Calls For Price 'Floor,' Limits To Bankruptcy Protections
No matter the number of significant
orders and new innovations we're likely to see from this week's
Farnborough International Airshow, the mood is tempered by
the economic tailspin a number of US airlines are in. A
prominent investment bank with strong ties to the aerospace and
airline industry called on Congress Sunday to increase regulation
of the US airline industry, arguing a financially healthy industry
is crucial to the well being of the nation’s economy.
"A strong domestic airline industry is an essential component of
our nation’s overall economic health, and the sector’s
current woes risk further damage to an already weak economy," said
Hector J. Cuellar, president, RSM EquiCo Capital Markets, the
global investment banking arm of RSM McGladrey and H&R Block.
"Government action is long overdue. Congress must act promptly to
prevent further industry deterioration and the corresponding
deleterious effects on the nation."
Cuellar has been active in the aerospace and aviation industry
for more than two decades. He was involved as a banker on several
company reorganizations and served as an expert witness in
bankruptcy proceedings for several airlines, including MarkAir and
more recently United Airlines.
He supports many of the arguments recently presented by former
American Airline chief executive Robert Crandall, who was
previously an advocate for airline deregulation. But,
as ANN reported, Crandall has gained
widespread attention for raising concerns about the industry's
condition.
"Bob Crandall has offered some compelling arguments, yet the
response from Congress and others has been distressingly muted,"
said Cuellar. "This issue has enormous implications for virtually
every American and should be debated vigorously."
The airline industry’s myriad problems have been well
documented, Cuellar said, noting the seven largest US carriers
reported a combined loss of $1.3 billion for the first quarter of
2008 – with a turnaround nowhere in sight. He argues that the
airlines challenges are not exclusively attributable to the jump in
oil prices.
"Without question, skyrocketing fuel costs have recently become
a major contributing factor to the airlines problems. But the
challenges facing the industry are much deeper, even systemic,
ranging from labor relations to lenient bankruptcy laws," he
said.
He also noted that many international carriers not only benefit
from regulation in their respective countries; they also are
actually either wholly owned or heavily subsidized by their
governments. Yet he is not arguing for increased US taxpayer
support of specific companies.
"It isn’t necessary to nationalize the industry or even
subsidize companies, and market-based solutions should continue to
play a major role. However, there are several concrete steps the
government can take to support the industry."
Among the actions Cuellar believes Congress should take include
creation of a commission to review airline pricing... and, if
necessary, establish a supervised floor on pricing. He also wants
Congress to amend labor laws to enable speedier resolutions to
contract disputes, and to more strictly regulation the
circumstances and actions airlines may take under bankruptcy
protection.
"The past three decades have shown that the airline industry has
characteristics that make a completely unregulated environment
injudicious," Cuellar said. "Market forces alone cannot overcome
many of its challenges. Yet recent calls for legislation
exclusively focused on fuel costs demonstrate a failure to
recognize the urgency of the situation. RSM EquiCo believes that
more extensive -- yet still limited -- regulation has the potential
to provide the airline industry with much-needed financial
stability, which is critical not only for those in the sector, but
for the US economy as a whole."