When Congress created an agency to facilitate loans to the shellshocked airlines after the terrorist attacks, critics decried the move as letting Uncle Sam not only select which carriers would survive but also re-engineer the structure of the U.S. air travel system.
At worst, opponents said the Air Transportation Stabilization Board could perpetuate the status quo in the industry, keeping the loss-plagued business on life support by doling out loan guarantees to industry giants that have high labor-cost agreements and inefficient operating systems.
But the Air Transportation Stabilization Board has surprised critics by mostly forcing the airlines themselves to dramatically reshape how they do business. The panel is being extremely cautious in providing government-backed aid to those airlines that have requested it, leaving the carriers to fly right on their own or risk collapse.
The ATSB, "whether they like it or not, is certainly shaping the way the industry evolves," said Tom Hansson, who heads the U.S. airline practice for consulting firm Booz Allen Hamilton.
The changes might eventually strengthen the airlines, although at the cost of making air travel more expensive and less convenient for passengers. There could be fewer flights, longer waits at airports, modestly higher fares, fewer first-class seats and more restrictions on frequent-flier miles, some analysts said.
"In the short run it's going to be painful for U.S. travelers," said Meg VanDeWeghe, a former managing director at J.P. Morgan Chase and now an executive-in-residence at the University of Maryland's business school. "But in the long run we'll see a stronger industry. They're going to be forced to focus on profitability and efficiency."
The biggest issue now before the ATSB is UAL Corp.'s United Airlines, one of only three major airlines that sought a loan guarantee before the deadline June 28. But the board refused to rush a requested $1.8-billion guarantee to United because the airline hasn't made the kind of deep cost cuts that the board demands.
As a result, United last week announced that it was teetering toward Bankruptcy Court unless it gets the employee wage cuts and other concessions it needs within 30 days.
United's announcement last week was just one event in the most tumultuous week for the airlines since the terrorist attacks, with US Airways filing for bankruptcy protection and industry leader American Airlines, a unit of AMR Corp., unveiling a massive cutback in flight schedules and employees.
Continental Airlines joined the parade Tuesday, saying it would ground jets, sharply reduce its available seats and charge low-fare customers for certain services to slash $350 million a year from its operating costs. The Houston-based carrier said it hoped to avoid layoffs through a hiring freeze and attrition.
Continental's brash chairman, Gordon Bethune, noted the problems at United, American and US Airways and said in a statement that his airline needs "some aggressive belt-tightening so we don't end up like them."
The airlines are grappling with a travel slump that has persisted much longer than industry executives expected, which is keeping a lid on fares--and the airlines' incomes--while airline operating costs remain stubbornly high. The result has been massive financial losses among the major carriers--$7 billion last year and $3 billion to $5 billion this year.
But as it has from the outset, the ATSB is taking a hard line toward those carriers asking for loan guarantees, demanding they first provide a business model that assures repayment of the loans without putting U.S. taxpayers at risk.
The loan-guarantee program was part of a hastily approved $15-billion airline-bailout package approved by Congress after Sept. 11. The first $5 billion was sent directly to individual airlines as cash grants to help them recover from the two-day shutdown of civilian air travel after the attacks and the severe drop in passenger traffic.
The rest is in loan guarantees, so that the airlines can tap the capital markets for financing, with lenders and investors knowing the U.S. government stands behind the loans in case of default. The ATSB was created to judge applications for guarantees and was given wide discretion for setting the criteria.
The ATSB granted only one guarantee, to America West, a unit of America West Holdings Corp., and only after the Phoenix-based airline made steep concessions that included giving Uncle Sam the right to buy a 33% stake in the airline. Several other requests from smaller carriers--including Vanguard Airlines, National Airlines and Spirit Airlines--were denied.