NCPA - National Center for Policy Analysis

Airline Bailouts Could Weaken Stronger Carriers

October 18, 2001

The federal government's $15 billion bailout of failing airlines could backfire, industry analysts warn. They fear that a few failing airlines -- propped up by federal aid -- will file for bankruptcy reorganization and set off fare wars that drag down the whole industry.

Something like that happened a decade ago during the industry's last financial crisis:

  • While they were reorganizing under Chapter 11 bankruptcy laws, America West, Continental, Pan Am, Eastern and TWA didn't have to pay some bills run up before they went into bankruptcy.
  • That gave them cost advantages that allowed them to sell lower fares than competitors could do profitably.
  • The advantages stuck after the reorganization -- which took years -- because each carrier greatly reduced its debt.
  • Economist and investor Felix Rohatyn points out that bankrupt carriers "add more competition at a time when the industry is in difficulty."

A board of federal officials is to dole out $10 billion in government-backed loans. About 100 airlines have received $2.4 billion of $5 billion in government grants so far. The board has considerable latitude in deciding which airlines get the guarantees.

Now, there is debate about whether the industry's weakest airlines should get guarantees if they have to seek protection from creditors anyway.

Source: Jayne O'Donnell, "Could Airline Bailout Backfire?" USA Today, October 18, 2001.

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