For Immediate Release
Office of the Press Secretary
October 5, 2001
Press Briefing by OMB Director Mitch Daniels
Room 450
The Dwight D. Eisenhower Executive Office Building
Regulations For Air Carrier Guarantee Loan Program under Section 101(a)(1) of the Air Transportation Safety and Stabilization Act (PDF Format)
4:21 P.M. EDT
MR. DANIELS: A very short
opening statement, and I'll take any and all questions.
I've just signed and sent to the Federal
Register regulations governing the loan guarantee sections of the
airline rescue legislation passed by Congress two weeks ago.
The record speed with which the people of
OMB and the relevant federal departments have addressed this complex
and nationally important topic provides, I think, further evidence of
this government's ability to move quickly and decisively when
necessary.
Speed notwithstanding, we believe we've
also moved thoughtfully. These regulations were prepared after
extensive consultation with the airline industry, the financial
community, and many members of Congress. They were written with
careful fidelity to the underlying statute and to the express intent of
those who voted to pass it.
The goal of that statute in its loan
guarantee section was to promote a viable commercial air system, one
that will deliver safe and efficient service to the American public in
the years ahead. Secondarily, its aim was to protect the
American taxpayer by maximizing the likelihood that any loans the
taxpayer guarantees will be repaid.
The legislation provided assistance to the
airlines in several forms, including: limitations on
liability, direct cash subsidies, and the possibility of loan
guarantees. The purpose of the first two categories was
stabilization of a situation then in crisis. The cash
payments, in particular, were intended to compensate airlines for
direct losses tracing to the terrorist attacks, and to provide
continuity of service for a reasonable amount of time.
The loan guarantee authority has a
different purpose. Its objective is not merely a further
extension of time to nonviable companies in hopes that a better
business climate may come along. The goal of the guarantees
is a viable system in the new and even more difficult environment now
facing the industry.
The rules we have written are inclusionary
and neutral. All of today's carriers are eligible and
welcome to apply. The board, led by the chairman of the
Federal Reserve, will not pick winners or losers, but, instead, will
follow clear guidelines in giving preference to the strongest
applications.
It's important to note that the strength
of an application under these rules may have little to do with the
current financial strength of the applicant. Much more
important will be the showing by the applicant and its partners of that
airline's ability to succeed in tomorrow's marketplace and to honor its
obligations without passing the bill to the American taxpayer.
All questions welcome.
Q Some of the
carriers that are in severe financial stress, what would they -- would
they have to show something different than, let's say, a Southwest,
which has had no layoffs and actually is still making money?
MR. DANIELS: Actually, a first
criterion under the act must be to show the unavailability of other
credit. So the very strongest airlines may be actually the
only ones precluded at the outset, maybe. Credit is very
unavailable in general, in the industry right now, it
appears. But the last point I made I think applies here,
that the important showing will be of a viability going forward.
And an airline that may be in some -- may
be in extremis now, might bring forward, for instance, a plan that
shows concessions from stakeholders, a plan that shows a new partner --
financial, operating or both -- who is expressing confidence in the
business plan that accompanies the application. So those may
-- under the preferences we've laid out -- may be those that come to
the top of the list.
Q You say something
less than 100 percent -- is there a max? Is it 95, for
example, 100 percent or 99 percent?
MR.
DANIELS: Right. The question goes to the point
that it will -- the board will not be authorized to offer 100 percent
complete guarantee, complete protection to the lender; that there must
be at least some participation -- and the more, the better; the
stronger the preference the board -- the greater the participation by
other investors or other partners, the stronger the preference to be
given to that application.
Furthermore, the board is asked, directed
to prefer private partners to public. There may be that
other public entities -- states or localities, for example, may step
forward to seek to guarantee part of the loan. That would
certainly be of advantage to the applicant, but not as much advantage
as a private sector party taking risk.
Q If I may just
follow up. Seven years is the maximum?
MR. DANIELS: Seven years is the
maximum. And you have really just touched on the only two
bright lines in these regulations. Other than that, they are
expressed in terms of preference and, in essence, creating a
competition among applicants.
Q Is the bond
program, is it a rolling kind of program, where as large carriers pay
off their loan guarantees in two to three years, the $10 billion will
-- you can re-lend out, re-issue --
MR. DANIELS: It's not seen as a
revolving fund; it's a $10 billion limit.
Q So once you hit
the $10 billion, that's it?
MR. DANIELS: That's
correct. I think that's the way to read the statute.
Q -- 100 percent
issue? I mean, could someone put up concessions from their
union or concessions from other stakeholders as the 2 percent or the 4
percent or whatever?
MR. DANIELS: That's really --
they were conceived of as alternate showings, John. The 100
percent really goes to the amount guaranteed, so the lender really must
be at some risk, or some other party must be at risk. But a
showing of concessions by employees, for example, or by management, or
by preexisting creditors, would be an important factor and would
strengthen an application.
