**[Information Related To Airline Funding]{.smallcaps}**

**[Text of Bill Language Related to Airlines:]{.smallcaps}**

**Transportation Security Administration**

"...In addition, for expenses related to aviation security,
\$3178,300,000, to remain available until September 30, 2003: Provided,
That such appropriation shall be remitted to U.S. flag air carriers for
expenses incurred related to aviation security based on the pro-rata
share each such carrier has paid or collected to date in passenger
security and air carrier security fees to the Transportation Security
Administration: Provided further, That such appropriation shall be
remitted to U.S. flag air carriers for expenses incurred related to
aviation security based on the pro-rata share each such carrier is
expected to pay or collect to the Transportation Security Administration
for the remainder of the fiscal year: Provided further, That payments
made under this heading may be used by an air carrier for such purposes
as each carrier determines appropriate: Provided further, That payments
made under this heading shall be made within thirty days of enactment of
this Act: Provided further, that no airline receiving funding under this
heading may provide compensation (pay, benefits, and stock options) to
senior executives that exceeds the base pay and benefits that such
executives received in 2002."

**White House Calls Funding in House Bill for Airlines "Excessive"**

**From Yesterday's White House Press Briefing**

Q **You mentioned this morning that the airline** **aid package on the
Hill is excessive**. Do you think the airlines are trying to take
advantage of the government to cover up some structural problems they
have?

MR. FLEISCHER: I think that the airline industry, even prior to the war
in Iraq, was beset by economic difficulties, obviously unrelated to
anything happening in the war in Iraq. The taxpayers responded
generously once, right after September 11th, in the form of loans that
were available to the airlines, some of which have just this week
accepted substantial loans from the taxpayers.

So the airline industry has to be looked at in terms of, is there
something specific that was caused as a result of this war that merits
additional help from the taxpayers? Or were there other conditions that
existed in the marketplace that need to be considered, separate and
apart from the war.

Some of the issues that the airline industry brought to the attention of
policymakers were their fear that a war would lead to a spike-up in the
price of fuel oil, which is a large component of the cost that airlines
incur. Jet fuel costs have actually fallen, not risen, as was predicted.
**Fuel costs have fallen from \$1.20 a gallon in February, to just 80
cents last week. Also, in terms of passenger ridership, the airlines
anticipated a 15-percent decline in ridership. There has, indeed, been a
decline of 10 percent, not the anticipated 15 percent.** And that\'s
also a factor that needs to be considered. The level at which the
ridership now is very similar to the level of just one year ago.

**Therefore, when the administration takes a look at the congressional
committee\'s action to add some \$3 billion to the appropriations for
the airlines, the White House believes that that is excessive.**

Q What is an appropriate amount?

MR. FLEISCHER: Something less than that. (Laughter.) The administration
does not oppose assistance for the airlines. But, clearly, given the
factors that have affected the airlines, such as fuel oil and the
limited impact the war has had, the administration believes that the
amount that the Congress is considering now is excessive.

# From the Statement of Administration Policy on the Supplemental

While the Administration did not request financial assistance for
airlines, it recognizes that the war in Iraq may have an impact on the
demand for air travel. The Administration urges that any relief be
associated with the impact of the present conflict. The amounts proposed
by the House and the Senate, which are intended to cover an 18-month
period, are excessive and the Administration will work with the Congress
to ensure that any aid package is appropriately scaled and appropriately
based on free-market principles. The industry is undergoing a period of
fundamental restructuring to align costs and capacity to the demands of
the marketplace, and excessive, generalized assistance would only delay
and disrupt these important and inevitable changes.

**Size of the Airline Assistance Package Versus**

**Worth of Major Airlines**

For \$3.2 billion, we could buy the entire market capitalization of the
following major US airlines:

**[Airline Market Capitalization (as of 3/31/03)]{.underline}**

US Airways \$5.6 million

American Trans Air \$44.1 million

United Airlines \$55.6 million

America West Airlines \$69.1 million

American Airlines \$327.6 million

Continental Airlines \$336.7 million

Northwest Airlines \$592.2 million

SkyWest Airlines \$595.5 million

[Delta \$1.1 billion]{.underline}

**Total (9) [\$3.126 billion]{.underline}**

***Article mentioned at yesterday's meeting:***

## The Status Quo Won\'t Fly

**By LAWRENCE B. LINDSEY**

With many of the nation\'s air carriers in or on the verge of
bankruptcy, the debate has begun on how to restructure the industry.
Much of the debate is quite predictable. Some on the left insist that
the problems are proof that deregulation has failed and a return to
regulation is needed. Many on the right cite a high cost structure and
suggest we use bankruptcy proceedings to lower airline costs and allow a
cost-competitive industry to emerge. The airlines themselves, of course,
want more money.

