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Sky-High Airline Debt Feeds Air Safety Debate : Transportation: Leveraged buyouts and takeovers have left U.S. air carriers more heavily in debt than ever, raising concerns that cost cutting could lead to inadequate staffing, poor aircraft maintenance and endanger passengers.


NEW YORK — What price airline safety?

The question is being heard loudly in the halls of Congress, as well as in the executive offices of U.S. airlines. Takeover activity in the airline industry has triggered worries that the level of safety in air travel will be diminished if a carrier takes on a large load of debt.

Definitive answers are difficult to find.

Although buyout and takeover moves in the airline industry have come to a virtual halt in the wake of the Friday the 13th stock market plunge, most observers agree that deals requiring high levels of indebtedness will eventually return to the airline scene and that the argument over their effect on safety will persist.

One such deal, the purchase of NWA Inc., parent of Northwest Airlines, took place this year. Another, a proposed management-employee purchase of UAL Inc., parent of United Airlines, has broken down, though attempts are being made to revive it. And while financier Donald J. Trump's offer to buy AMR Corp., parent of American Airlines, has been withdrawn, it is highly likely that Trump--or someone else--will go after AMR before long. Other airline companies are also said to be vulnerable.

What does all that have to do with safety?

Many people, among them Transportation Secretary Samuel K. Skinner, believe that safety can be compromised by an airline's financial difficulties. But not much evidence has been forthcoming.

In leveraged buyouts, a company is purchased with borrowed funds that must be repaid with cash from operations or from the sale of some of the company's assets. Takeovers are always based on the belief that the assets of a company are worth much more than the value represented by the total market price of the stock.

According to Paul P. Karos, airline analyst with the First Boston Corp. investment firm, 40% of U.S. air travelers are already being carried by highly leveraged airlines. If the UAL and AMR deals had gone through as originally structured, that figure would have risen to 75%.

Veteran airline observers maintain that if heavy debt is a major factor in safety considerations, Trans World Airlines, Pan American World Airways and Eastern Airlines should have been grounded long ago.

But do debt burdens compromise safety?

Will a heavily leveraged airline--should there be a downturn in the economy--be forced to skimp on the maintenance required for safe operations? Has deregulation resulted in greater competition--forcing down profits, causing airlines to cut corners in ways that put their passengers in danger? Will interest payments take precedence over airplane repairs? Will airlines that are heavily in hock postpone the purchase of new planes? Might they spend less on pilot training and hire less-experienced pilots to keep salaries low?

Opinions are widely divided. And the relatively little research that has been done is not conclusive.

Despite the belief that huge debts do, indeed, present a significant danger to the traveling public, some experts staunchly maintain that the last thing an airline will do is put safety in second place. Indeed, they say that safety standards might even improve at airlines with financial difficulties.

Hunter College Prof. Devra L. Golbe, in a March, 1986, article entitled "Safety and Profits in the Airline Industry," wrote:

"Evidence suggests that it is unlikely that profit-reducing changes in regulation will lead to more accidents. The evidence presented here on airline safety and profits does not support the popular wisdom. There does not seem to be a statistically significant relationship between safety and profits.

"If there is any relationship, it is weak and of the 'wrong' sign: That is, more profitable firms may have more accidents. It does not appear that profit-reducing changes in regulation will necessarily lead to less-safe airlines."

Nancy L. Rose, of the Sloan School of Management and Center for Transportation at the Massachusetts Institute of Technology, wrote in a paper entitled "Financial Influences on Airline Safety":

"My sense is that this whole airline safety debate over the last five years is more heat than light generated by people who have very strongly held opinions. But they are not based on an analysis of the statistics. They are based on gut feelings which have some validity to them but are not always on target."

Rose added: "Evidence suggests that deregulation may have improved the industry's financial condition, which means a financial performance-safety link could lead to increased safety since deregulation."

She noted that some private incentives, including lower insurance premiums, encourage safety.

Also, she said, airlines have an important stake in maintaining a reputation for providing safe service in order to attract and retain business. Airlines with bad safety reputations are likely to lose passengers to their safer competitors

Moreover, she added, large, profitable airlines might be the most vulnerable to accidents simply because they fly more miles.

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