Airline board is again accused of bias

Leslie Miller

Thursday, Aug. 22, 2002 | 9:49 a.m.

WASHINGTON -- Regional airlines say a federal loan-guarantee board created to help the financially strapped industry recover after Sept. 11 is showing little regard for small carriers.

The board has approved one guarantee and given conditional approval to a second for large airlines close to bankruptcy when those decisions were made. All four applications the board considered from small carriers were rejected.

"We're just perpetuating dinosaurs that aren't able to meet the demands of the market in the 21st century," said Alan Bender, aviation professor at Embry-Riddle Aeronautical University. "This is being used to bail out the airlines for problems that existed before Sept. 11."

A board spokeswoman, Betsy Holahan, said all applications are treated equally and evaluated carefully.

Added Rep. John Mica, chairman of the House Transportation aviation subcommittee: "They're being very stingy with taxpayer-guaranteed dollars, and that's what we wanted,"

Industrywide, more than 100,000 layoffs were announced in the weeks after Sept. 11. Midway Airlines ceased operations and announced plans to become part of US Airways.

Congress, moving quickly, approved $5 billion in direct payments to airlines for lost business due to the attacks and created the Air Transportation Stabilization Board. It is making up to $10 billion in loan guarantees to airlines that can show they were hurt by the attacks.

A guarantee makes the federal government a co-signer on an airline's loan, agreeing to cover the debt if the airline folds. The airlines arrange the loans, but the financing will not go through without the government's signature.

The board, which meets secretly, has three voting members: Peter Fisher, Treasury undersecretary for domestic affairs; Kirk Van Tine, general counsel for the Transportation Department; and Edward Gramlich, a Federal Reserve governor.

From the outset, critics were concerned the board would favor politically well-connected larger airlines over smaller, regional airlines. There also were worries the guarantees would just delay the inevitable demise of some airlines, leaving taxpayers responsible for the loans.

Michael Conway, chief executive of Las Vegas-based National Airlines Inc., called the board "the most powerful force affecting this industry today."

National's request for a $50.5 million loan guarantee was rejected last week because it was deemed too risky. With other low-cost carriers in National's market, the board said, the airline "wasn't essential to a safe, efficient and viable commercial aviation system."

Conway claimed that America West, the eighth-largest airline and the first to get a loan guarantee, is using the financing to expand its service so it can drive National out of business.

National has filed a complaint with the Justice Department.

America West spokeswoman Janice Monahan denied Conway's claims.

America West was on the brink of bankruptcy when it received a $380 million guarantee in January. In return, the airline had to give the government the option over 10 years to buy one-third of the company's publicly traded stock at a fixed price -- 18.7 million shares for $3 each.

The deal also called for America West to give the government annual payments totaling $135 million over the nearly five-year life of the loan, as well as a $3.8 million fee upfront.

At the time, some in the industry said the terms were so stringent other airlines would hesitate to apply. But others have.

About a month before seeking bankruptcy protection, US Airways got conditional approval for a $900 million guarantee, provided the seventh-largest airline agrees to give the government the option for a bigger ownership stake than it had offered. The board said it recognized the possibility of bankruptcy and would review the reorganization plan before approving a loan guarantee.

United Airlines, the No. 2 carrier, wants a $1.8 billion guarantee to help head off possible bankruptcy. Nine smaller airlines also are awaiting word on their requests.

Jacob Schorr, chief executive of Fort Lauderdale, Fla.-based Spirit Airlines, thinks the board may have rejected his company's request for a $54 million guarantee because the board relies on consultants who do not understand the low-cost, low-fare industry.

"The whole dynamic is that the consumers are saying no to the high-cost carriers," Conway said. "What the government is doing through the ATSB, they're going completely counter to where the consumer wants to go."

The board also has rejected loan guarantees for Kansas City-based Vanguard Airlines and Frontier Flying Service Inc., an Alaska commuter airline. Vanguard shut down after the rejection.

"ATSB says, 'We're not picking winners and losers,' " said Scott Dickson, chief executive officer of Vanguard. "I'm sorry, they are."