Loan guarantees alone can't save airlines
By SHIHOKO GOTO, UPI Senior Business Correspondent
WASHINGTON (UPI) - Government intervention to keep certain industries such as airlines afloat is necessary, but loan guarantees will not automatically lead to recovery for ailing industries, Federal Reserve Gov. Edward Gramlich said.
Even before the terror attacks of Sept. 11, 2001, many US airlines had been struggling to stay profitable as the economy turned sour, decreasing the number of travelers. But the terrorist strikes, followed by the war against Iraq and now concerns about the severe acute respiratory syndrome outbreak, has lowered the number of flying passengers still further. The industry as a whole has reported losses totaling about $30 billion since the September 2001 attacks.
American Airlines, the nation's biggest carrier, and No. 2 airline United, as well as US Airways, the sixth-largest air company, are all teetering on the verge of bankruptcy, and have all called for considerable government subsidies to keep them afloat, complete with loan guarantees from federal authorities.
But even loan guarantee programs cannot save failing industries, the Fed governor told a group of economists. What's more, not all struggling airlines have taken advantage of the policy. Since the plan was made available in late 2001, only three of the eight largest companies have filed for protection. Of those, America West and US Airways have been approved, but the application for United was not approved, even though its application could be revised as it emerges from bankruptcy.
"The low participation rates have different rationales, but they probably all suggest a common message. When all is said and done, it turns out to be difficult to produce an application that appeals simultaneously to the borrower and to the lender and yet still satisfies the rigorous legislative requirements and the board's interpretation of these requirements," Gramlich said. "For airlines, few of the large ones even applied," he added, suggesting the plan itself is not without faults.
"The loan guarantee approach might be described as middle of the road; more intrusive than just relying on private lenders to allocate credit but less intrusive than giving industrial handouts or bailouts," Gramlich said.
He pointed out that lack of access to credit was often because lenders thought the potential borrower was too high a risk to undertake.
"If the business plan of an applicant just cannot be made to show a profit under reasonable economic assumptions, private lenders are unlikely to be interested in making new loans," he added. "There were rumors that the non-applicants were dissuaded by the terms demanded by the loan guarantee board - high fees and stock warrants," Gramlich said.