America's airlines seem likely to receive a hefty bailout from Congress this week. But is the multibillion-dollar package necessary?
In the wake of the Sept. 11 terrorist attacks on the United States, in which four airplanes were hijacked and crashed, prospects for the industry look bleak.
With tourists and business travelers expected to shy away from the suddenly unfriendly skies, domestic carriers have already announced almost 100,000 layoffs and reduced their schedules, while the major airlines' stock prices have plummeted this week.
But some industry observers are not convinced that the rapidly constructed financial windfall for the airlines has to be put in place at this point.
"I don't know whether it's justified yet because we don't know how many people are going to quit flying," says Richard Bingham, professor of urban studies at Cleveland State University.
Cash Flow Problems
That's not what airline executives have been saying, though. Industry leaders have not been shy about lobbying for an aid package, and requested $24 billion in cash and loans during meetings with Congress this week.
"We are in very urgent need of a financial infusion, very, very quickly," Delta Air Lines CEO Leo Mullin said Wednesday.
But the House and Senate both passed a $15 billion package today consisting of a $5 billion cash payment to the industry, with a potential $10 billion or so in guaranteed loans if problems persist, and a lessening of liability costs for American Airlines and United Airlines, whose planes were hijacked on Sept. 11.
The government's aid will also probably include $3 billion in security costs not included in the cash grant or loans.
Although less than their desired figure, the plan would address the most pressing problem the airlines are facing at the moment: cash flow. Compared to some other industries, the major airlines do not keep a great deal of cash on hand — usually anywhere from three weeks to three months of reserves. Even the grounding of all flights for about two days last week cut into those reserve substantially, analysts say.
"Right now we are very concerned with cash flow at a number of our airlines," said Susan Donofrio of Deutsche Bank Alex Brown in a report this week. "If Continental, one of our healthier airlines with $800 million in cash, has deemed it necessary to immediately cut 20 percent of its [flight] capacity and lay off 12,000 of its workers, we shudder to think what the other airlines are going to be faced with."
Bad Year, Bad Luck or Bad Management?
The terrorist attack came at a time when the airlines were facing imminent retrenchment anyway. The sputtering economy had led to a decline in revenue for several airlines, especially due to a downturn in business travel.
As a result, the industry as a whole lost money in the second quarter of 2001 — traditionally its strongest part of the year — for only the third time in 30 years.
In that period, American Airlines, the nation's largest carrier, lost $507 million after a profit of $321 million in the second quarter of 2000. The second-biggest domestic carrier, United Airlines, lost $292 million after a second-quarter profit of $336 million the year before.