NCPA - National Center for Policy Analysis

Government Loan Guarantees for the Airlines

January 3, 2002

In effect, the emergency airline bailout legislation passed after Sept. 11 put the federal government in charge of restructuring the deregulated U.S. airline industry, say observers. This risks exacerbating the industry's pre-existing problems.

  • Congress gave the industry $5 billion outright in compensation for harm done when the government grounded commercial airplanes.
  • But overriding objections from some in the administration, Congress also offered $10 billion in government loan guarantees and created a three-member board to dole them out.
  • Congress gave the board contradictory mandates to approve loan guarantees only for airlines for which "credit is not reasonably available," but only if those loans are "prudently incurred" and "a necessary part of maintaining a safe, efficient and viable commercial aviation system."

The airline industry was on the verge of a shakeout before Sept. 11. Due to competition from upstart, low-cost carriers, some airlines were going to fail.

The three member board split on its first decision, a $380 million loan guarantee for America West, an airline that was widely expected to fail before Sept. 11. The Department of Transportation and the Federal Reserve voted for the bailout, and the Treasury Department against. The board demanded the equivalent for the government of a 33 percent stake in the airline -- which may fail anyway.

"The whole spirit of deregulation was that the government shouldn't pick winners and losers. But that's what they're now engaged in doing," says economist Alfred E. Kahn, the architect of airline deregulation.

Source: David Wessel, "The Risks of Aiding Airlines," Wall Street Journal, January 3, 2002.

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