THE Bush administration has decided to take a ``pro-competition'' approach to mergers in the airline industry. According to a high-level White House official, this approach means the administration would vigorously oppose legislation currently moving through Congress which would require the transportation secretary to review and approve leveraged buyouts of major US airlines. ``We're going to throw cold water on that idea,'' says the official, who did not wish to be named.
There is one major airline merger pending. A group of investors is currently negotiating to buy UAL Inc., the parent of Chicago-based United Airlines. But the investors are now having trouble with financing. Donald Trump on Monday dropped his bid to buy AMR Inc., the parent of American Airlines.
The President's Economic Policy Council met on Tuesday to discuss the issue. The council is composed of the Cabinet-level officers who are involved in managing the economy. At this meeting it was decided to send a veto message to the sponsors of the bill.
The legislation, which would delay a takeover by as much as 50 days, is sponsored by Rep. James Oberstar (D) of Minnesota and four other congressmen. Rep. Glenn Anderson (D) of California, chairman of the House Public Works and Transportation Committee, says there is a need for closer regulation of the industry. ``An economic downturn could place airlines with a lack of financial resources in a crisis situation. At that point, they may well be forced to sell off assets, cut back on employees, and cut corners on safety,'' says Representative Anderson, one of the co-sponsors.
One of Representative Oberstar's concerns is that airlines that are burdened with debt may skimp on maintenance. However, the White House official says, ``There is no evidence that there are safety problems. The Federal Aviation Administration [FAA] can step up and spot lapses in safety.''
If the FAA were to find a pattern of abuse, it could revoke the fitness certificate of an airline. Oberstar argues, however, that currently there is a gap between doing nothing and pulling the certificate.
``That is a choice between a fly swatter and an atomic bomb,'' says Oberstar.
The proposed legislation would allow the Department of Transportation to reject a buyout if it would financially weaken a carrier, require the sale of assets, or cause a deterioration in the carrier's ability to compete.
In addition, it could reject buyouts that would give control of an airline to a foreign interest, or where there is insufficient information about the pending merger.
The issue of controlling takeovers is not academic. Mr. Trump said one of the reasons his bid for American Airlines collapsed was because of the proposed legislation. The stock market last Friday then dropped 190.58 points in large measure because of disappointment over problems with the UAL takeover and the Trump bid.
The Wall Street Journal, in an editorial, subsequently linked the Oberstar legislation with the market's plunge. Oberstar denies the bill had any effect on the stock market.
``This particular bill was only introduced last week, but similar bills have been in existence for months,'' he stated. The Oberstar bill was scheduled for mark-up by the full Public Works and Transportation Committee yesterday.
The White House moved quickly on the issue because of perceptions that it was divided. Oberstar early in the week felt the administration did not have a strong view. He reportedly said there was ``wiggle room'' in the administration's position since the Bush view was put forth in a letter by Deputy Transportation Secretary Elaine Chao.
But White House officials denied that there was any ground for compromise. Transportation Secretary Skinner in fact is expected to sign the veto message when it goes to Congress.
The airline industry itself is divided on Oberstar's legislation. American Airlines, for example, supports the proposed bill. ``We have real questions about how much debt a company should have given the volatile nature of the industry,'' says Al Becker, a spokesman for American in Dallas. Jim Lundy, a spokesman for Delta Airlines, says it supports the ``ideas behind the bill.''
According to industry sources, however, UAL Inc. has changed its position from a supporter of the bill to an opponent since the proposed legislation would affect its own leveraged buyout. Officials at United Airlines in Chicago had no comment.
The White House has consistently opposed any attempts to limit leveraged buyouts. A leveraged buyout involves an acquisition using large percentages of debt.
The White House view is that the marketplace will find ways to slow down the use of debt in takeovers.
In fact, the White House now is pointing at the junk-bond market, which is in disarray, as an example of how the marketplace works.