The U.S. airline industry will be crippled if the government does not provide relief on an order never before seen in the private sector, says Scott Gibson, a senior vice president with Simat, Helliesen & Eichner, a company that provides consulting to the airline industry.

Scott Gibson
Senior Vice President,
Simat, Helliesen & Eichner
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Gibson, who testified before the House Transportation Committee this week, says that not only does the government need to provide immediate relief and loan guarantees to the airline industry, it also will have to underwrite insurance for cataclysmic events and restore public confidence in airtravel by helping to police commercial travel. Even if these measures aretaken, Gibson says, the crisis facing the airline industry is so great that it's almost certain a number of airlines will go out of business.

TSC: What did the House Transportation Committee ask you as youtestified before them Wednesday?

Gibson: They are looking at a bill to help the airline industry. This is such a cataclysmic event, akin to an act of war, that it threatens the entire airline industry. Government has an essential role here to keep this key infrastructure business up and going. Were they not to do that, Idon't think there is any other party out there who could help preserve thisindustry.

Aside from financial aid, which needs to happen very quickly, the firstthing that the government needs to do is to restore confidence in the airtransport system, and that may involve federalization of security and othermeasures. That is the most essential thing. Absent that, this business isdead.

TSC: Do you believe that the $24 billion that the airline industryis seeking from the government is sufficient?

Gibson: They are now seeking nearly $18 billion. None of us knowsfor sure. All of us are making projections based on past events -- the GulfWar, Pan Am 103. While they help give us an indication, none of them arecomparable to the events that happened last week. Certainly the airlines'traffic results since the system started up again are much more depressedthan one might have expected.

TSC: What about the $5 billion that President Bush is giving to theindustry in immediate cash? Is that sufficient?

Gibson: It's sufficient to stabilize the airlines for today,yes. The airlines have a very specific problem today, and that is cash. American, held by AMR ( AMR), and United, held by UAL ( UAL), will run out of cash. The financialmarkets are closed to them because of the liability issue now facing theentire airline industry. Unless there is some kind of shield provided bythe government to protect airlines from third-party claims, no one in theirright mind would lend money to the airlines.

The second problem you've got is confidence in the business goingforward. We don't know when passengers will return. It may not be soonenough. So every airline in the nation is at risk of going bankrupt. Giventhe fiduciary responsibility of a lending institution, who in their rightmind would lend money to a business that they can't predict will be arounda month from now? The answer is, they won't.

That's where the loan guarantees are needed. There is no privatecompany that can afford the risk, because the risk is unknown.

TSC: What's going to happen to the aircraft that are in production now atBoeing (BA) and Airbus? Who is going to buy those?

Gibson: The airlines have probably started negotiations with the aircraft manufacturers. It is inconceivable to me that in a world when you have 20%-25% of the current fleet grounded that you have an ability to afford the new deliveries. There are 930 aircraft on order by U.S. passenger carriers.

The airlines can cancel and not take an aircraft, but they will incurpenalties. And most airlines make big predelivery payments. They get thatmoney back when they are in receipt of the plane through financing, but themarkets today are not functioning.

TSC: What about insurance? How much aid might American Airlines andUnited Airlines hope to receive? And what kind of protection against lawsuitsmight they seek?

Gibson: The airlines generally have coverage for an accidentthat includes a terrorist event. I have never heard of coverage greaterthan $1 billion per event, and the $1 billion rule of thumb is designed tocover 500 injuries or fatalities, damage to the aircraft and property.

Certainly something of the order of magnitude of the World Trade Centergoes far beyond the insurance coverage that is in place. Historically, thisgoes far beyond the ability of American or United to absorb. This basicallykills those companies -- the liability that stems from the two crashes intothe World Trade Center.

As far as whether the other airlines' loss of business due to thisevent is covered by insurance, I do not know.

TSC: So are you saying that American and United are going to go outof business?

Gibson: Yes, it could jeopardize their survival, but what Ithink they will do, absent protection from Congress, is go into bankruptcyand say this is a pre-petition claim.

As far are the lawsuits are concerned, there is a ceiling on the totalamount that they can be sued for. If you had an aircraft accident thatinjured people on the ground, this historically has covered them. I don'tthink any insurer or airline ever envisaged an event where an aircraftaccident might result in the collapse of a huge building and 5,000fatalities.

TSC: Do you think a rash of bankruptcies is inevitable?

Gibson: Yes. Even before the events last week, with Midway ( MDWYQ) already filing bankruptcy, there were many other airlines on watch that were at risk of bankruptcy. The monies we are talking about giving the airlines are for making them whole, for covering the days of the shutdown and the expected shortfall of revenues as a result of people not flying.

TSC: Do you expect there to be layoffs in addition to the 100,000the airlines have recently announced?

Gibson: Certainly there are several airlines that have not yetannounced layoffs, so I certainly do expect more. Even the numbers we arealready seeing, while substantial, might not be enough. So much of thisdepends on whether people start flying again.

TSC: In sum, what is your general outlook for the industry and forinvestors?

Gibson: I think things are about as bad as they are going to gettoday in terms of the impact on traffic and revenues going forward. Onewould like to believe that as people start to feel the system is safe, theywill return to flying. That's an issue of confidence, and time will tellhow quickly that is restored.

A lot of this depends on what Congress does. In a world of noCongressional action, it is highly likely that we will see many airlinesgoing into bankruptcy, and many of those that go into it will fail. What thismeans for investors is unclear. Bankruptcy can wipe out the equity andoften does. It does not automatically do that. The real question is whydoes equity get wiped out.

The airlines' argument, which I think is a fair argument, is these areacts of terror. These are not normal business events. They are notsomething to do with the companies themselves. The companies were just avehicle through which these acts were perpetrated. Thus, they should not bethe ones to bear responsibility.

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