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Feds pay airlines $2.5B
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September 27, 2001: 5:50 p.m. ET
First payments arrive, lifting bankruptcy threat for America West, others
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Airlines started getting about half of the $5 billion in federal assistance Thursday as President Bush announced a new series of security measures at a rally at Chicago's O'Hare Airport.
While the security measures, including federalization of airport security, greater use of armed sky marshals, and use of national guard at major airports, are seen as a way of getting passengers to return to planes, the cash infusion approved this past weekend is seen as key to the industry weathering its current cash crunch.
The payment has already taken the airline facing the greatest immediate threat of insolvency, America West Airlines, away from the brink. Last week in testimony before a congressional committee considering the bailout, Douglas Parker, CEO of the airline's holding company, America West Holdings Inc. (AWA: down $0.23 to $2.02, Research, Estimates), said the airline would consider filing for bankruptcy protection without help. One week and $60 million of assistance later, that's no longer the case.
"The imminent threat of bankruptcy has been removed," said America West spokesman Jim Sabourin. He said the airline expects to eventually see $122 million of federal assistance, and that even half that money at this point is enough to keep flying.
Bill Mosley, a spokesman for the Department of Transportation, said the department is still working at determining the final assistance numbers to each U.S. carrier. But rough estimates allowed it to make partial payments. He couldn't give an estimate when the rest of the money would be available.
"We'll have to see how quickly we can conclude the rest of it," he said.
The airlines had hoped for as much as 80 percent of the $5 billion in the first payment.
"Clearly the more we get the sooner the better," said John Heimlich, director of economic and market research for the Air Transport Association. But he said that while the airlines would have liked more than half, they were pleased that some discussion of only giving $1 billion this week were dropped.
"Will it be enough for everyone? It's not clear, but $2.5 billion is better than $1 billion, especially if they move quickly with the second half," Heimlich said.
Part of the delay is that Sunday marks the end of the current fiscal year for the federal government, so a delay to next week will shift the cost to a different budget.
Even though carriers have some cash available to them, there was a risk that some of the weaker carriers might file bankruptcy protections to insure their continued viability, said Phil Baggaley, airline analyst for debt rating agency Standard & Poor's.
"An airline will not want to wait till they're out of cash or almost out of cash to file bankruptcy," he said. "They'll want to have enough cash to operate in bankruptcy when access to credit is even more limited. You don't wait till you're down to last dollar."
Baggaley said that among major carriers those most at risk are America West and US Airways (U: down $0.30 to $4.10, Research, Estimates). US Airways is greatly impacted because Washington's Reagan National Airport is still closed due to security concerns. National is a key hub for US Airways and crucial to the operation of the Washington-New York shuttle, which had been US Airways' most valuable asset before the attack.
Passenger return may take time
President Bush urged Americans to return to flying in his speech at O'Hare Thursday. "Get on the airlines, get about the business of America," he said.
Secretary of Transportation Norman Mineta took a United Airlines flight to O'Hare to demonstrate faith in the system.
The assistance won't be enough to save the carriers unless passengers return to the air, said Glenn Engel, airline analyst with Goldman Sachs. And even with new security measures and federal assistance, Engel doesn't see a quick change in current weak demand for seats.
"I think what it takes will be time," he told CNNfn's The Money Gang Thursday. "In past cases it took three-to-six months time. My guess is this will be a little bit longer – probably six-to-12 months." (222KB WAV) (222KB AIF)
Engel estimates that the airlines will lose a total of $10 billion due to the attacks, and said the financial assistance is crucial to their survival until traffic can return.
"Demand right now is down 50-to-60 percent," he said. "That's just unprecedented. They just don't know what it will be down in the fourth quarter. They can't absorb these huge losses or else there won't be an industry to bounce back."
Bailout won't stop layoffs
The airlines have announced nearly 100,000 layoffs since the attack as most cut their flight schedule by 15-to-20 percent due to lack of demand.
Those employees will not keep their jobs even with the assistance. Many are not even getting the severance packages called for in their union contracts as management used emergency or extraordinary circumstances clauses to void those protections and payments.
AMR Corp. (AMR: down $0.34 to $17.90, Research, Estimates), the largest airline company and owner of American Airlines and Trans World Airlines, reversed course late Wednesday to say it would make some kind of payments to the 20,000 employees who will loose their jobs there, although it would not give details of that assistance. The company's statement said the $900 million it expects to get from the federal government will make the payments possible.
AMR did not give any estimate of the cost of the severance, although Al Becker, spokesman for the company, said it will be at least tens of millions of dollars.
Continental Airlines (CAL: down $1.75 to $13.00, Research, Estimates), one of the airlines that said it intends to pay the severance costs spelled out in its contract, said Wednesday those payments will cost it about $60 million.
Late Thursday, UAL Corp., parent of United Airlines, announced an indefinite suspension of its quarterly cash stock dividend of 5 cents per share.
The UAL (UAL: Research, Estimates) board said it approved suspending CEO James E. Goodwin's compensation for the rest of the year at his request. Board members also will forego their salaries until the end of the year.
In a separate announcement, the company named Jack Brace as chief financial officer, effective immediately. Brace replaces Douglas A. Hacker, who will remain as president of United NewVentures.
Cargo carriers also are in line to get federal assistance under the bailout package to compensate them for lost revenue during the air system shutdown following the attack. A preliminary estimate from ATA shows FedEx (FDX: down $0.15 to $34.75, Research, Estimates) getting about $210 million as part of the federal bailout, while United Parcel Service (UPS: up $0.27 to $49.72, Research, Estimates) should get about $120 million. Atlas Air (CGO: down $0.66 to $8.78, Research, Estimates), the No. 3 air cargo carrier which flies freighters for other airlines, should get at least $40 million, but could get quite a bit more, Heimlich said.
Click here for a look at airline stocks
The air cargo carriers have seen revenue bounce back much more quickly than the passenger carriers, and FedEx and UPS are using their strong cash positions to repurchase shares at a time when passenger carriers are cutting staff and struggling to find cash. 
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Continental jobs cuts will cost $60M - Sept. 26, 2001
Delta cutting 13,000 jobs - Sept. 26, 2001
Airline losses could ground U.S. economy - Sept. 21, 2001
American parent and United to cut 20,000 jobs - Sept. 19, 2001
Airline executives warn of bankruptcies - Sept. 19, 2001
Airline stocks see steep selloff - Sept. 17, 2001
Continental slashes staff, flights - Sept. 15, 2001
Airlines' cash will last only 30 days - Sept. 14, 2001
Losses widen for airlines - July 18, 2001
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