Bailing out Congress: an assessment and defense of the Air Transportation Safety and System Stabilization Act of 2001.

• Author: Lewinsohn, Jonathan

NOTE CONTENTS INTRODUCTION I. "CONGRESS: WE HAVE A PROBLEM" A. Initial Response B. A Bill Becomes a Law 1. Statistical Underpinnings 2. Theoretical Underpinnings C. Anatomy of a Loss 1. Short-Term and Long-Term 2. Five Billion Dollars in Losses 3. Moving the Goalposts and Declaring Victory 4. Ten Billion Dollars in Loan Guarantees II. THE ATSSSA IN ACTION III. THE ATSSSA: IN SEARCH OF JUDGMENT A. (Overcoming) The Anti-Bailout Presumption 1. Perverse Incentives 2. Efficiency B. Comparative Analysis 1. Retrospective Comparison: Relative Results 2. Prospective Comparison C. Monday Morning Quarterbacking the ATSSSA 1. Covert Options 2. Other Options D. Outlines of a Model CONCLUSION INTRODUCTION

On September 11, 2001, almost immediately after receiving clearance to reenter the Capitol, (1) the United States Congress began the task of responding to the terrorist attacks. The first sessions were filled with tributes to the dead (2) and massive appropriations for rebuilding, (3) but by Friday, September 14, three days after the worst terrorist attack in the nation's history, the House of Representatives met late into the night to discuss one thing: whether to supply the commercial-aviation industry with the largest one-time corporate bailout in American history. (4)

Although the airlines were officially deregulated in 1978, (5) the industry continued to function as the "prodigal child" of the federal government. (6) This unusual, hybrid relationship emerged from the unique set of expectations facing the post-regulation industry. Even absent direct government control, consumers wanted airlines to operate with the "reliability of utilities, providing frequent flights on-time" to many destinations "at low cost and with cozy amenities." (7) At the same time, both Congress and the public expected the airlines to function as separate businesses in the public marketplace, (8) protecting workers' salaries, surviving on razor-thin margins, and facilitating economic activity. As a result, the deregulated industry was still monitored closely by the federal government. (9)

In the months before September 11, the airline industry (10) experienced particular difficulties due to the growth of low-cost carriers, decrease in business demand, and rich labor contracts negotiated during the 1990s boom. Unable to reduce excess capacity or abrogate labor agreements, the airlines approached Labor Day 2001 facing losses of between $2 (11) and $3 (12) billion. The government's response, however, was not sympathetic. Choosing to blame the industry's woes on management, Congress was concerned less with the carriers' financial position than with their treatment of passengers. As late as August 2001, Congress held "a series of hearings and threatened to approve a robust passenger rights bill despite industry lobbying efforts." (3) The prospect of a congressional bailout was simply inconceivable.

But all of this changed on September 11 when an industry that was already at the breaking point saw its "economic rubber band snapped." (14) Within hours of the attacks, the Federal Aviation Administration (FAA) issued the first ever national groundstop order requiring the shutdown of U.S. airspace. (15) With fixed costs upwards of 80%, (16) the airlines started hemorrhaging hundreds of millions of dollars per day, (17) leading to calls for government assistance even before planes were back in the sky. Industry lobbyists, (18) Wall Street analysts, (19) and national newspapers (20) all highlighted the industry's complex predicament: Insurance plans had been canceled or made significantly more expensive; (21) credit markets, unsure about the liability facing the airlines, had all but dried up; (22) airline workers were being laid off by the tens of thousands; (23) and the ripple effects were spreading across the "just-in-time" economy. (24) To make matters worse, airline equity values were poised to plunge once the markets reopened, (25) and a number of carriers were rumored to be headed for bankruptcy. In Congress, a consensus developed that the nation's airlines--a symbol of the flag (26)--could not be made victim to the terrorists. What emerged, only eleven days after the attacks, was the Air Transportation Safety and System Stabilization Act (ATSSSA) of 2001, (27) an $28 billion (28) federal bailout that had been conceived, drafted, and signed amid a marked sense of crisis.