None of these approaches will produce a customer-friendly airline
industry that is viable in the long run. To say that today\'s air
transport industry is deregulated is about as true as to describe France
as a capitalist ally of America. While fares are deregulated,
government\'s heavy hand still controls most of the cost side of the
ledger: controlling labor negotiations, access to capital, and domestic
restructuring all while imposing a heavy tax burden.

Re-regulation of airfares and routes could preserve this regulated and
non-economic cost structure, but only at a high cost to either the
taxpayer or the flying public. Amtrak provides one model; taxpayers
contribute about 45 cents for every one dollar paid by the traveling
public to maintain service. If the higher costs were transferred to the
flying public, the big losers would be moderate-income families flying
on super discounted coach fares. In the first decade-and-a-half after
airline price deregulation began, ticket prices fell by 33% in real
terms even though real personal incomes rose by 40%.

The bankruptcy model works for a time. But, successive bankruptcy rounds
in the past few decades have induced air carriers to keep as little as
possible on their balance sheets. Most planes are now leased. Pension
funds are under-capitalized. Cash-on-hand is often pre-committed to
future tax payments or for flights booked but not yet flown. The entire
market value of the five largest carriers is less than \$3 billion. The
capital markets are essentially closed to the industry.

Nor is bankruptcy court a good substitute for either competitive labor
markets or the collective bargaining process. United has just asked the
court to void its labor contracts. Competitive pressures could force
other airlines to do the same.

Small non-unionized, low-cost carriers do offer a viable business model
and will play an increasing role in the years ahead. But that model only
works between particular city pairs. The nation\'s current air transport
system relies on a hub-and-spoke model that allows passengers to fly
from any city to any city. It is that national air transport system that
is endangered by the current airline tax and regulatory structure and
business climate.

Deregulation, not re-regulation or a resort to bankruptcy court every
decade or so, offers a much better and more sustainable alternative.
While bankruptcies are now probably inevitable in the short run, the
government needs to act to create a structure in which carriers that
emerge from the current financial mess can operate profitably. Change is
needed in five areas.

Start with labor. Airline collective bargaining arrangements hardly
constitute what anyone would call free collective bargaining. Government
officials decide if and when strikes can occur. Once authorized, fear of
a possible shutdown causes bookings to go to other airlines, draining
the airline of incoming revenue while forcing it to keep paying the full
costs of operation. No airline can survive for long, and so the union\'s
demands are invariably met. The resulting high costs are the airlines\'
biggest problem.

A much better approach is final-offer arbitration where an arbiter picks
either labor\'s last offer or management\'s last offer. Both sides thus
have an incentive to appear reasonable. Until government sets a workable
structure for collective bargaining, no unionized air carrier is going
to be viable over the long run.

Government also limits airlines\' access to equity capital. Foreign
ownership is prohibited. So, while Daimler can buy Chrysler, British Air
can\'t buy United. The government\'s logic was based on the need for the
president to commandeer planes to ferry troops and materiel to Europe in
the event of a Soviet invasion. Certainly some national-security
addendum can be added to any reform in this area. Meanwhile, the free
market model on which the let-them-go-bankrupt approach depends doesn\'t
work when the number of buyers is so restricted.

Ironically, the status quo is actually producing the very foreign
control the law technically prohibits. The chair of the bankruptcy
committee for both United and USAir is the European consortium Airbus.
As in the labor market, the best solution for the capital market is
government deregulation, not re-regulation.

The government also micromanages the competitive arrangements of
domestic air carriers to an extent that far exceeds its antitrust
involvement in other industries. Not only must their actions pass muster
at the antitrust division of the Justice Department, but they must also
meet a separate higher standard set by the Department of Transportation.
Setting a higher standard for an acceptable market structure in a
failing industry makes little sense. Again, the best solution is less
regulation, not more.

