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Bankruptcy ... not bailout

By Michael and Susanna Dokupil
web posted October 15, 2001

Our President has encouraged us to respond to the vicious terrorist attacks on this country by returning to business as usual as quickly as possible. Yet, government bailouts of industries affected by these events may distort the market forces directing these industries for many years to come. Rather than administer a direct transfer of wealth from taxpayers to airline company shareholders, Congress should redirect its natural impulse to "do something" into more useful channels. A far better solution for both the airline industries would be to construct an expedited bankruptcy proceeding for those companies that found themselves insolvent after the attacks.

Public support of the bailout is predicated on a fallacious assumption: that if airlines went bankrupt, they would cease to provide services. Certainly the airline industry provides an indispensable service to our modern economy, but bankruptcy will not rip up runways, demolish airports, or destroy airplanes. Midway Airlines, for example, was operating in Chapter 11 on September 10. TWA and Continental have both continued operations through bankruptcy in the past.

In fact, Chapter 11 bankruptcy does not require that companies liquidate their assets. When a company files Chapter 11, the company continues to operate while negotiating (with the aid of the bankruptcy court) with its creditors about how to restructure the company. Usually the stockholders lose their equity, and the bondholders become the equity holders. It is appropriate for the stockholders to lose their money because they purchased a risky asset. In addition, hijackers have posed a threat to air travel for decades, and the risk they entail should have been taken into account by the market price of the stock.

Bailout supporters also believe that a government handout will save jobs. This, too, is incorrect. A lack of consumer confidence caused the decrease in demand for air travel after September 11, not the financial health of the industry. If that decrease in demand continues, the number of flights provided and number of jobs in the industry will naturally decrease. Even with financial assistance, airline carriers have announced 100,000 layoffs.

Perhaps most insidiously, the airline bailout creates significant government entanglement with the industries. The government plan not only places restrictions on the salary and severance packages of industry executives, but it envisions taking equity stakes in the airlines themselves. Because the government will want to protect its investment, partial government ownership almost guarantees that the airlines need never trouble themselves with supply and demand curves again.

It is not the business of government to save companies in the face of countervailing market forces. Many of the airlines were already in poor financial health prior to September 11. Why should the taxpayers prop up inefficient, poorly run companies? Why should the government use taxpayer dollars to deprive more profitable airlines like Southwest of the benefit of their competitive advantage? Such measures undercut the very foundations of our economy.

Finally, the large, commercial airlines should not get special privileges above other industries affected by the terrorist attacks. Numerous pilots and private flight instructors were prohibited from operating their business for days after the attack due to new regulations imposed by the federal government. Bowing to the rent-seeking efforts of the large, commercial airlines sets a dangerous precedent. The travel agents have already sought $4 billion in compensation for terrorist-related losses, and other industries will no doubt queue up to take advantage of the free-spending Congress.

Instead of interfering with market forces, Congress should create an expedited bankruptcy and reorganization procedure for companies rendered insolvent by the recent terrorist attacks. This plan would relieve the debt burden on the industry while placing the burden of the loss where it belongs - on the investors, not the American taxpayers.

Michael Dokupil is an investment manager in Houston and a former Economics professor. Susanna Dokupil is a recent graduate of Harvard Law School. They can be reached at dokupil@psinet.com.

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