Subcommittee On Aviation

Subcommittee on Aviation

Hearing on

Financial Condition Of The Airline Industry

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TABLE OF CONTENTS(Click on Section)

PURPOSE

BACKGROUND

WITNESSES

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PURPOSE

The Aviation Subcommittee will hold a hearing to receive testimony on the financial condition of the U.S. airline industry one year after the September 11, 2001 terrorist attacks.

BACKGROUND

After the terrorist attacks of September 11, 2001, there was serious concern that, without significant U.S. government financial support, many U.S. airlines would go bankrupt. In response to this concern, Congress enacted the "Air Transportation Safety and System Stabilization Act" (P.L. 107-42), which was signed into law on September 22, 2001. The Stabilization Act provided a total of $5 billion in compensation to air carriers for direct losses incurred as a result of Federal ground stop orders and for incremental losses incurred between September 11, 2001 and December 31, 2001, as a direct result of the terrorist attacks. In addition, the Stabilization Act provided for up to $10 billion in airline loan guarantees.

STATUS OF IMPLEMENTATION OF STABILIZATION ACT

Direct Compensation

As of September 18, 2002, $4.55 billion of the $5 billion in direct compensation provided by the Stabilization Act had been paid to a total of 396 passenger and cargo air carriers. The bulk of these funds were distributed in 2001, including $2.3 billion that was distributed very quickly -- by October 1, 2001.

The Department of Transportation (DOT) initially used procedures set out in Program Guidance Letters to make a first round of payments amounting to nearly 50 percent of the $5 billion total. On October 29, 2001, DOT issued a final rule providing procedures for air carriers to use in applying for additional compensation. Under the October 29th rule, DOT issued a second round of payments that was intended to distribute about 85 percent of $5 billion total. Three subsequent rules were issued, in January, April, and August of 2002, to address comments received on the prior regulations. Applications for a third round of payments were due to DOT no later than July 29, 2002, and DOT is now in the process of issuing the third, and final, round of payments.

In general, payments that have not yet been made at this point fall into two categories: (1) contested claims, and (2) the $35 million set-aside for small carriers, such as air taxis, air tour operators, and air medical operators. Regarding the contested claims, DOT is working to settle contested claims as quickly as possible, but some will likely result in litigation. Regarding the $35 million set-aside, this category of funds cannot be distributed until all claims in that category are settled. About half of these claims are settled to date, and DOT estimates that it will be able to settle the other half and distribute the $35 million set-aside in about one month.

Since the $5 billion in compensation is subject to taxation, the Air Transport Association (ATA) estimates that the air carriers will receive a net benefit of about $4 billion after taxes, assuming a marginal tax rate of 20 percent.1

Loan Guarantees

Sixteen air carriers applied for a Federal loan guarantee under the program established by the Stabilization Act. To date, only one -- America West -- has been finally approved, and one other -- USAirways -- has been conditionally approved. Four applications have been denied (Vanguard, Frontier Flying Service, Spirit Airlines, and National Airlines). Ten applications are pending -- the largest of which is United Airlines' request for a $2.0 billion loan, of which $1.8 billion would be guaranteed by the Federal government.

The America West loan is a $429 million unsecured loan, of which $380 million is guaranteed by the Federal government. This loan is not secured by tangible assets. However, as part of the loan agreement, the Air Transportation Stabilization Board (ATSB) received stock purchase warrants that will enable it to buy a certain amount of America West stock at a certain "strike price" in the future. No voting rights are attached to these warrants.

For USAirways, the ATSB has conditionally approved a $1 billion loan, of which $900 million would be guaranteed by the Federal government. In contrast to the America West loan, the USAirways loan will be secured by a variety of assets. To receive final approval of this loan guarantee, USAirways must conclude legally binding agreements, satisfactory to the ATSB, regarding the cost-savings and the initiatives described in USAirways' business plan. In addition, the ATSB must receive additional stock purchase warrants in an amount and at a "strike price" acceptable to the Board. Finally, certain issues as to collateral (including slots and gates) must be resolved to the ATSB's satisfaction. The loan guarantee would be available to USAirways if and when it emerges from bankruptcy.

IMPACT OF 9/11 ATTACKS ON AIRLINE INDUSTRY

Prior to September 11, 2001, the U.S. commercial airline industry was already in a weakened condition due to a combination of reduced passenger demand and rising labor costs. Business travel in particular had dropped significantly by January, 2001 in response to a rapid slow-down in the U.S. economy. The September 11th attacks were a major shock that further weakened the industry.

At the time the Stabilization Act was enacted, the airline industry estimated that it would lose about $24 billion in liquidity (cash and short-term equivalents on hand) during the period from September 11, 2001 to June 30, 2002. This estimate was based on the experience of the airline industry after the Pan Am 103 bombing and the Persian Gulf War, both of which negatively impacted airline revenues. It also factored in the severity and systemic nature of the September 11th attacks; cash burn rates immediately prior to the attacks, as well as expected fixed costs in the months ahead.2 This $24 billion projected drop in liquidity cannot easily be compared to the net loss figures discussed below. The net loss figures below are for a slightly different time period and conform to Generally Accepted Accounting Practices (GAAP) (accrual-based) accounting requirements -- as required by law -- rather