This brings us to taxes and other mandated costs. Federal taxes and fees
now consume 25% of the cost of a low-priced ticket. That does not
include the further tax burden on profits and wages that most businesses
face. This tax compares with an 18% federal excise tax on cigarettes and
an 11% federal excise tax on whiskey. Is air travel more of a sin than
alcohol or tobacco?

Sept. 11 necessarily increased the number of unfunded mandates on air
travel. Obviously security is a prime concern. But unfunded mandates
allow politicians to claim credit without facing the costs. Meanwhile,
many business travelers who require speed and convenience have been
forced off the airlines and onto corporate jets, depriving the carriers
of some of their highest-margin customers.

Any industry requires sensible regulatory and tax policies to survive.
Setting up a workable regulatory and tax framework for the nation\'s
airlines should be a top priority. The status quo just won\'t fly.

Mr. Lindsey, a former economic adviser to President Bush, is now
president and CEO of the Lindsey Group.

Updated April 1, 2003

***The following article from Business Week may be useful in
understanding some of the problems faced by the airlines.***

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  ![](media/image1.png){width="3.125in" height="0.5625in"}             ![](media/image2.png){width="5.2083333333333336e-2in"
                                                                       height="4.1666666666666664e-2in"}

  -------------------------------------------------------------------- -------------------------------------------------------

APRIL 7, 2003\
\
INDUSTRIES

  -----------------------------------------------------------------------
  Can Anything Fix the Airlines?

  **It\'s clear that another government bailout won\'t be a permanent
  solution. Here\'s why**
  -----------------------------------------------------------------------