Q Do you
anticipate, going forward, that the board will have any role in
business decisions going on at the airlines?
MR. DANIELS: Absolutely
not. The goal here is to honor the authority as it was
conferred under the statute, but not to have the board in the business
of, as I said, picking winners and losers, and certainly not to have
the board involved in the ongoing operations of the airline.
The statute did direct the preference is
to be awarded to applications offering the government a chance to share
in any upside, through warrants or other such vehicles. But
we do not view those as an investment to be held, but rather to be
liquidated if it ever has any value, and we expressly preclude any
voting rights on the part of the government.
Q Can carriers use
the guarantees to financed purchases of other airlines? Are
there any provisions in here that --
MR. DANIELS: That would
certainly be possible. It is entirely conceivable that the
guarantees may be extended to a partnership of two of today's
airlines. Some degree of consolidation in this industry was
deemed highly likely prior to September 11th. There is no
reason to suspect that the chance of that has been diminished by that
event.
So, yes, it's entirely possible, for
instance, that an applicant might come forward on its own, and not be
successful in making a sufficient showing under these regs, but could
return with a partner, perhaps a merger partner, and satisfy the
conditions here.
Q If I may just --
that's a long and lengthy process if you go through the antitrust
procedures. Do you envision the anti-trust procedures not
taking place?
MR. DANIELS: The anti-trust
procedures will have to take place, but we envision them taking place
in -- with the same sense of urgency that applied to this process so
far, and allowed us to deliver these regs in 14 days.
Q So the state, any
state that the government -- if the governments have a stake in a
carrier, that's not required?
MR. DANIELS: It is not
required. It would strengthen an application, be seen as a
preference factor, but it's not required.
Q What's the time
frame that you think will occur, as far as the loan guarantees being
issued? Because the deadline is June
28th. There's no specified data that I see on the evaluation
process. So what kind of time frame are you looking -- and
as you get applications, will you issue loan guarantees as they roll
in, or will you wait until June 28th to start making decisions?
MR. DANIELS: First, let's be
careful about the pronouns. "You," meaning "we," won't be
involved at all. This is a separate and independent board
that will make these judgments under Chairman Greenspan's
chairmanship. But we've tried to build this for
speed. We know this is a situation of some
immediacy. It is certainly to certain
carriers. And we hope it will be streamlined and as
efficient as such a system can be.
In fact, from some of our conversations,
one would reach the conclusion that the delays in the process will not
be on the part of -- will not be occasioned by the board or by these
rules, but by the time that the financial marketplace may take to make
up its mind.
Q Forgive me, if
you could just explain a little bit further your comments about the 100
percent -- if Airline X, for example, were to apply and they have a 50
percent backing from someone else, they would be more likely to get it
than an Airline Y?
MR. DANIELS: Absolutely.
Q -- 90 percent --
MR. DANIELS: One hundred
percent is not permitted, but 99 percent, in theory, would
be. But 98 beats 99 and 95 beats 98. And two
applicants each at 90 percent, but one with private backing -- that is
to say, people, a partner or partners with the confidence to take a
risk with private money would be stronger than a 90 percent guarantee
request where the balance is socialized by a different group of
taxpayers.
Q So it would be
the same for two airlines --
MR.
DANIELS: Yes. Although, two airlines, by
definition, gives you a private partnership and, presumably, if it were
some sort of merger, a very significant stake on the part of the
partner.
Q Is there any
provision in here that would allow cities or states to be the other
agency that is involved?
MR. DANIELS: Yes, they're not
precluded. That's exactly what I mean when I say that
private partners, under these rules, are a stronger factor in an
applicant's favor than public entities.
Q Were you at all
concerned that the -- loans would actually encourage mergers that would
not have occurred otherwise -- mergers?
MR. DANIELS: No. No,
but it wouldn't necessarily be an unhealthy thing. The goal
of this legislation, and we believe the assignment of this board, is to
promote a strong system, a viable, safe, efficient system that serves
the public well. It is certainly not to promote or
perpetuate any given company or management.
Q Going back to her
earlier question. If the applications are in by June 28th,
how soon could the loan guarantees go out to carriers?
MR. DANIELS: Actually, we see
that as sort of an end point. We rather anticipate, and
several airlines have indicated to us, they would move very quickly to
get an application in front of the board. I think we would
anticipate the first applications happening within weeks.
Q Do you think it
could be approved by the end of the year, possibly?
MR. DANIELS: Hard to guess, but
I can only say that we have tried to design a system that is as
flexible and nonbureaucratic as possible. So the board will,
in its due diligence, will I know have to deliberate
carefully. And if there is a flood of applications at the
very beginning, weighing them one against the other will not be an easy
thing to do. But I would hope that we're dealing in a
deliberation process that's measured in weeks, not years.
