Note 2. September 11, 2001 Terrorist Attacks

On September 11, 2001, four commercial aircraft were hijacked by terrorists and crashed into The World Trade Center in New York City, the Pentagon in northern Virginia and a field in Pennsylvania. These attacks resulted in an overwhelming loss of life and extensive property damage. Immediately after the terrorist attacks, the Federal Aviation Administration (FAA) closed U.S. airspace, prohibiting all flights to, from and within the United States. Airports reopened on September 13, 2001, except for Ronald Reagan National Airport in Washington, D.C., which partially reopened on October 4, 2001.

When flights were permitted to resume, our passenger traffic and yields were significantly lower than before the attacks. Additionally, new security directives required by the FAA increased our costs and reduced our ability to continue our pre-September 11, 2001 schedule. Due to the significant reduction in traffic, we reduced our scheduled network capacity by 16%, effective November 1, 2001.

On September 22, 2001, President Bush signed into law the Air Transportation Safety and System Stabilization Act (Stabilization Act) which is intended to preserve the viability of the U.S. air transportation system. Among other things, the Stabilization Act:

• provides for payments from the U.S. Government totaling $5 billion to compensate U.S. air carriers for losses incurred from September 11, 2001 through December 31, 2001 as a result of the September 11 terrorist attacks;
• authorizes, subject to certain conditions, the issuance of federal loan guarantees totaling up to $10 billion to U.S. air carriers;
• instructs the Secretary of Transportation to ensure that communities that had scheduled air service before September 11, 2001 continue to receive adequate air transportation service;
• permits the Secretary of Transportation (1) to provide insurance to U.S. air carriers, and to reimburse U.S. air carriers for certain increases in the cost of insurance relating to the operation of an aircraft; and (2) to limit to $100 million the total liability of a U.S. air carrier to third parties for terrorist acts committed during the 180 days following the enactment of the Stabilization Act;
• extends the due date for the payment by U.S. air carriers of certain excise taxes; and
• limits the liability of U.S. air carriers, and establishes a federal compensation program, for individuals physically injured or killed as a result of the September 11 terrorist attacks.

Under the Stabilization Act, each U.S. air carrier is entitled to receive the lesser of (1) its losses for the period of September 11, 2001 through December 31, 2001 that resulted from the September 11 terrorist attacks; or (2) its proportionate share of the $5 billion in total compensation available to all U.S. air carriers, of which $4.5 billion is available to passenger airlines based on their available seat mile share, and $0.5 billion is available to cargo carriers. Based on our available seat mile share, our allocated portion of compensation under the Stabilization Act is approximately $654 million; however, due to uncertainties regarding the government’s calculation of compensation, we recognized $634 million of this amount in our 2001 Consolidated Statements of Operations. We received $556 million during 2001. We expect to receive the remaining amount during the June 2002 quarter.

Subsequent to September 11, 2001, our insurance providers reduced our coverage and increased our premium rates for war and terrorism risk insurance effective September 25, 2001. Under the new terms, liability coverage limits remain unchanged for passengers and employees but have been significantly reduced for other parties such as persons and property on the ground. Provisions under the Stabilization Act provide for excess war risk coverage above $50 million, provided by the FAA, for liabilities in excess of limits instituted by commercial insurance providers. The initial coverage was in force until January 11, 2002 and was renewed by the FAA for a period of 60 days. The FAA has the authority to continue extending such excess war risk coverage until other viable alternatives are available.

The Stabilization Act also provides for reimbursement of certain insurance premium increases, at the option of the Secretary of Transportation. The FAA agreed to reimburse airlines for increased costs of war risk insurance for a period of 30 days. As a result, in December 2001, we received $6 million for the additional insurance premiums we paid for October 2001. Additional reimbursement is dependent upon the release of funds to the FAA by the Office of Management and Budget.

As a result of the September 11, 2001 terrorist attacks, we recorded $1.1 billion of asset write-downs and other nonrecurring items in our 2001 Consolidated Statements of Operations. For additional information about these charges, see Note 9.