*There\'s no question that the war in Iraq is taking its toll on the
airline industry. In the week the war started, traffic fell by 10% and
advance bookings by up to 40%. High oil prices are hurting, too. But
it\'s also clear to politicians and passengers that the industry is
perpetually in trouble and never satisfies shareholders, customers, or
employees for long. A divided White House and Congress are now pondering
granting more financial aid to the ailing industry, but simply handing
the airlines another slug of money won\'t end their troubles. The debate
over a bailout has already raised critical questions about how the
industry got to this sorry spot in the first place and, more important,
how to fix the mess. Here\'s a primer on an industry that for too long
has made little economic sense.*\
\
**Why are the airlines in such dismal shape?**\
Carriers have been hit with an unprecedented series of crippling events:
the popping of the tech and telecom bubbles, which sharply reduced
business travel; the terrorist acts of September 11; and now, a war. But
the airlines deserve plenty of the blame for their current agony. During
the boom of the \'90s, they lost control of costs and then passed the
burden along to high-paying business passengers by raising business
fares 79% in five years. That worked, until recession and terrorism put
the brakes on business spending \-- and lower-cost rivals increasingly
took to the skies.\
\
\
**Are there just too many airline seats chasing too few passengers?**\
Yes, overcapacity is part of the problem \-- at least for the high-cost
carriers. While the major lines have grounded some 300 planes since the
terrorist attacks, and industry capacity was down 13% in February from
2000 levels, supply and demand are still out of kilter. That\'s why the
carriers have been forced to offer what even airline executives consider
\"irrational\" fares to fill seats.\
\
Some analysts think another 10% to 20% of capacity must be permanently
cut to help the airlines regain their footing. Why doesn\'t it happen?
The hypercompetitive network carriers such as American
([AMR](javascript: void showTicker('AMR')) ), United
([UAL](javascript: void showTicker('UAL')) ), and Delta
([DAL](javascript: void showTicker('DAL')) ) are always looking over
their shoulders, fearful that if they mothball any planes, a rival will
snatch up market share. That\'s why some airline executives and analysts
are hoping for outright liquidations of such major carriers as bankrupt
United Airlines, which has 16% of the domestic market. At the end of the
day, though, individual airlines have little control over industry-wide
capacity.\
\
**Why are costs such a big issue now?**\
Because big hub-and-spoke carriers face a huge cost disadvantage
compared with rapidly growing rivals such as Southwest Airlines Co.
([LUV](javascript: void showTicker('LUV')) ) and JetBlue Airways Corp.
([JBLU](javascript: void showTicker('JBLU')) ) Adjusting for differences
in the lengths of their trips, the network carriers\' costs are a
staggering 66% higher than the low-cost airlines, figures Gary Chase of
Lehman Brothers Inc.\
\
While the network airlines have shouldered that cost disadvantage for
years, a few critical things have driven down airfares. The low-fare
carriers now compete directly on routes that account for about 55% of
the network airlines\' domestic revenue, up from 14% in 1991, says
Chase. At the same time, Internet sales have made it far easier for
passengers to compare prices across carriers.\
\
**Given the dire situation, why don\'t management and labor each agree
to some compromises in order to get costs down?**\
With the help of the bankruptcy court, US Airways Group Inc. has already
slashed its costs almost 25%. And the other big players will be forced
to follow or face Chapter 11 themselves. Labor is target No. 1 because
it\'s the biggest piece of the airlines\' costs, about 40%. That\'s why
American and United both want to cut their overall labor costs by up to
a third. It\'s not clear yet how those talks will turn out.\
\
**Continental appears to have succeeded in cutting costs. Could it serve
as a model?**\
True, Continental Airlines Inc.
([CAL](javascript: void showTicker('CAL')) ) has weathered this storm
better than others, due in part to its lower costs. Yet the carrier
continues to lose money, and its unit-cost disadvantage to the low-fare
players is more than 60%. That\'s better than the 80% gap at American.
But Continental, too, will have to make changes to survive.\
\
The carrier already has scored big savings in labor costs. Thanks mainly
to advantages in work rules and pensions, won as a result of its last
two bankruptcies, the carrier has enjoyed about a 15% unit labor-cost
advantage over some of its rivals.\
\
Labor savings alone didn\'t do it, though. It wasn\'t until CEO Gordon
M. Bethune arrived in 1994 that the airline decided to spend some of its
cost advantage to improve operations and boost morale, avoiding another
bankruptcy. Bethune and his team got out of the executive suite,
laboring side-by-side with frontline staff. They also worked hard to
reward employees for results, such as improving on-time performance. The
esprit de corps that Continental has created \-- during a booming
economy and while it was improving pay \-- will be tough for others to
match when they\'re seeking massive concessions.\
\
**So can work rules at the other majors be improved in a similar way?**\
They\'re trying hard, albeit belatedly. Consider some of the work rules
that United is now trying to change in bankruptcy court. By planning a
vacation that overlaps with workweeks, a senior pilot can turn 10 days
of leave into a full month off with pay. Because of such rules, United
pilots fly an average of 44 hours a month, compared with 62 at
Southwest. United is demanding that pilots raise that total by 15 hours.
The airline also complains that it employs 427 skilled mechanics at 18
airports to oversee the push-back of planes at the gate \-- a task that
is assigned to lower-paid workers at other airlines. Changing that alone
could save United \$40 million a year.\
\
**Is the hub-and-spoke system part of the problem, too?**\
Yes and no. The hubs allow the airlines to economically serve routes
that might otherwise be too lightly traveled to merit direct flights.
These are the kinds of routes \-- such as Sarasota to Sacramento \--
that would likely never generate enough traffic to interest Southwest or
JetBlue. At the same time, the hubs allow major carriers to create
international networks that appeal to business customers, who prefer to
book their travel with a single carrier.\
\
For now, the hubs are just too costly to operate. The big carriers are
trying to change that \-- not by dismantling hubs but by spreading out
the flow of traffic throughout the day to use gates, aircraft, and
employees more efficiently. The jury is still out on how big the savings
from those moves will be.\
\
**So will the cost-cutting goals of the network players put them on a
level playing field with Southwest?**\
No, and they\'re not aiming to meet Southwest\'s costs. That\'s because
most of the hub-and-spoke carriers still believe they can offer a better
product that will attract higher paying passengers. That includes such
amenities as business-class service and broad frequent-flier programs.
American says it can sustain a 30% revenue premium over its low-cost
rivals, a rate it has achieved historically. But a 10% premium might be
more realistic as the low-fare carriers spread and improve their own
products. If the big airlines guess wrong, they could find themselves
permanently out of business in the next downturn.\
\
By Wendy Zellner in Dallas, with Michael Arndt in Chicago