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."

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