CHARLOTTE, N.C. -- Government backing can save ailing companies, even help to make them viable. Just ask US Airways ( LCC). In 2001, in the aftermath of the Sept. 11 terrorist attacks, which worsened an increasing drop-off in air travel, Congress created the Air Transportation Stabilization Board, equipping it with the power to guarantee loans to keep airlines afloat. The precedent is a valuable one, as Washington considers how to help General Motors ( GM), Ford ( F) and Chrysler at a critical time in their history. US Airways was by far the biggest beneficiary of the ATSB. In 2002, it was awarded a $1 billion loan, of which the ATSB guaranteed $900 million. The loan helped it to survive two bankruptcies and eventually to engage in a successful merger. Merger partner America West was also an ATSB client, receiving a $429 million loan in 2001. Today, US Airways is prospering -- to the extent that airlines prosper -- and the ATSB has shut down, its work completed. In the US Airways deal alone, the board made more than $300 million in fees, interest and profit on the sale of warrants, and it saved the nation's seventh-largest carrier. "Both these airlines would be nonexistent had they not merged," said US Airways CEO Doug Parker, in a recent interview. "But merged, we saved 35,000 jobs." Then, a sharp drop in traffic highlighted structural flaws in the airline industry, and lenders shied away from carriers. Now, a sharp drop in spending highlights structural flaws in the auto industry, and lenders shy away from everybody.
"Both industries are obviously pivotal to the U.S. economy, and in both, an exogenous event exacerbated existing problems to the extent where government intervention seemed necessary," says former ATSB member Jeff Shane. The ATSB was careful with its money, using only about 17% of its $10 billion in funding. "The loans and guarantees were given out extremely carefully, after long and difficult negotiations by professionals," says Shane. "The results demonstrate that the government can be pretty good at investment banking when it needs to be." The board's rigor assured taxpayers were protected. "If we could turn the carrier into a stronger carrier, make it more cost effective and stronger, that would be fine, but the first question was, 'What are the ingredients here for repayment?' " Shane says. A Transportation Department undersecretary who served on the board for two years, he is now a Washington attorney. The board even rejected a request from United parent UAL ( UAUA) for a $1.8 billion guarantee of a $2 billion loan. In a 2002 press release, it explained: "The business plan submitted by the company is not financially sound (and) would pose an unacceptably high risk to U.S. taxpayers. When United reapplied, it was turned down again. In all, the board approved loan guarantees for seven carriers -- but turned away nine others. "What people don't realize is how challenging it was to get the loan guarantees," says David Castelveter, spokesman for the Air Transport Association and a former US Airways spokesman.
Adds Dave Davis, a top financial executive at US Airways during both bankruptcies: "The ATSB didn't go and try to nitpick pieces of the plan and say, 'You had to do this or do that.' But they didn't allow us to come in with generalities. They were very focused on how real our cost savings were and how specific. They (constantly) asked, 'Are these realistic numbers?' " The model would be a good one for providing money to the auto industry, says Davis, now a partner at private equity firm Perseus LLC. For US Airways, he notes, the ATSB essentially provided DIP financing during both bankruptcies. For the auto industry, which is intent on avoiding bankruptcy, a similar outcome might require "legislation that would provide a bankruptcy-like process, with an auto czar or an ATSB-like panel, where somebody had the power to do bankruptcy-like things," Davis says. An ATSB-like board, says aviation consultant Bob Mann, would provide "exactly the sort of oversight that Congress is talking about today: 'We want to have a business plan, and we want to have a sense that it is workable.' " From the labor side, conditions imposed by the ATSB were harsh, says Bill Pollock, former chairman of the US Airways chapter of the Air Line Pilots Association, which made the biggest share of the concessions in the two bankruptcies. In the first bankruptcy, filed in 2002, the ATSB determined that in return for the loan, the airline had to submit a plan providing a 7% profit margin, Pollock says. Fitch Ratings, employed by the board to ensure viability, determined that over the seven-year life of the loan, US Airways had to fund too much debt related to the pilots' defined benefit pension plan. "It was impossible to secure the loan short of doing something about that book debt, even though it varied with the market, so we had to make a difficult decision to close the plan," Pollock said.
The old plan was replaced with a defined contribution plan offering similar benefits but without the same funding burden for the carrier. "It was an excellent plan," Pollock said. "But it didn't survive the second bankruptcy." In that bankruptcy, filed in 2004, meeting ATSB loan covenants was again a constant concern, and pilots had to scale back the plan during negotiations with the company. Even today, Pollock is criticized -- sometimes intensely -- for the pension decisions the pilots' leadership council made while he was chairman. "I get the credit for it, and I don't mind that," he says. "Without doing it, US Airways as it exists today would not be here." But were the ATSB process to be replicated, he says, "It ought to have a little bit more compassion for circumstances that people can't control."