The Timeshare Beat: Potomac Crossings; Airlines in Freefall

Airlines In Free Fall

Two conflicting facts present themselves this week in Washington. One, as the New York Times declared in an editorial, “Congress cannot stand aside and allow an act of war to destroy the nation’s transportation network.” The other factor, as described by columnist Robert Novak, is “a crisis can change Congress only so much. Lawmakers cannot completely shake the mood on Capital Hill which has grown increasingly poisonous over the past 40 years.” Though muted by public events, rigid partisanship and ideology remain. Issue by issue, here is where things stand for the airline industry the week of Yom Kippur.

View from the Hill. Testifying before the Senate Banking Committee, Federal Reserve Chairman Alan Greenspan said that the terrorist attack’s produced a significant drop-off in activity in an already weak economy but that the long-term prospects remained strong. The Securities and Exchange Commission (SEC) Chairman Harvey Pitt noted that the market seemingly had not given way to panic selling. Treasury Secretary Paul O’Neill urged caution. Meeting behind closed doors with the Congressional leadership, they all urged policymakers to wait a bit and assess the impact of the attacks before pushing for a big fiscal stimulus package. It would include a mix of government spending increases and further tax cuts. The FED’s Beige Book survey indicated an economy that was sharply deteriorating even before last week’s events.

White House officials also said that they were anxious not to approve a massive, multi-sector bailout for all business that had been adversely affected. Congress was in no mood for proposals to immunize businesses from normal market forces. The preliminary consensus was that a proper role for government was to protect the security and functioning of air traffic but not to protect the returns of people who had invested in airline stocks. Such actions would benefit citizens who had invested in specific stocks at the expense of taxpayers who had not.

Congressfolk Fly Commercial, Too. Testimony before the House Transportation Committee chaired by Don Young (R-Alaska) did not prove to be as favorable as industry lobbyists, who have a $20 million a year budget, had hoped. Caught over-reaching in an emergency, airline lobbyists lost fast-track legislation when Rep. Lloyd Doggett of Austin (D-TX) stopped a unanimous consent rule. They then had to approach Congress in the regular (i.e. visible) way.

In testimony this week, the industry asked for $5 billion in immediate cash infusions, $12.5 billion in loan guarantees and $7.8 billion in tax relief, including a deferral for a year or more of jet fuel and ticket tax payments. They called for legislation limiting their liability for non-passenger (people in the buildings) and property (the buildings) damage stemming from the attacks. They suggested the government assume that liability.

Wanting to end having to absorb passenger complaints, the expense of actually having an adequate security system and the liability of providing the passenger screening service, the airlines also proposed the federalization of airport security. In what appeared to be “Cashing In” on the emergency, they also asked for regulatory relief from both antitrust and labor laws and exemption from the costs of laying off workers as specified in their collective bargaining agreements.

Winding up a politically insensitive performance, they did not comment on proposals to help the estimated 130,000 airline workers they expect to layoff. When asked by the committee, they refused to promise any reduction in executive compensation during these difficult times. Their position was that since executive stock options were now worthless, they needed their salary and bonuses. The committee and the leadership of both parties are very interested in the total impact of layoffs throughout the hospitality industry. Reports from vacation areas here and in the Caribbean indicate as much as 95 percent vacancies.

The Response. Congress balked at reducing or suspending any taxes and the industry quietly shelved that request which they had calculated publicly as being worth $8 billion but privately at $12 billion. The $12.5 billion in loan guarantees has been negotiated down by the committee to $10 billion. At the moment, the Bush Administration is suggesting an immediate $5 billion to cover the losses directly associated with the hijackings plus help with the insurance liability. It also promised that $3 billion of the newly-allocated $40 billion budget addition would be used to enhance (but not take over) airport and airline security improvements.

The federal government would extend to the airlines temporary terrorism risk insurance on domestic as well as international flights for the next 180 days. While there is no question that an act of war is not the airline’s fault, even the Wall Street Journal objects to a bailout, asking “what’s to stop politicians from tapping taxpayers to bail out every other industry?” The airline industry may prove to have lost $1 billion in this past week alone and estimates exceed $4 billion for the year. Losses in this range would exceed all the profits the industry has ever made in 75 years.

Overhauling Security. A major reason the proposal to federalize airport security is having slow-going is the history of airline battles over the years. Government improvement efforts, regarded as unfunded mandates by the industry, have been repeatedly resisted, diverted or watered-down. The current system is a left-over from the ‘70’s when the philosophy was to prevent a plane from carrying a bomb, not being a bomb. The blame goes everywhere. The industry sub-contracted the service to the lowest bidder. The government didn’t enforce the rules and an unthreatened public demanded no delays instead of adequate security. The over-riding concern of all was an intense pressure to move edgy passengers through security checkpoints with as little delay as humanly possible. The net result for the current system is that any “improvements” being suggested would have:

zero impact on the hijacking methods used last week
major inconvenience for travelers
negative financial impact on airlines by making flying unattractive
huge economic consequences for the whole economy.

Hardened Cockpits. Because the current airport security proposals all seem to throw money at the problem while making it worse, there is some sentiment to slow down and think things through. A large part of the war on terrorism must be a “Capitalist Counterattack” that puts the global economy back on a growth path. The battle requires fresh thought, not wasting money. One line of debate will be evaluating simple steps to make the airplane a less inviting target.

The reason to breach security is to commandeer the airplane. If, the thinking goes, you can’t control the aircraft, there is less reason to take the risk. Proposals to deny a hijacker control include a “panic button” that would irrevocably lock the airplane on autopilot so that neither the pilot nor the hijacker could fly the plane. Airbus has had such a system for years but Boeing does not. The electronics are already in place and retrofitting would be fast and cheap. Controls can be designed that seize control of the plane by ground control if there is any deviation from the approved flight plan.

There are also proposals to isolate the cockpit from the rest of the aircraft with impregnable doors and not allow the pilot to open the doors for any reason. Video cameras would be used in the cockpit to monitor the cabin. A third debate is to allow pilots to carry weapons of their choice so that even if a door were penetrated, armed resistance would await. The Israeli airline El Al has both armed pilots and hardened cockpits and they haven’t been hijacked in 30 years. It’s a point that will be debated. The surplus in the transportation trust fund may be earmarked for the retrofit program.

Changing Habits. The final worry for the airline industry is that business travelers are canceling and say that they are not sure when they want to travel again. In the meantime, they will discover new ways to cope without traveling or by using car and train. High-speed rail enthusiasts are already scheduling press conferences. Load factors reported by the airlines on Thursday were at 3 percent. Chewing up cash reserves at $300 million a day, the airline industry doesn’t even want to think about permanent changes in travel habits. Industry experts agreed that if the load factor is still under 20 percent later this fall the losses would be so great that no bailout would succeed.