Q But you do plan
to issue loan guarantees before June 28th?
MR. DANIELS: There goes that
pronoun again, but -- (laughter.)
Q But the board
plans to issue them before June 28th?
MR. DANIELS: Well, that was
simply an attempt, I think, to establish some end to the
process. Maybe you can see it as an encouragement to come
forward sooner, not later. But that's a deadline for
applications, not for a decision.
Q So in other
words, when the applications -- you're not waiting to receive all the
applications by June 28th the make your decision after
that. But applications could be accepted and a decision made
on a case-by-case basis before then?
MR. DANIELS: That's correct.
Q There was, I
think, a perception, at least, in the industry a few days ago that what
you were thinking about was going to be tougher on the weaker airlines
than this seems to be on its face. Can you talk about what
happened in the intervening time and, you know, particularly any kind
of lobbying you got from people in Congress or elsewhere?
MR. DANIELS: It really wasn't a
process like that. We simply tried to keep the statute in
front of us all the way, and live up to the balancing of interest that
I think it reflects. It is certainly true -- and maybe this
is the source of really incorrect rumors, John -- that the rough
precedence we have for this, we have an OMB circular on this that
suggests an 80 percent lid on loan guarantees in very different
contexts.
This is a more welcoming set of rules than
we applied in those earlier cases.
Q The -- program?
MR. DANIELS: That's
correct. But this is a very different situation.
That said, this does set up, in essence, a
competition; this is not an entitlement program. Some of the
early proposals for loan guarantees would have created a formulaic
system like the one that governed the cash -- come one, come all -- and
some expectation, or even entitlement that any airline applying would
walk off with such a guarantee. That is not the bill
Congress passed or the administration agreed to, and it's not at all
what these regs say.
Q To follow up on
that then, how do you avoid picking winners and losers? I
mean, this does set up a competition and, you know, the first guy out
of the gate makes a valid bid for half the money. I mean,
what do you -- how do you avoid the winners --
MR. DANIELS: I think the regime
the board will operate under will allow the market to indicate which
are the strongest applicants, or applications; and to indicate which
are the ones with the best chance of living up to their end of the
deal.
Q If circumstances
change after June 28th and there is a severe downturn in carriers, then
decide they might need these, is there any provision for applying after
June 28th?
MR. DANIELS: These regs could
be amended at some point, I suppose.
Q You don't have --
you list at the end of your press release here the seven steps for a
loan -- then you say in the last graph that none of this matters if you
don't want it to. Does that sort of underscore how you plan
to operate? There is that kind of flexibility?
MR. DANIELS: It's merely a way
of saying that essentially any carrier operating today has an
opportunity to come in. I would simply hazard the guess that
an application that came in and made -- and failed to include several
of these preference items is not likely to fare very well, and is
likely to be turned down in favor of those which take their cue, and
thereby strengthen their application.
Q In the two weeks
since this legislation has passed, do you get any sense from the
airlines about whether the level of the need -- has it increased or
decreased as the situation has returned --
MR. DANIELS: I think it's still
too soon to say. Obviously, ridership is coming back on an
encouraging track. I hope it is seen as encouraging, but
from such a low base, obviously the situation is still very severe.
But the cash infusion, I think the
airlines said, themselves, and other observers feel was very, very
substantial, and certainly ample to buy a lot of breathing space.
Q A lot of people
in the industry wanted the length to be 10 years -- you have it in
seven years. Can you explain the rational behind that?
MR. DANIELS: We just didn't see
a rational for anything greater than seven.
Q What's magic
about the seven number?
MR. DANIELS: Well, the shorter
the time period, in general, we think the more likely repayment
is. You'll also find in the regulations a strong inducement
to a shorter term by the requirement that fees, as negotiated between
the board and a successful applicant, must increase each
year. So while there is a limit at seven years -- and there
was a lot of input urging much shorter maximum term than seven -- but
while terms up to seven years are permissible, we expect that the board
will structure these arrangements in a way that induces applicants to
want to pay these loans back quickly and get back into a standard
business mode in the private sector.
Q So who gets those
fees? The government?
MR.
DANIELS: Yes. The act directs us to see that the
government is compensated for the risk that it is undertaking, which is
quite a substantial risk, and the fees are a principal means of doing
that.
Q What about --
MR. DANIELS: That's the second
means of doing that.
Q But also, could
there be a spread, in other words, if you're guaranteeing nearly 100
percent risk to the commercial lender is going to be very low, they're
going to charge almost a government interest rate, right?
MR. DANIELS: That's correct.
Q But you'd want to
charge a high interest rate because --
MR. DANIELS: The greater the
government risk, the greater the fees it should be demanding.
Q Right. So then the spread would be
between that market interest rate the bank charges and what you would
charge. Is that correct?
MR. DANIELS: It could be, yes.
