The Air Transportation Safety and System Stabilization Act3

The main provisions of the statute provide:

1. Direct payments and loan guarantees

a. All U. S. air carriers were eligible to share a $5 billion fund to compensate them for direct losses due to the federal ground stop order that resulted immediately after the terrorists’ attack, and incremental losses incurred between September 11 and December 11, 2001

b. Issuance of up to $10 billion in federal loan guarantees and credits to air carriers, subject to terms and conditions set by the president

2, Insurance and liability

a. Limited the liability of air carriers, certi­fied by the DOT as victims of an act of terrorism, for losses suffered by third par­ties to $100 million in the aggregate (due to the terrorist act) with provisions for the government to assume all liability over that amount

b. Prohibited the imposition of punitive damages against either the carrier or the government as a result of the terrorist act

c. Granted the DOT authority to reim­burse air carriers for insurance premium increases due to September 11

3, Tax provisions extending certain tax due dates for air carriers

4, Creation of a victim compensation fund to compensate individuals (or their survivors) for injuries or death caused by terrorist – related aircraft crashes on September 11 The Act established the Air Transporta­tion Stabilization Board, whose function was to administer the issuance of the $10 billion in federal loan guarantees to affected airlines. As a precondition to the issuance of any guarantees, the Board had to determine that:

1, Credit was not reasonably available to the airline at the time of the issuance

2, The intended obligation (the loan and the purpose for the loan) was prudently incurred

3, The transaction was a necessary part of maintaining a safe, efficient, and viable com­mercial aviation system in the United States

By the middle of 2002, some 400 air carriers had applied for compensation for direct losses as a result of September 11. The government had approved and paid $4.3 billion to 382 different carriers. The largest payments went to the larg­est airlines. United received almost $725 million, American received $656 million, and Delta got $595 million.

At the same time, the Stabilization Board continued to work through applications for loan guarantees. It quickly became clear that the Board was not going to rubber-stamp applications for the airlines. America West, the first to receive guarantees, was required to rework its application several times in order to satisfy the Board, and the guarantees were conditioned on the airline granting to the government a form of collateral
to guarantee repayment, warrants on one-third of the airline’s stock. Warrants are options to pur­chase stock at a predetermined price.

The Board rejected other applications, including Vanguard Airline’s request for just $7.5 million in guarantees. Eleven other small airlines made applications, with varying results.

Major airlines were slow to apply, primarily because of the rigid stance taken by the Board in evaluating applications. In addition to requir­ing security for the government guarantees, the Board also required the airlines to make operat­ing changes designed to increase the likelihood of repayment. US Air, for instance, received conditional approval for $900 million in guar­antees dependent on the airline securing size­able concessions from its employees. The labor unions would not agree, and U. S. Air went into Chapter 11 in August 2002. United Airlines also applied for guarantees in an amount of $1.8 bil­lion. Again, labor would not agree to the conces­sions required by the government. In December 2002, UAL filed for bankruptcy protection under

Chapter 11 of the Act. The other legacy carriers were just barely hanging on. Later in this chap­ter we will review the record of all remaining legacy carriers’ use of Chapter 11 since 2001.