"Airline Financial Aid Bill Moving But Hurdles Are High"

Monday, October 7, 2002

Financial Aid Bill Moving But Hurdles Are High
Airline Measure May Never Emerge From Full Committee 
Airline Financial News


Airlines got a smattering of good news this month when a key House
subcommittee approved a bill offering some measure of financial aid. But
the bill falls far short of what the airline industry wants, and some
sources say the legislation may die on the vine, never emerging from the
full Transportation Committee. 

The bill approved by the House aviation subcommittee on Oct. 2 did not
abolish the $2.50 per passenger fee that can amount to $10 for a round
trip ticket, a high priority of the airline industry and some on Wall
Street. That did not keep the head of Delta Air Lines [DAL] from trying
to convince members of the Senate Commerce Committee on Oct. 2 to
abolish that fee, as well as take other actions to save the industry
hundreds of millions of dollars. Leo Mullin, chairman and CEO of Delta,
told the Senate committee that the new security fee costs the industry
$265 million. It does not appear, however, that the Senate committee
will approve sweeping legislation envisioned by the airline industry. 

The bill approved by the House aviation subcommittee extends war risk
insurance until the end of next year, reopens a $10 billion loan
guarantee fund if war breaks out with Iraq, helps airlines carry mail on
passenger airlines and requires the Transportation Security
Administration to reevaluate the seating of air marshals in first-class
seats after the cockpit doors are hardened. The subcommittee also said
airlines should receive loan guarantees and lines of credit to buy fuel
if oil prices rise sharply during a conflict with Iraq. 

The airline industry was able to kill an amendment that would have put a
$750 million per year cap on industry-wide airline fees that are levied
in addition to the $2.50 per passenger segment fee. Airlines argued that
the cap was set too high. 

The airline industry got only some of what it wanted from the House
subcommittee. 

Testifying before the Senate Commerce Committee, Mullin said the
industry has a five-step legislative agenda: 1) Eliminate the $2.50
security ticket segment tax; 2) Immediately authorize airlines to carry
U.S. priority mail; 3) Obtain reimbursements to the airlines for
unfunded security mandates; 4) Eliminate the monthly security fees
airlines are currently paying to the Department of Transportation; and
5) Assure that costs associated with armed- pilot programs or cabin crew
self-defense training are not levied on airlines. 

Susan Donofrio of Deutsche Bank Securities questioned the wisdom of
reopening the loan guarantee fund, emphasizing that the net debt/capital
ratio for most major airlines is currently well over 80 percent. "What
this tells us is that just renewing the loan guarantee program to the
industry may not be such a good idea since the industry is already
burdened with a very heavy debt load," she told the Senate committee.
"Many of these companies will, therefore, become even more highly
leveraged. What may in fact happen is that very weak carriers may be
forced to cut fares to cover the loans from the government, weakening
the stronger airlines." 

It would be much better, she said, to give some type of tax relief,
especially if an Iraqi conflict further exacerbates the airlines'
already tenuous financial position. She noted that airline fees and
taxes represent 26 percent of the price of an airline fare compared to
15 percent in 1992 and 7 percent in 1972. This is even greater for the
low-fare airlines, representing over 30 percent of the price of their
airline fares. 

Despite the pronouncements of airline executives and financial analysts,
it is quite conceivable nothing will come of the Senate hearings and the
bill approved by the House aviation subcommittee. Sources say Rep. John
Mica (R-FL), chairman of the House subcommittee, will continue to push
for the measure. But the chairman of the full Transportation Committee,
Rep. Don Young (R-AK), may not be inclined to approve a measure that
could be perceived as a second bailout for the airline industry. 

The executive committee of the AFL-CIO's Transportation Trades
Department (TTD) united behind a declaration this month that
transportation unions cannot support legislation to reimburse the
airlines for their war and terrorism related costs unless more than
150,000 laid-off aviation industry workers receive jobless benefits and
hiring preference for the thousands of federal airport security jobs
remaining unfilled. 

The House bill includes several provisions spurred by hearings a week
earlier. Regarding war risk insurance, it limits airline liability for
third party damages (i.e., injuries to people in a building or on the
ground) from acts of terrorism to $100 million. It also extends existing
war risk policies until the end of next year at premiums no higher than
now. Currently, DOT has been extending the policies for 60-day periods
and raising the premiums. The current policies expire on Oct. 16. These
policies cover only damages to third parties, not damages to passengers,
crew or the aircraft itself. The bill would extend coverage to these
areas. 

The provision establishing a deadline for screening mail also makes it
clear that postal workers would be considered federal employees and
allowed to do the screening. 

According to Mullin, increased terrorism insurance costs amount to $150
million; revenue losses due to new restrictions imposed on air carriage
of U.S. mail cost $90 million; cockpit door fortification costs $20
million; loss in revenue because of the federal air marshal program
costs $35 million, a fee for passenger screening costs $40 million and
other mandated security costs amount to $60 million. 

In addition to the financial aid provisions, the bill approved by the
House aviation subcommittee reforms the Federal Aviation Administration
and takes measures to improve air traffic control. 

Meanwhile, on Oct. 1 Continental Airlines [CAL] reported that
system-wide September mainline jet passenger revenue per available seat
mile (RASM) is estimated to have increased between 9 and 11 percent
compared to September 2001. But it decreased between 17 and 19 percent
compared to September 2000. For August, RASM declined 2.7 percent
compared to 2001 and declined 15.2 percent compared to 2000. 

Jim Higgins of Credit Suisse First Boston attributed Continental's RASM
to a marginally improved revenue mix from business traffic and
better-than- expected yield. Continental has been publishing its own
system revenue numbers along with its traffic since May 2001, and the
carrier's results generally foreshadow industry results published a few
weeks later by the Air Transport Association.


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