The Big Bailout

Corporate Research E-Letter No. 16, September 2001

The Big Bailout: 
Questions About Federal Aid for the Airline Industry and the Takeover of Airport Security

by Philip Mattera

On September 21 Congress cleared legislation that provides a $15 billion aid package for the nation's airlines, the largest bailout of an industry since the federal intervention in the savings and loan crisis of the 1980s. A combination of $5 billion in cash payments and $10 billion in loan guarantees, the measure is meant to prevent a collapse of commercial aviation in the wake of the attacks on the World Trade Center and the Pentagon. The bailout bill, drafted and brought up for a vote in a matter of days, passed with very little opposition in what is now being called a War Congress.

The speed with which the legislature acted cut short public debate on the plan. Even though the aid package is now law, there still are a number of questions both about the bailout and about the federal initiatives relating to airport security that were announced by the Bush Administration on September 27.

How much of the current woes of the industry are attributable to 9-11?

There's no question that the shutdown of the entire U.S. aviation system for several days and the sharp falloff in air traffic amid the terrorism panic have been a major blow to the industry's finances. Yet all was not well among the airlines before the hijackers performed their deadly deeds. The industry was on its way to posting a total loss of about $2 billion this year. As Treasury Secretary Paul O'Neill put it, "Some airlines were a mess before any of this happened." It's difficult to avoid the conclusion that the aid package is both a response to an emergency and a boost to help the industry recover from its marketplace woes.

What sacrifices are being made by airline executives and lenders?

The only real concession the bailout bill requires from the industry is to freeze compensation for Top executives. That's not much of a hardship. The total compensation received last year by chief executives at the largest carriers -- United, American and Delta -- averaged $3 million. Herb Kelleher, the CEO of Southwest Airlines, made a killing in the exercise of stock options and raked in a total of $14 million. Several airline chief executives have announced that they will voluntarily forgo their pay for the rest of this year, but most of them will remain millionaires. For example, Donald Carty, chief executive of American's parent company AMR Corp., should still have at least $3 million of income to report on his tax return next spring.

Lenders are not being asked to make even token concessions. When the federal government bailed out Chrysler Corp. two decades ago, banks were required to relax loan repayment provisions.

What will happen to airline workers?

The most conspicuous omission from the bailout bill is any provision for direct aid to airline employees. The major carriers (apart from Southwest) have responded the post-attack slump in business in announcing some 100,000 layoffs. To make matters worse, American and Northwest Airlines initially sought  to invoke contract clauses that allow them to avoid notice and severance pay in an emergency, canceling those plans only after the unions threatened to lobby Congress to deny them bailout funds. Airline unions are appealing to Congress to assist their members, but it is unclear that the request will be as favorably received as the one from airline management. House Majority Leader Dick Armey suggested that aid to workers was not "commensurate with the American spirit."

Putting workers last is nothing new in an industry that has a long history of antagonistic labor relations. Among the recent illustrations of this was the 12-week strike carried out earlier this year by pilots at regional carrier Comair, a subsidiary of Delta Air Lines, to improve salaries that started as low as $17,000. Flight attendants involved in an organizing drive at Delta have reported being harassed by supervisors. In some cases, management's hard line is backed up by the federal government. Last March, the Bush Administration created an emergency board to prevent a strike by mechanics at Northwest. Three months later, the Administration vowed to intervene if flight attendants at American carried out a threatened strike. Courts also help to tip the balance in favor of management. In 1999, American got a federal judge to impose a penalty of $45 million on its pilots union for refusing to end a sick-out over disputes relating to the company's acquisition of Reno Air.

Who's responsible for lax airport security?

Well before the hijackings that turned three airliners into flying bombs, experts were warning that security at the nation's airports was woefully inadequate. Much of the responsibility for this can be laid at the feet of the Federal Aviation Administration. Critics have long argued that the FAA is conflicted: one the one hand, it serves as a booster for the air travel industry; on the other, it is the industry’s regulator. The same clash of loyalties was pointed out after the ValuJet crash in Florida, with some arguing that the policing functions need to be made separate.

Yet the airlines themselves must share the blame. The carriers have been responsible for the system that screens passengers and carry-on baggage to prevent the introduction of weapons onto aircraft. Last year the U.S. General Accounting Office published a report warning that the effectiveness of the screening system was weakened by the high rate of turnover among the people staffing the checkpoints. The rapid turnover, which means that the typical screener has very little experience on the job, was attributed to the low wages and inadequate benefit packages offered by the security contractors hired by the airlines. The GAO found that at some airports the turnover rate among screeners was more than 300 percent a year. Workers involved in protecting the safety of thousands of passengers were often being paid at or just above the minimum wage. Even the workers at airport fast-food restaurants were earning more.

What does federalization mean for airport worker organizing?

On September 27 President Bush announced a series of measures intended to restore public confidence in airport and airplane security. A key element of the plan is a transfer of responsibility for the screening process from the airlines to the federal government. Details of the plan are still fuzzy, yet press reports suggest that the screeners would not become federal employees. The work would continue to be contracted out, though the feds reportedly would not follow the airline practice of awarding the work to the lowest bidder. Some reports also suggest there may be different contracting practices between larger and smaller airports, raising questions about uniformity of safety.

It is not yet clear how much the switchover to federal oversight will improve the working conditions of the screeners--or whether incumbent screeners will get first rights to the federalized jobs. Also uncertain is what impact this change will have on those screeners who are participating in union organizing drives. The Service Employees International Union has launched campaigns at three West Coast airports--Los Angeles (LAX), Oakland and Seattle-Tacoma--where security personnel (along with some passenger service workers) are employed by a contractor called Huntleigh USA. SEIU, which is pushing for an elevation of wages and benefits to a livable level and the "professionalization of screeners," has put up a website about the campaigns at <>.

Last year SEIU won card-check recognition for employees of Globe Airport Security Services, a division of Burns Security Services, at LAX. SEIU also was recognized as the bargaining agent for screeners and other workers employed by International Total Services Inc. at San Francisco International Airport (SFO) under the terms of a labor peace agreement negotiated by a coalition of unions to cover all contractors operating at the airport. A recent report issued by the Institute for Labor and Employment at the University of California at Berkeley concludes that the job quality initiatives at SFO are already reducing turnover and improving job performance among security workers.

There's a good case to be made that unionization, rather than federalization, is the real solution to the problems of screeners and thus a key element in the restoration of confidence among the flying public.

(ranked by revenue passenger miles--RPMs--in 2000)

1. United Airlines
126,880 million RPMs
operating revenue: $19.3 billion

2. American Airlines
116,515 million RPMs
operating revenue: $18.1 billion

3. Delta Air Lines
107,782 million RPMs
operating revenue: $15.3 billion

4. Northwest Airlines
79,101 million RPMs
operating revenue: $11.0 billion

5. Continental Airlines
62,314 million RPMs
operating revenue: $9.1 billion

6. US Airways
(plan for acquisition by United blocked by Justice Department)
46,827 million RPMs
operating revenue: $9.2 billion

7. Southwest Airlines
42,230 million RPMs
operating revenue: $5.7 billion

8. Trans World Airlines (acquired by American in 2001)
27,215 million RPMs
operating revenue: $3.6 billion

9. America West Airlines
19,102 million RPMs
operating revenue: $2.3 million

10. Alaska Airlines
11,979 million RPMs
operating revenue: $1.8 billion

Source: Air Transport Association