Q The regs talk
about limiting the initial applications to make sure there is enough
sufficient to go around. Is there any kind of a cap for
application or overall cap?
MR. DANIELS: No. We
looked at that and decided that was, again -- would be too
inflexible. We just don't know what the marketplace is
likely to look like here.
Q So the board will
just determine at its own discretion how --
MR. DANIELS: That's
right. It's limited only by the $10-billion total.
Q Can you discuss
briefly the role that Wall Street has in providing guidance on the loan
guarantees? There has been discussions about a handful of
big investment banks that were providing some sort of consultation on
this. Can you discuss the role Wall Street or investment
banks had in helping --
MR. DANIELS: Advisory.
Q Advising, yes.
MR. DANIELS: You said
briefly. (Laughter.)
Q Can you discuss
it a little further and maybe tell us who was providing some of that
advice?
MR. DANIELS: It was necessarily
limited, and it was also limited by the appropriate ethics statutes,
but we did welcome guidance of any kind from any party. And
there was at least one group meeting at which firms ventured opinions
about what would and wouldn't work.
Q How many
firms? Were air carriers at all involved in any of these --
MR. DANIELS: I honestly don't
-- well, air carriers were seen -- I'm sure we heard from every
significant air carrier one way or another, many of those in
person. We did all we could in the hours available.
Q While I have you
here, I'd like to ask you a little bit to clarify
something. The Senate Budget Committee and the House Budget
Committee have come out with their principles for the stimulus
package. And they talked about offsetting in the out years to pay for
the stimulus now, and limiting it to one -- sunsetting it after one
year. I'm wondering if you could just comment a little bit
about those principles?
MR. DANIELS: Sure. I
can do that because they were gracious enough to include me in more
than one meeting on these. I chose -- I was invited to
attend their press conference yesterday. I chose not to do
that because I thought it was really their statement. But I
thought it was, and observed what I thought was a very constructive
contribution. They've pointed out the need to be aggressive
and active, even to the point of going into unified deficit if need be
in order to get the economy going in the short-term; but also to be
careful not to sacrifice long-term fiscal discipline. And
the administration supports that point of view.
I would point out that although they
discussed as a principle offsetting, directly offsetting in later years
stimulus in earlier years, I don't think that was part of the
principles they released yesterday.
Q What was the
final sentence? That they would offset --
MR. DANIELS: They didn't get
the unanimity about saying it, so they made a gesture in that
direction.
Q Does the federal
government believe that some American airlines will go out of
business.
MR. DANIELS: I don't know;
wouldn't know.
Q Were you trying
to avoid providing this financing to companies that went into
bankruptcy? Were you trying to avoid debtor in possession
type financing by the government?
MR. DANIELS: No. In
fact, a company in bankruptcy is still eligible under these rules --
only, however, if the application is accompanied by a court certified
emergence plan or recovery plan. So as I said earlier,
essentially every company is eligible to try to fashion a successful
application, even those who are now or might in the future enter
Chapter 11.
Q -- if a loan is
given to an airline that then files for bankruptcy protection under
Chapter 11, does the government get some sort of preference in order to
--
MR. DANIELS: The board will be
encouraged to take measures to protect against the loss -- any loss in
that case. The loan funds, under the terms of the rules, are
not to be used for repayment of previous creditors. So
that's one break, but this will be a subject, I know, for negotiation
of anybody who might be in that situation.
Q It's not spelled
out that way in the regs?
MR. DANIELS: Right.
Q If a carrier
needs these loans to avoid bankruptcy, does that then become a strike
against them under these regs in getting the loan?
MR. DANIELS: That's a hard
question to answer. Again, the heart of their application
must be a business plan that is persuasive. That will not be
easy to do at a time when a dominant factor in such plans, namely
future demand, is very hard to project, given the uncertainty --
setback in public confidence that we've suffered, and that sort of
thing.
So the heart -- but the heart of the
application will be the persuasiveness of that business plan and the
extent to which the application incorporates these preference
items. So I think by definition a plan that's going to come
to the surface in that way ought to be one which suggests avoidance of
bankruptcy, but it wouldn't be foreclosed.
Q Would you
monitor, then, their adherence to the business plan once you granted
the loan?
MR. DANIELS: Well, the board,
once again. (Laughter.) I'm sure we'll be in
close contact with developments at the successful applicant firms.
Q Is there a
mechanism, then, for the board to go back in and say, wait a minute,
you're not following the business plan that you presented to us.
MR. DANIELS: This is really for
the lender. It's another reason, by the way, to insist on
the involvement of at least some measure of risk on the part of other
parties. In a typical situation in which the government
wasn't involved, investors and lenders would be doing exactly what
you're saying, and we want to keep some measure of private sector
vigilance in the process, not simply have the lender off the hook and
the airline free to do what it wants.
END 4:47
P.M. EDT
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