Bailout must weigh benefits to society, airlines

As the economy adjusts to new realities after the attacks of September 11, Congress and President Bush must decide whether to extend financial aid to the airline industry, and if so, how much and in what form.

Calls for aid came almost immediately after the attacks. The loudest voices have been from lawmakers representing states such as Minnesota and Texas that are home to large airlines.

The principal argument for aid is that airlines are lost tens of millions of dollars for every day that they did not fly immediately after the attacks. The FAA, an agency of the federal government, directly ordered this inactivity.

Moreover, paying for new security measures at airports will cost airlines money. Future demand for air transportation may be sharply reduced because of increased security and because of increased fear of flying on the part of business travelers and general consumers.

The airlines, argue the advocates of aid, are a vital part of the nation’s economy, particularly as the nation gears up for military action. If all the airlines go broke, how will people get from place to place? Thousands of airline employees will be thrown out of work, as will those of airline suppliers. The economy will grind to a halt.

The arguments against aid, coming from the left and the libertarian right, are based on questions of fairness. Why compensate airlines and not taxi drivers who depend on picking up fares at airports? Why compensate airlines and not the travel agencies for which booking flights is still an important source of revenue? Why act to protect shareholders’ equity and highly paid CEOs’ salaries when these same airlines are already laying off thousands of wage and salary employees?

Other critics argue for market discipline. Many airlines were already knee deep in a financial swamp because of high fuel prices earlier in the year and because a slowing economy was cutting into travel. Is the attack and FAA-ordered grounding just a pretext to make up for past bad business decisions? True, FAA restrictions cost them revenue, but truckers also lose revenue when the police shut down a highway for hours. We don’t compensate them. Many firms purchase business interruption insurance, why can’t airlines do the same? Yes, getting such policies would be more difficult for airlines than for a video rental store, but some international insurers are willing to lay off almost any risk for a price.

Yes, airlines will lose future business because of public fears, but U.S. apple growers lost sales when the public became frightened of Alar, a growth regulator sprayed on many orchards. Chilean grape growers lost millions when one poison-tainted sample was found in a shipment to the U.S. Neither group was compensated

Finally, critics argue that the prospect of most major airlines going bankrupt is not the same as wiping out all air transportation. Airlines likely would continue to operate while in the bankruptcy process. They are going concerns with real assets. Someone would take them over at some price. Existing shareholders and the banks that lent to airlines would take a bath, but the planes would keep flying. The new owners would know that they should structure their businesses to be more resilient to external shocks that the past owners had.

My guess is that, after weighing the arguments, Congress will pass a pragmatic bailout package consisting of some grants and some loans. The airlines will not get as much as they want, but they will get more than will smaller affected firms, such as travel agencies or hotels. Congress may opt to create a national agency charged with airport security. That would ease some of the financial burden that now falls on airport authorities, the airlines and on air travelers and shift it to general taxpayers.

In addition, while the theoretical argument for market discipline will appeal to many conservative economists, in the real world we have to consider transaction costs. If a bankruptcy judge could wave a wand and discharge debt and shareholders equity in an instant, the “market discipline” argument would be more convincing. But as anyone who has ever had to deal with a bankrupt firm knows, the restructuring process can chew up mountains of real resources.

More important, a major industry would be in limbo for months or years, with no one in a position to make crucial long-term decisions.

Can an economist really add any insight to this debate? The best recommendation I can make is that our representatives try to distinguish between cost and benefits to society as a whole and costs and benefits to specific individuals such as stockowners or airline managers. Any aid should be limited to that necessary to accomplish broader national purposes. There is no need to guarantee every manager’s bonus or make every stockholder financially whole.

© 2001 Edward Lotterman
Chanarambie Consulting, Inc.