Special Edition #1
September 24, 2001

The discussion below focuses on the immediate, practical application and effect of the Act. Some of the provisions of the Act are inconsistent or incomplete, and there is scant legislative history. But time is short – indeed the first tranche of financial aid could be distributed early this week. The discussion is based on our best understanding at this time of how the Act is to be implemented in four primary areas, in order of immediate importance: the immediate provision of five billion dollars in direct aid; the resolution of insurance and liability issues; delayed deposit of withholding and excise taxes; and the availability of up to ten billion dollars in loans and loan guarantees.

1. This program is for all "air carriers", scheduled and non-scheduled, passenger and cargo, large and small and without regard to aircraft type. It is limited to U.S. citizens recognized as air carriers by the DOT through the grant of certificate or exemption authority. While the major airlines will receive aid measured in the hundreds of millions of dollars, smaller air carriers may also receive substantial aid. The context in which the term "air carrier" is used indicates that it is not intended to include indirect air carriers such as freight forwarders and tour operators.

2. An air carrier is eligible if it incurred direct losses as a result of the DOT ground stop order on September 11 and/or incremental losses as a result of the terrorist attacks. (through December 31, 2001).

3. For an air carrier incurring such losses, the amount of aid is the lesser of (i) its losses or (ii) a formula amount. The term "loss" is not otherwise defined, but the DOT views it as the net loss over the relevant period. While aid to some smaller or specialized air carriers conceivably could be limited by the amount of their losses, most aid will be limited by the formula. The formula works as follows:

• $4.5 billion will be allocated on the basis of available seat miles on passenger and combination passenger/cargo flights in August 2001.

• $500 million will be allocated on the basis of revenue ton miles in all-cargo flights in the 2d Quarter of 2001.

Any aid received will be included in the gross income of the air carrier, i.e., it is not tax-exempt. There are no other specific conditions attached to this initial infusion of aid. However, the DOT may require any air carrier receiving financial assistance to maintain scheduled air service to any point served by that carrier before September 11.

1. Over the weekend, the DOT communicated with all air carriers on its registers, and there are hundreds, requesting two types of information:

• By Monday September 24, CY2001 financial projections before and after September 11.

• By Wednesday September 26, asm and rtm data for the relevant periods (the vast majority of air carriers do not otherwise report this data to the DOT)

2. The financial projections, which must be verified by

the company’s chief financial officer or an equivalent position, assume that each air carrier’s eligibility and alternative cap on recovery is the difference between the projected CY2001 net financial results with and without the September 11 acts of terrorism.

3. The DOT will distribute the aid in at least two tranches, with the first, estimated at $2.5 billion, to be distributed early this week and the second to follow soon thereafter. This will permit adjustments to be made as more information is received from air carriers.

1. The liability of American and United for all claims resulting from the terrorist-related aircraft crashes on September 11 "shall not be in an amount greater than the limits of the liability coverage maintained by the air carrier." Title IV of the Act creates the September 11th Victim Compensation Fund, a fast-track administrative procedure for recovery from the Government of economic and non-economic losses incurred by the victims and their families.

2. With respect to possible terrorist acts against air carriers for the next 180-days, the Secretary of Transportation may certify any such act as an "act of terrorism." If he so certifies, the third party liability (other than passengers) of the affected air carrier is limited to $100 million and there may be no recovery of punitive damages. The Government will be responsible for any liability above $100 million. The Secretary also has the discretion to extend this provision to vendors, agents and subcontractors of air carriers.

3. The Secretary may reimburse an air carrier for premium increases on coverage ending before October 1, 2001. The base period is the period September 4 – September 10, 2001. This authority lasts for 180-days.

4. The Government-financed war risk insurance program may be extended to all U.S. air carrier operations, domestic and foreign, commercial and military.

U.S. air carriers are given an extension of time until November 15, 2001 or such later date (up to January 15, 2002) that the IRS may prescribe for the deposit of withholding and excise taxes otherwise due between September 10 and November 15. This includes all withholding for payroll taxes, social security payments and transportation excise taxes (this does not include the fuel tax). The carriers remain civilly and criminally responsible for the collection and deposit of these taxes.

The five billion dollar direct aid package and the insurance /liability and tax measures are meant to preserve the airline industry for the very short term. The loan and loan guarantees are meant to restore the credit-worthiness of the industry over a somewhat longer term.

The program will be administered by a new body, the Air Transportation Stabilization Board, to be made up of designees from DOT, Treasury, the Board of Governors of the Federal Reserve System and the Office of the Comptroller General. OMB has 14-days to issue regulations for applications and minimum requirements.

The broadly stated requirements and conditions for this program follow:

• The Board may provide Government loans and/or loan guarantees in an amount not to exceed ten billion dollars.

• Unlike direct aid, there is no formula that places a cap on assistance provided to any one air carrier. OMB may address that in the forthcoming regulations.

• To be eligible, an air carrier must not have commercial credit reasonably available at that time.

• The Board must find that the air carrier has incurred the obligation prudently and that the assistance "is a necessary part of maintaining a safe, efficient, and viable commercial aviation system in the United States."

• A loan or loan guarantee will include conditions, in addition to the ability of the DOT to hold that carrier in at any point receiving scheduled service before September 11. These conditions include a two-year freeze on the total compensation paid to any executive receiving more than $300,000 in such compensation in 2000 (with severance allowed at twice that amount). The Board also may require the air carrier to give the Government an "upside" position in the company in the form equity or equity-equivalent instruments. And the Board may attach such other conditions as it deems appropriate.

1. The Act authorizes but does not appropriate $120 million for the Essential Air Service subsidy program. It is unclear whether this is inclusive of, or added to, the existing authorization/appropriation in the amounts of $50 million and $65 million, respectively.

2. The Act "affirms" the President’s decision to spend three billion dollars on aviation safety and security. Those funds will be made available to both air carriers and airports and are part of the already enacted emergency supplemental appropriations bill.. Details should be available shortly.