Can a libertarian accept the ATSB? (Briefly Noted).

Hemphill, Thomas A.

ON SEPTEMBER 22, 2001, PRESIDENT Bush signed into law the "Air Transportation Safety and System Stabilization Act" (ATSSSA). The Act provides for up to $10 billion in federal loan guarantees to assist air carriers who suffered losses in the wake of the terrorist attacks of September 11, and to whom credit is not otherwise reasonably available from financial institutions. In order to receive the loan guarantees, airlines' applications must be approved by the Air Transportation Stabilization Board (ATSB), whose membership includes designees of the Federal Reserve chairman, the secretary of the treasury, the secretary of transportation, and the comptroller general. The board can offer air carriers loan guarantees of less than 100 percent of the loan amount for up to seven years.

No one questions that the U.S. commercial aviation industry (especially the passenger sector) suffered severe financial losses as a result of September 11. Few people also question that the industry, overall, was teetering on the financial brink before the terrorist attacks; the eight largest air passenger carriers posted combined net losses of $7.5 billion in 2001, with estimated losses of $8 billion for 2002. Thus, many supporters of a free market/libertarian philosophy may look on the work of the ATSB with a cynical eye. But I believe the board's efforts can be lauded because its members have diligently stayed true to the ATSSSA's stated purpose and have not "mission crept" into the role of trying to "save" the airline industry from its non-September 11 malaise.

ATSB EVALUATION CRITERIA

As a former loan officer with the New Jersey Economic Development Authority, I am familiar with the criteria used for providing loans and loan guarantees to the business community. After reviewing the regulations for the ATSSSA program, I conclude that the set of financial and economic criteria used to evaluate and approve air carrier applications meets or exceeds that employed in the banking industry. For example, risk evaluation factors that underlie ATSB judgment include the borrower's ability to repay the loan by a specific date, adequate assets to secure the guarantee in case of default, and the ability of the lender to administer the loan in full compliance with the requisite standard of care. Furthermore, the ATSB also gives loan guarantee preference to applicants that meet the greatest number of the following criteria:

* A financially sound business plan.

* Greater participation in the loan by non-federal and private entities.

* Federal participation in the financial success of the air carrier and its security holders.

* Concessions by security holders, creditors, or employees that will improve the financial condition of the air carrier so that it will be better able to repay the loan and operate on a financially sound basis after repayment.

* The guaranteed loan proceeds will be used for a purpose other than repaying debt.

* The proposed credit instruments contain financial strictures that minimize the federal government's risk and cost associated with making loan guarantees.

This in-depth financial analysis supports the ATSB's charge (or fiduciary responsibility) to protect taxpayers' money, i.e., to ensure loans are repaid by the airlines to financial institutions. In addition to post-September 11 financial and economic data on each company's performance, the board examines data from previous years' financial statements to ascertain the economic health of the firm. Those data are compared to airline industry averages to ascertain whether the applicant air carrier has been exceeding, matching, or falling short of the industry annual performance data. The ATSB carefully evaluates the economic impacts of September 11 on each applicant firm, but poor pre-September 11 economic and financial performance is not rewarded with a loan guarantee. That was not the intended purpose of the Act nor has the board expanded its legislative charge.

THE ATSB'S RECORD

What has been the performance of the ATSB through the end of 2002? Of 15 air carriers who applied for loan guarantees, only six received approval or conditional approval.

The most newsworthy ATSB decision was the December 4, 2002 rejection of an application from United Airlines (the nation's second largest air passenger carrier) for a $1.8 billion guarantee of a $2 billion loan that the airline desperately needed. Five days later, United filed for Chapter 11 bankruptcy protection, which made it the largest bankruptcy in aviation history. Prior to its bankruptcy filing, the airline reported that it was turned down for loans from 25 banks, while credit agencies downgraded its debt well into the "junk" territory, thereby effectively eliminating its ability to raise funds from either debt (bond) or equity (stock) markets. While there has been criticism of the board's approval of the $900 million gurantee to U.S. Airways, the members' unanimous decision is predicated on a company business plan that offers convincing "substantial and diverse cost savings" as well as "credible revenue assumptions" that reasonably assure a viable airline.

The total amount of loan guarantees that the ATSB has extended as of the end of 2002 is a little over $1.6 billion on a total of just under $1.9 billion of total financing. The amount of loan guarantees rejected by the board through the end of 2002 totaled almost $2 billion. Therefore, the ATSB approved only 40 percent of air carrier applicants for 45.2 percent of all potential loan guarantees. That is only 16.2 percent of the ATSB's loan guarantee capacity of $10 billion. Those results verify that the ATSB has been evaluating each of the air carrier applicants on its individual merits. There is little doubt that the board's decisions have disappointed many of the nation's air carrier executives who had a preconceived notion that applications for loan guarantees were simply a formality for an industry-wide federal government bailout. The results show to the contrary.

A LIMITED ROLE FOR INDUSTRIAL POLICY

The active role that the ATSB has taken as a stabilizing factor in the passenger air carrier industry has been limited yet decisive. Following its legislative mandate, the board has directly intervened where it has found that an airline possesses a business model that has been successful prior to September 11 and, were it not for the economic fallout affecting the industry since then, would still be viable. The fiduciary responsibility of the ATSB's members makes it imperative that the overall financial health and business strategy of the firm be considered because repayment of the loan is of the highest importance.

Air carriers with sub-par performance and lackluster management before September 11 were certainly not going to rise to the occasion in the post-September 11 passenger aviation business environment. For those firms, the ATSB's decision to reject their applications relegated them to the bankruptcy court, either in reorganization (Chapter 11) or final dissolution (Chapter 7). Had the ATSB provided loan guarantees to all 15 airlines, it would have simply prolonged the inevitable march to the bankruptcy courts--but this time taxpayers would have been standing in line as one among many creditors.

What does this say about the ATSSSA exercise in industrial policy? The ATSB has followed its legislated mandate to provide appropriate stabilization of an American industry used as an instrument of war by terrorists. It has followed an economic and financial evaluation process that is similar to that employed by the banking industry. It has limited the financial exposure of public monies by granting loan guarantees to firms that have a reasonably successful business model and adequate security to ensure repayment of their loans. A laissez-faire libertarian who philosophically abhors industrial policy may have reason to feel comfortable that this industry-specific program to assist an industry directly harmed by terrorism has provided an effective policy model for those rare circumstances when government intervention may be a necessary palliative.

Thomas A. Hemphill is a visiting instructor in the Department of Strategic Management and Public Policy of the School of Business and Public Management at The George Washington University. He is a former loan officer with the New Jersey Economic Development Authority and fiscal officer for the New Jersey Historic Trust