United Airlines' (OTC BB: UALAQ.OB) failure to secure a $1.6 billion loan guarantee may be a major setback for the company, but it is a big step in the right direction for the airline industry overall.
For too long, United and other carriers such as USAirways with uncompetitive cost structures have been propped up by a variety of government supports. As Herb Kelleher, CEO of Southwest Airlines (NYSE: LUV), once remarked, "Bankruptcy court for airlines has become a health spa." A level playing field in the airline industry is long overdue, and the Air Transportation Stabilization Board's (ATSB) decision, which was announced yesterday, indicates that the government is coming to its senses on this issue.
The ATSB was created to provide financial stability and liquidity for the industry after 9/11 -- not to provide long-term financial support to struggling airlines. In addition, according to its charter, any airline must prove that receiving a loan guarantee is "a necessary part of maintaining a safe, efficient and viable commercial aviation system in the United States."
United's application does not meet that criteria. Even here in Denver, where United is the dominant carrier with a 60% share of the market, keeping the airliner in business is not seen as critical to the viability of Denver International Airport. The mayor's office released a statement today noting that "In the unhappy event that United is not able to reorganize successfully, there could be some dislocation, but we would hope it would be temporary because it would be our expectation that other carriers would want to pick up those jobs."
As I wrote in March, a number of low-cost carriers, including Motley Fool Stock Advisor standout JetBlue Airways (Nasdaq: JBLU), America West Airlines (NYSE: AWA), AirTran Airways (NYSE: AAI), and Frontier (Nasdaq: FRNT), have been actively lobbying against the $1.6 billion loan guarantee and other government supports that they argue unfairly support United when it competes against them. They would happily pick up passengers and routes from United.
The result of this decision is that United -- like most other companies -- will be forced to go out to the credit markets and pay the appropriate risk premium for debt. To stay in business, it will have to find more ways to cut costs while maintaining customer service. Otherwise, it will simply be decimated by the superior business models of the low-cost carriers. While often painful to the losing companies and their employees, fair competition is the foundation of America's dynamic and entrepreneurial market-based economy. The airline industry is ultimately no different than any other.
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Fool contributor Salim Haji lives in Denver and does not own shares in any of the companies mentioned.
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