The All Too Visible Hand

Four months and what a difference a war makes. Osama bin Laden is nowhere to be found, there is a new government in Afghanistan, and hey-no terrorist attacks after all those warnings from Tom Ridge and the various “me-too” governors. There was even a 20% growth in movie box office revenues from Christmas weekend to New Year’s weekend. I suppose we can go back to eating pretzels and watching football games without worry now. We must be safe and all is well again, right?
Airplanes are refilling, though carriers are operating fewer routes, and so far not a single airline has filed for Chapter 11 bankruptcy. In fact, Midway Airlines even went out of bankruptcy as a result of September 11th, after filing for Chapter 11 protection in August, with the help of the swift September $14 billion airline industry “bailout” from Congress. It took Continental Airlines’ $3 million-a-year CEO Gordon Bethune only five days after the September 11th attacks (I’m sure each of them deeply mournful and deliberative) to hold a press conference demanding the bailout and threatening that 100,000 jobs could be lost in the following 90 days without it. Congress swiftly answered his plea.
And guess what. Dow Jones reported one month later that Continental’s third-quarter net income fell 98%, and had it not been for the bailout package, Continental would have posted a -gulp- loss! But it actually posted a gain. But, why just the thought of that…dare I even say it…ahem…loss!…draws tears to my weary eyes. And to think, Continental only ended the quarter with $1.2 billion in cash while it estimated its November operating losses to be around $5 million a day and decreasing.

Meanwhile, a provision in the bill prevents victims’ families from suing the airlines for damages if they take financial help from them. How charitable. Yes, thank goodness for Uncle Sam’s helping hand. How bold and brave of Mr. Bethune; his industry owes him high praise.
Perhaps nobody should heap praise more than Federal Express, who reported a third-quarter net earnings gain of 26%, from $194 million last year to $245 million this year! Champagne all around! Oh, except $116 million of that gain was a direct result of the congressional airline bailout-you know, the one designed in part to compensate for a dropoff in passengers because of terrorism fears. Who knew that even our mailed packages were afraid to board an airplane?

And that’s just the first $5 billion of the bailout plan. The remaining $9 billion is to be distributed in the form of loan guarantees, with strings attached, in a sort of domestic IMF-type arrangement where the U.S. government plays its usual role and the multi-billion dollar airline industry is cast in the role of a developing nation, except one with healthy long-term GDP figures and a positive trade balance.

Furthermore, while some analysts worry about the conflict-of-interest posed by government possibly taking stock in return for loan guarantees, The Wall Street Journal reported January 4th that a consultancy partially owned by GE Capital Aviation is giving guidance to the government panel in charge of disbursing the loan guarantees. That charge basically means that the panel gets to pick which companies survive in the industry and which ones…well, you know, what all those people did on September 11th.

There’s more. According to The WSJ, GE Capital Aviation is one of the biggest creditors of America West Airlines, the first airline to apply for and be awarded a $380 million guarantee from Uncle Sam’s swift and generous helping hand.

But wait-there’s more. Without that guarantee, The WSJ reports, many analysts say America West would have had to file for bankruptcy. Now that worked out just peachy keen for America West’s major creditor GE Capital Aviation, didn’t it?

In a September interview on the radio program Uncommon Knowledge, Milton Friedman commented on Uncle Sam’s recent generosity to the airline industry. Said Prof. Friedman, “We should not have had a bailout. The airline industry is a competitive industry. In some years, it’s made extremely great profits. In some years, it’s had losses. It is a very variable industry. If you want a competitive industry, it’s got to stand on its own feet.” Silly professor. Little did he know that Continental Airlines would almost have had to post a loss without that bailout! And FedEx, well can you even imagine?

He continued, “The hardest thing in the world to understand is that people operating separately, through their joint relations with one another, through market transactions, can achieve a greater degree of efficiency and of output, than can a single central planner.” I wonder if GE Capital Aviation would agree with that. Where does he get these silly notions?

Oh, and about Continental CEO Bethune’s threat: he predicted there could be 100,000 layoffs in his industry without the bailout. As it turns out, he showed uncanny prescience. Since the third-quarter, indeed there have been over 90,000 layoffs in the U.S. airlines. Oh but wait a minute, he got the bailout he asked for. Then how did he get that figure? Hmm…

No worries, though. Maybe FedEx is hiring, awash in its 26% “earnings” growth. How fortunate we all are for the swift, gracious, beneficent, generous, corporate-helping hand of Uncle Sam.

January 22, 2002
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