Regionals get short end of government largesse

 - October 4, 2007, 9:03 AM

Hesitant to “look a gift horse in the mouth,” Regional Airline Association president Debby McElroy applauded the Office of Management and Budget’s decision to allow bankrupt carriers, including RAA members Midway Airlines and Shuttle America, access to part of the $10 billion in loan guarantees signed into law as part of the Air Transportation Safety and System Stabilization Act. However, she stopped short of issuing a full endorsement of the Bush Administration’s plan, particularly on issues regarding the term lengths of the guarantees and the risk-assessment method used by the FAA in its administration of low-cost liability insurance.

Although the final rule regarding the loans increased the term length of the guarantees from the originally proposed three years to seven years, aircraft financing plans typically extend to at least 10 years, leaving a significant period during which loans would remain unsecured by the government. “We were very pleased that the loan guarantees were available for all regional airlines, but we’re disappointed that the terms specified don’t allow for the easy use of this for financing new regional jets,” said McElroy.

The $10 billion in loan guarantees, made available from October 11 through next June 28, followed the allocation of $5 billion in direct aid to airlines affected by September 11. As of October 12 some 41 passenger-carrying regional airlines had accepted roughly $100 million (see table). Although no regionals had applied for loan guarantees at press time, RAA estimates that some 60 percent of its membership has “expressed interest” in participating in the program.

Midway to Reopen This Month
Despite the apparent limitations of the loan guarantee program, its final iteration proved far more liberal than original proposals, particularly in its eligibility requirements. Under an earlier draft, the plan would include no carrier operating under Chapter 11 bankruptcy protection. The final draft allows bankrupt carriers to participate as long as they can show that their court-certified reorganization plans included consideration of the guarantee and underlying financial obligation. In fact, Durham, N.C.-based Midway Airlines, which declared Chapter 11 bankruptcy on August 13 and ceased operations on September 12, plans to reestablish limited service this month with the help of loans secured under the program.

On the issue of liability insurance, McElroy again applauded the federal government for its intervention with a special “gap” policy offered through the FAA at $7.50 per departure. However, she remains concerned about the program’s across-the-board administration of third-party liability coverage, without consideration for the bigger risk associated with mainline jets compared with the smaller airplanes flown by regionals.

“Because they’re doing this on a per-departure basis, the cost for the third-party gap insurance is the same for a Boeing 757 as it is for a Beech 1900,” said McElroy. “In defense of the DOT, you can construct all kinds of scenarios, but if you look at the private market, they do this on a per- passenger basis, which is an approximation of what they believe the exposure is. Regionals pay less because we fly fewer passengers.” 

On the issue of airport security, McElroy said the RAA will await the details of a House resolution on the issue before issuing a formal position. However, she said the association supports “federalization” of security; RAA’s support of the ultimate law depends on the extent to which Congress makes airport security a government function. Republicans in the House support a plan involving federal oversight of contract screeners. Democrats generally agree that the government should take full responsibility for airport security.

Since September 11 regional airlines across the U.S. have seen their security costs double, according to RAA estimates. Airlines that operate predominantly into smaller airports, where fewer carriers share the cost of security, have felt the most severe effects, said McElroy. Of course, regional airlines serve the majority of those smaller destinations. “Sixty-nine percent of all the airports in the U.S. receiving scheduled airline service are exclusively served by regionals,” stressed McElroy. “These are airports with fewer passengers, by and large where we are providing the screening. Our ability to spread those increased costs is limited, and in many cases we have lower passenger revenues to do that.”

Whatever package Congress ultimately adopts, its timeliness will prove critical to those airlines’ ability to recover financially to the effects of September 11. Aside from the economic issues, however, McElroy bases her arguments for federalized security on some more fundamental points.

“Clearly we believe that airport security should be a federal function for a number of reasons,” said McElroy. “Most important, this is really a national defense issue. We don’t have a contract army for good reason; national security is a federal function. Second, the ability to respond quickly to changes in intelligence information is extremely important. A federal agency can make all the appropriate changes to counteract any terrorist threats without having to filter information through the airlines. Finally, we are by necessity becoming far more invasive in our screening both with luggage and in person. I think passengers will be far more accepting of that if it’s done in an official capacity rather than by private individuals.”