & Company, Inc.
Within days of Sept. 11, 2001, Congress legislated
$5 billion in grants, and
up to $10 billion in government loan guarantees for airlines. The
measure
specified that airlines, which in the first days after 9/11 were not
assured of
access to capital markets, could apply for loan guarantees, but must do
so by June
30, 2002.
Due to the legislation's onerous terms, few carriers
applied. Among these
was United Airlines, which sought $1.8 billion in loan
guarantees. Its June 2002
business case was based on a rapid and continuing recovery in fares and
revenue,
which seemed unrealistic to independent analysts, even then.
In December 2002, the Air Transportation
Stabilization Board denied United's
request, citing unrealistic revenue projections and an uneconomic cost
structure.
Within days, United filed for bankruptcy. Since then, United has used
bankruptcy
to great advantage to restructure most costs save for fuel, and
eliminate $5
billion in debt.
United hit a Chapter 11 "home run" and in December
2003, reapplied for $1.6
billion in guarantees, supplemented by $400 million in private
capital.
Meanwhile, UAL lobbied for and ultimately got the lion's share of
benefits from
pension funding deferral legislation, an "inside the beltway" home run.
Flush with its success at feeding at the trough of
legislative subsidies,
United began to bluster. Its CFO crowed United had been so
successful
restructuring and had crafted such a strong business case, that it
would
successfully reorganize "with or without" federal loan guarantees, a
theme United
executives repeated during March-June 2004.
Perhaps intended to buoy confidence among investors
being courted for a "Plan
B" private equity infusion, or to illustrate its ability to repay a
guaranteed
loan, it had an unanticipated effect - convincing the ATSB that United
no longer
required a loan guarantee. Because inability to access capital
markets is a
requirement for eligibility, United's own statements disqualified it.
Equally troubling, ATSB stated there were still
holes in United's business
case. So, two years further along on the industry learning curve,
United was
denied -- again, and now for two key reasons, statutory and on merits.
United's has been the only case pending before the ATSB for more than a
year, so
it must be time to close the books and turn out the lights,
right? Nope. Despite
admitting a loan is unnecessary and two years of talks with ATSB,
United claimed,
unbelievably, that it hadn't had a chance to submit its "Best And Final
Offer."
As insurance, the Administration appeared ready to
gerrymander players as
needed to achieve politically desirable "yes" votes. Even though
a quick back-of-
the-envelope calculation suggests competitors' families' outnumber
United
families' by more than 300,000. Recount, anyone?
It has been three years since the U.S. economy
slipped into recession and a
cyclical downturn began to pound the airlines. Network carriers
began in early
2001 to find themselves with excess capacity and insupportable cost
structures.
The industry was forecast to lose $3 billion in 2001, before the Sept.
11
tragedies unfolded. Yet no major network carrier has failed.
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. With no large-scale
retirement of
excess capacity, airlines have suffered a persistent loss of pricing
power, such
that even restructured carriers find their gutted cost structures
barely
supportable at the low fares, offered by low-cost rivals, that now
predominate.
After his airline, having submitted what was by all
estimation a very
rational business plan, was turned down, apparently for no other reason
than his
Las Vegas-based operation was judged "not vital" to the national
airline
infrastructure, Mike Conway, CEO of now-defunct National Airlines,
argued that the
ATSB was "picking winners and losers."
The ATSB twice picked United as a loser, yet may be
getting set, under
political pressure, to pick it as a winner - "wink, wink" -- on the
third try.
Who'd have thought this possible, coming from a "free-market"
administration?
Can't we just let Charles Darwin finish his work?
----------------------
Mann is a former executive at four U.S. airlines -- American, Pan
Am, TWA and
Tower -- and founder of R.W. Mann & Company, Inc., an independent
airline industry
analysis and consulting firm.
[As
originally drafted, Saturday, June 19, 2004]
Is Political Influence Placing
(
by Robert W. Mann,
Jr.
President,
R.W. Mann & Company, Inc.
Airline
Industry Analysis and Consulting
Within days of the tragedies of
the Air
Transportation Stabilization Act,
authorizing $5 billion in outright
grants divided among
all airlines, and up to
$10 billion in government loan
guarantees. The Act
specified that
airlines, who in the first days after 9/11
had virtually no
access to private
capital, could apply for loan guarantees,
but must do so
within nine months, by
A board of review (the Air Transportation Stabilization Board, or ATSB)
with three voting members, one each from Treasury, Federal Reserve and
Transportation departments, was set up to vet applicants' eligibility
and perform due diligence on business plans underlying loan guarantee
applications.
Due to the onerous "lender of last resort" terms specified in the
loan
guarantee legislation, few carriers applied. Among these was United
Airlines
whose application requested $1.8 billion in loan guarantees.
Its
business case, outlined
in a June 2002
application, was based on a rapid
and continuing
recovery in fares and
network revenue, which seemed
unrealistic to most
independent analysts, even
then.
