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A Diet for Ailing Airlines

November 04, 2002

The word "Amtrak" should be all it takes to persuade policymakers of the need to assert fiscal discipline in dealing with the nation's troubled airlines.

United Airlines, the largest carrier operating out of Los Angeles and San Francisco, faces a rough ride, even by the standards of an industry awash in turbulence. Parent company UAL posted an $889-million third-quarter loss. Union workers, who own 55% of the company, tentatively have agreed to $5.8 billion in concessions -- but their retirement fund threatens to sell off anemic UAL shares.

Bankruptcy looms for United, the world's second-largest airline, and it is lobbying fiercely for a $1.8-billion federal loan guarantee, which it describes as necessary to bridge an approaching cash shortfall.

The loan guarantee program that Congress passed after 9/11 made good sense. But it is clear that hard-pressed airlines must be viable in the long run before knocking on Uncle Sam's door -- or the nation risks traveling a dangerous track similar to the one that led to the heavily subsidized Amtrak rail system. The possibility of war and an oil price hike underscores that airlines must operate on a sound financial footing.

The federal Air Transportation Stabilization Board, which is reviewing United's application, must remember that such loans are to deal with problems created in the wake of Sept. 11 -- not long-standing issues. Loan guarantees make little sense if an airline's costs -- including wages and salaries -- remain out of balance with demand. And good service and attractive ticket prices are crucial.

Airlines already have grounded enough workers and aircraft to create a substantial new carrier. But the pain isn't over. The industry lost a cumulative $7 billion in 2001 and will lose another $7 billion this year.

Economics texts say that Bankruptcy Court is exactly where an unprofitable airline belongs. United argues that a loan guarantee is the solution to its woes.

What's needed is a middle course similar to the one taken by US Airways Group, which won a loan guarantee but also negotiated substantial labor concessions and is using Bankruptcy Court to shed unprofitable routes and reorganize its finances.

Using bankruptcy to knock well-paid pilots into a lower tax bracket might make some envious souls feel better, and winning a loan guarantee might spare airline executives some sleepless nights. But neither is guaranteed to make an airline attractive to the flying public.

To give United the loan guarantee it's after, the federal board must decide whether the company has shed enough excess costs. It must also see a business plan that meets consumer demand for solid service and competitive pricing. When the economy does rebound, that's what the flying public will want. Absent the traveling public's endorsement, airlines risk becoming another subsidized drain on the economy.

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