The Act, which was passed without amendment in both the Senate and House, sought to stabilize the airlines in a manner that distinguished between pre- and post-September 11 losses. While broad-including the establishment of a Victim Compensation Fund (29) and tax postponements (30)--it contained only four central terms: (1) $5 billion in direct compensation to the airlines for all losses suffered in 2001 as a result of the terrorist attacks; (31) (2) the authorization of an additional $20 billion in loan guarantees to be approved by the newly created Air Transportation Safety Board (ATSB) based on rules promulgated by the Office of Management and Budget (OMB); (32) (3) the capping of carrier liability for the September ix attack and future terrorist attacks; (33) and (4) the government's assumption of substantial insurance costs and risks. (34) By mixing immediate cash assistance and liability relief with longer-term loan guarantees, Congress was able to act quickly without effectively re-regulating the industry.

The reactions to the Act were fast and, at times, furious. Major airlines feared that the OMB's standards for loans would be set too high, while labor leaders, (35) along with representatives from other affected industries, (36) denounced the Act for its exclusive focus on the carriers. Even members of Congress publicly speculated--as early as October 1, 2001--that the Act had been overly generous. (37) On the other side of the ledger, the New York Times applauded the Act's (apparent) recognition that government could be a catalyst for economic change, while the Air Transport Association (ATA) expressed gratification that the nation's airlines would not be allowed to become "the first economic casualty of this war." (38) The sheer enormity of the sums, combined with the responsibilities the Act imparted on the government, convinced both supporters and detractors alike that Congress would be taking a leading role in reviving the industry.

Nearly four years later, however, this conclusion is being drastically reconsidered. In the end, Congress disbursed $4.6 billion in direct compensation to the airlines--$400 million less than the statute authorized. The ATSB managed to extend $2.56 billion in loan guarantees, (39) but rejected almost $2 billion in requests, including applications from US Airways, United, and Vanguard that could have saved those carriers from bankruptcy. (40) The Board actively discouraged other applications by requiring bankruptcy-like concessions and steep compensation. Although the industry is no longer in danger of imminent collapse, it is still in a state of flux, with carriers at all cost levels facing margin pressures and significant losses. (41)

In light of these events, it is easy to deem the ATSSSA a failure, or at least a poor effort in comparison to previous congressional bailouts. After all, Chrysler, the most famous recipient of congressional-bailout funds, (42) returned to health in under three years, netting the federal government a profit of $312 million. (43) But to assess the ATSSSA in such terms is to overlook the Act's unique circumstances and motivations. It is true that Congress was helping the airlines to redeploy capital in response to unanticipated business conditions, thus branding the Act a "bailout." (44) Yet its aim was never to ensure the indefinite survival of each carrier or to rehabilitate the nation's commercial aviation industry. Rather, as this Note will argue, Congress conceived of the Act as a public relations measure, designed to return the airlines to their pre-September 11 positions and prevent the spectacle of mass carrier bankruptcies immediately following the terrorist attacks. Unlike previous bailouts, which were designed to overcome market dictates permanently, the ATSSSA was formulated to stabilize the industry only briefly and to reassure the nation without severely distorting the market forces that had been operating since deregulation. (45) The ATSSSA was thus more a symbolic salve than an industry savior, a prophylactic measure to avoid the possibility of a public relations calamity.

This Note, then, will assess the ATSSSA and explain why it was passed, how well it met its objectives, and whether it might serve as a template for the future. This is no idle academic exercise. In the event of future attacks, it is likely that the airlines, or a host of other industries, will come calling on Congress to provide immediate, lifesaving assistance. With the economy hanging in the balance, it should already be known whether a statute resembling the ATSSSA would provide a reliable, appropriate, and efficient response. (46)

Accordingly, Part I will study the genesis of the Act, tracking its development from the first discussion in the House the day after the attacks to its passage eleven days later. Looking closely--for the first time--at congressional debates, committee hearings, Wall Street reports, and newspaper editorials, this Note will attempt to capture Congress's understanding of the industry's predicament as well as the philosophy behind the Act's formulation. What emerges is a portrait of an Act designed to let the carriers tread water only until the period of national tragedy had passed. From this perspective, the industry's current predicament, including its multiple bankruptcies post-2001, is demonstrative of the Act's success rather than its failure.

After outlining Congress's approach to the Act, Part II will briefly examine the Act's immediate effects. This, in turn, will set the...