"A New Airline Policy: Kill United"

Wednesday, April 2, 2003                         

A New Airline Policy: Kill United
By HOLMAN W. JENKINS, JR.
The Wall Street Journal


US Airways emerged from bankruptcy on Monday, though its chief compared it
to a drowning man who found himself a little nearer the surface. United
thinks it will get out eventually too, though murmurs of liquidation
continue.

Meanwhile, American Airlines is teetering despite wage deals tentatively
reached on Monday. But inside of bankruptcy or out, a restructuring of the
industry's biggest player only increases the likelihood of Chapter 11
filings by Northwest, Delta and Continental, as each tries to preserve its
dwindling cash and options in a more brutally competitive environment.

The trouble is, cycling the entire industry through Chapter 11 can't fix a
problem of too many carriers chasing too little traffic. Bankruptcy isn't
meant to be a place for whole sectors of the economy to hide out, hoping
conditions will change. That's why an epiphany has come to many observers
and investors: United Airlines must die.

Yes, there would be traffic disruptions, and, yes, every instinct of the
bankruptcy process is to maintain a company as a going concern, especially
when the potential buyers in a liquidation are themselves on the verge of
cracking up. Here's a chance for the Air Transportation Stabilization Board,
created after the Sept. 11 terrorist attacks, finally to play a useful role.

The agency has been more nuisance than help thus far, last seen doling out
loan guarantees to keep too many airlines flying. For once, the board could
get its hands constructively dirty by supervising the breakup of United,
with its key Asia routes and dominant hub at Chicago, while minimizing
inconvenience to the flying public.

There's a precedent for a carve-up of a vital transport network on a running
basis -- the division of Conrail between Norfolk and CSX in 1996. CSX's
chief at the time was none other than John Snow, now our treasury secretary
and, as luck would have it, one of the principals of the stabilization
board.

For reasons too convoluted to recount, Mr. Snow, against his better
judgment, found himself in a bidding war for Conrail against Norfolk
Southern. Then Linda Morgan, head of the federal Surface Transportation
Board, weighed in and restored what everyone knew to be the right solution:
Divide it up, giving the two dominant Eastern railroads a way to extend
their competition into the crucial New York City market.

This is what needs to happen to United, with a twist: Today the airline
industry's finances are in such a calamitous state that none of the
prospective bidders can afford to buy United's assets. The industry has
already borrowed every last dime anybody will lend it, carrying debts of
$100 billion.

Yet consolidation still makes as much sense as it would if the current state
of industry balance sheets were able to accommodate the necessary
transactions. Technically, the stabilization board's lending window closed
last year, but $8.5 billion of its $10 billion remains untapped --
sufficient at current market values to buy up the industry and turn it into
Ameriflot (not a solution we're currently recommending).

The board has already agreed to revisit United's twice-rejected
loan-guarantee application if it emerges from bankruptcy. Mr. Snow (along
with fellow board members Fed Chairman Alan Greenspan and Transportation
Secretary Norman Mineta) could readily stretch this point to include
supporting other carriers to take over certain United routes, planes and
other assets that could be profitably folded into a shrunken industry.

The trends that have brought the industry to such a sorry pass, we're
confident in saying, are historically anomalous. Air travel has not been
outmoded by a new technology (say, teleportation), and yet fewer people are
flying as a portion of GDP than they were two years ago, as if the economy
were regressing to an earlier stage of development.

The hassle factor contributes to public reluctance, but so does an
atmosphere of unreasoning dread. In the days immediately after Sept. 11,
George Bush made a point of telling people to get on airplanes and fly with
confidence. Since then, in the manner of barn-door closers from time
immemorial, federal agents have been treating the airlines as if they are
besieged by terrorists. They aren't.

This doesn't mean a terrorist somewhere isn't hatching a plot to attack a
jetliner with a handheld missile. One might like to know, for instance, if
two SA-7s fired at an Israeli airliner in Mombasa in November, reported to
be from the same factory batch as one fired at a U.S. military plane in
Saudi Arabia in May, were also from the same batch as 30 SA-7s found in
Basra last week.

Terrorism has always constituted a significant portion of the de minimis
risk you assume when flying. Even so, you're still safer today on an
airplane than in a car for comparable trips.

For their part, airline executives have a hard time dealing with the
conundrum presented by geopolitical events. They have been trained not to
talk about safety, because safety is supposed to be assumed. On a visit to
the Journal offices, Delta CEO Leo Mullin broke his vow long enough to note
the "intellectual fallacy" that leads people to prefer a 300-mile drive on a
holiday weekend to getting on an airplane. "The result is hundreds of
deaths," he said. Until terrorists attacked on Sept. 11, 2001, major
carriers had suffered only two fatal crashes in five years.

The urge to travel, and the urge to be rational about it, will resurrect
itself someday. In the meantime, Washington is already hip-deep in the
airline shakeout, administering the bankruptcy courts, piling on security
mandates and continuing to collect hefty airport taxes that reflect
assumptions about traffic growth that are now dreamily optimistic.

Consolidation is not a magic cure for everything that ails the airlines.
Their congenital inability to make and keep any profits over the long run is
a perplexing issue -- one that perhaps will be solved only when we modify
some of our historic antitrust prejudice against cooperative acts by
competitors. But that's a subject for another day.


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