In December 2002, the Board denied United its requested loan guarantee,
citing among other factors, its optimistic revenue projections and as a
result, an uneconomic cost structure. Within days afterwards,
United
filed bankruptcy. In the ensuing eighteen months, United has used
the
Chapter 11 process to great advantage, to
restructure virtually
all of
its costs save for fuel and also eliminate $5 billion in debt.
In short, United hit a home run using Chapter 11, and in December 2003,
resubmitted a loan guarantee application, this time for $1.6 billion,
supplemented by $400 million in private capital. As the ATSB
pondered
United's revised application, the airline
continued
to lobby hard for
and ultimately received what is agreed by all to be the lion's share of
benefits from multi-industry pension "catch up" funding deferral
legislation, an “inside the beltway” home run.
Meanwhile, a number of other carriers who had received ATSB loans had
run into financial difficulty, due to their having under-run what were
clearly optimistic revenue forecasts and/or and under-achieved on
projected cost cutting and productivity levels. USAirways
and American
Trans Air were forced to restructure agreements with the ATSB and
private lenders, and cut labor costs deeper to avoid technical
defaults. To add urgency, fuel costs were rising, far above levels
forecast in most carriers' business cases, leaving financial holes
sized at an
annualized hundreds of
millions of dollars at
United, USAirways and many
other airlines not
participating in the
process.
Despite runaway energy prices (and despite a CEO fresh from the oil/gas
industry), United, flush with its success at feeding at the trough of
legislative subsidies, began in early March 2004 to bluster. The
CFO
made public statements to the effect of they had achieved such a
successful restructuring, and had crafted such a slam-dunk business
case, that they no longer needed the ATSB's
loan
guarantee to
successfully reorganize and emerge from bankruptcy. This was a
theme
that United executives reiterated over and
over again
during the
March-June 2004 time period.
Whether this bluster was to buoy confidence among investors being
courted for a "Plan B" private equity infusion and end-run Plan of
Reorganization, or to sway the ATSB in favor of its ability to repay
(and hence grant) the guaranteed loan, it appears to have had a nasty
and unanticipated (but perhaps only by United) effect. The
unintended
consequence was (duh!) to convince the ATSB that, by United's
own
statements, it no longer required a loan guarantee. Since the Act
plainly states inability to access private capital markets is a
requirement for eligibility, United's
statements
would seem to de facto
disqualify them from further consideration. And it did.
Even more troubling, the Board also indicated in its most recent
decision declining United's application --
Treasury
and Federal Reserve
members voting no, Transportation representative abstaining -- that
there were still 747-sized holes in the United business case. So,
with
United two years further along on the industry learning curve and after
two years more negotiation with the Board, and with the ATSB two years
further along with its own due diligence processes, United was turned
down -- again, and now for two key reasons.
End of story, right? And since United's
has
been the only case pending
before the ATSB -- FOR MORE THAN A YEAR, most other carriers
having
gone their own way and used their own devices to commence or complete
restructurings -- it must be time to close the books and turn out the
lights at the Board, right?
"But, NOOOO!" as Jim Belushi would have
said. Stated another way, in
classic Yogi Berra-esque fashion, "It ain't over 'til it's over".
Despite claiming the loan to be unnecessary, despite having been at it
with the Board for two years and despite having been in court that same
day for a bankruptcy control extension, United quickly filed for
reconsideration, claiming, unbelievably, that it hadn't yet had an
opportunity to submit its "Best And Final
Offer".
And in what appears to be developing in Administration gerrymandering
fashion, they appear ready to change players as needed to get the
"yes"
outcome that they now seem to view at this late date as politically
desirable. [Although a quick back of the envelope calculation
suggests
some portion of 60,000 United families
approving, some
portion of
400,000 competitors' families objecting "big time" to the political
favoritism, which seems pretty obviously a net negative outcome.
Recount, anyone?]
It has been more than three years since the
recession and the associated cyclical loss of business began to pound
the airline industry. Network carriers like American, United and
Delta
began in early 2001 to find themselves with excess capacity and
insupportable cost structures. The industry was forecast to lose
$3
billion for the year 2001, well before the tragic events of September
11th occurred. Yet even after September 11th, no major network
carrier
has failed.
Unlike prior business cycles when Eastern, Pan Am, Braniff
and others
failed, it is chiefly the ATSB loan guarantee process that has placed
"on hold" Charles Darwin's evolutionary demise of the weakest
competitors. With no large-scale demise of excess capacity, the
industry has suffered a persistent loss of pricing power, such that
even
restructured carriers find
their gutted cost
structures barely supportable
at the low fares,
offered by low cost
competitors, that now predominate.
After his airline, having submitted what was by all estimation a very
rational business plan, was turned down by the ATSB, apparently for no
other reason than his Las Vegas-based operation was judged "not
vital"
to the national airline infrastructure, Mike Conway, CEO of now-defunct
National Airlines, argued that the Board "was picking winners and
losers".
I agreed with
has now picked United as a loser twice, yet may be getting set, after
political
influence peddling, to
pick it -- the third time
being the charm, "wink, wink" –
as a winner.
Who'd have thought this possible, coming from a "free-market"
administration?
Can't we just
invite Charles Darwin back, off hold, and let him finish his work?
- Bob Mann