US Air Carriers Receive $58 Billion Coronavirus Bailout Because The Government CARES

Coronavirus has severely impacted airline operations worldwide.  American, Delta and United, have slashed international flights by 75% or more as the bottom has dropped out of the demand for air travel.  Overall the number of passengers on US airlines is only about 10% of projected levels.  Not surprisingly, the US airline industry asked the federal government for financial help.  The government gave the industry what it was asking for —  with a few strings attached.

On Friday, March 27, 2020, the House of Representatives passed the Coronavirus Aid, Relief and Economic Security Act (CARES).  The President signed it into law the same day.  CARES is a $2.2 trillion stimulus and relief package designed to mitigate economic losses to US businesses and population resulting from the ongoing coronavirus pandemic.  Air carriers and contractors are in line to receive up to $61 billion of those funds.

I’d heard about the airline bailout and wanted to know what it provides and requires.  For those who are interested, here are the details of CARES applicable to  airlines in a nutshell.

Financial Assistance Available To Air Carriers

• $25 billion in grants for passenger airlines
• $4 billion in grants for cargo carriers
•  $3 billion in grants for airline contractors like caterers
• $25 billion in loans for passenger airlines to cover losses due to the coronavirus
• $4 billion in loans for cargo airlines to cover losses due to the coronavirus

  

Conditions For Receiving Financial Assistance

• Grants must be used to cover employee wages, salaries and benefits.
• Companies receiving grants or loans cannot reduce their workforce involuntarily or reduce rates of pay or benefits before October 1, 2020.
• Grant recipients must not engage in stock buybacks through September 30, 2021.
• Grant recipients must not pay dividends or make other capital distributions to holders of common stock through September 30, 2021.
• For the duration of the Restricted Period, an executive of an air carrier receiving a loan under the CARES Act whose total compensation in 2019 exceeded $425,000 may not receive total compensation in excess of the total compensation received in 2019.
• The Restricted Period for executive compensation begins on the date the loan or guarantee agreement is entered into and ends one year after the loan or guarantee is no longer outstanding.
• Grant recipients may be required to issue to the government warrants, options, preferred stock, debt securities, notes, or other financial instruments to compensate for receiving payroll support.
• The government may deny payroll support grants to any company that files for or considers filing for bankruptcy.
• An airline that receives a grant for payroll support can be required to maintain service to any point served by the carrier before March 1, 2020.
• The Treasury Department may not loan money to an air carrier
  unless the Treasury Department receives a warrant or equity interest in a  borrower that has securities traded on a national exchange, or for any other air carrier a warrant, equity interest or senior debt.

  

My View

The President and Congress seem determined to minimize the economic effects of the coronavirus.  As far as the CARES Act is concerned the government wants people to believe the bailout protects employees.  Already airlines are looking at ways to reduce employee pay without violating CARES.

At American and United for example, union contracts provide a certain minimum number of hours employees must be paid each month.  Those airlines are indicating their desire to maintain employment levels but pay many employees much less than what they would normally earn.  Delta is nonunion, and it has advised employees they wouldn’t be laid off but workweeks could be cut to three or four days.

In reality, CARES seems designed to protect airline shareholders and bondholders more so than employees.  CARES lets airlines avoid bankruptcy.  Shareholders and bondholders stand to lose all or part of their investments if airlines declare bankruptcy.

Airlines have gone through bankruptcy many times.  Major airlines have usually been able to obtain financing to continue operations.  Continuing operations means a continuing need for employees.  The danger of bankruptcy for airline employees is that bankruptcy gives airlines the ability to unilaterally modify labor agreements.

Bailouts for companies and individuals may encourage irresponsible behavior.  For the last several years US airlines have enjoyed record profits.  Much of that profit was used to buyback stock thus raising earnings per share and the stock price.  Many executive short- and long-term compensation plans are based on earnings per share targets.  Airlines could have used those profits for improving their products and services and achieving a financial condition that could withstand a severe downturn.  There is no need to prepare for a severe downturn if airlines are confident the government will bail them out.

The same applies to individuals.  In our consumer economy, individuals are not encouraged to save.  Savings are important for a healthy economy and the creation of capital.  Living paycheck to paycheck is common.  Missing one or two paychecks means many can not pay essential bills like mortgages, rent and utilities.

Savings are important for a healthy economy and the creation of capital.  Giving people money because they have not saved won’t help to reverse the decades long trend of a declining savings rate in the US.

Final Thoughts

This bailout seems unnecessary and an encouragement to reckless behavior by corporations and individuals.  Savings are important for a healthy economy and the creation of capital.  Giving people money because they have not saved won’t help to reverse the decades long trend of a declining savings rate in the US.  For individuals, the bailout is essentially smoke and mirrors because we are borrowing from ourselves.  The taxpayer is on the hook for the money the government is giving to taxpayers.  The $2.2 trillion CARES act will be just the beginning if the coronavirus comes in waves of infections as some epidemiologists predict.

What do you think of the CARES Act impact on airlines, individuals and the national economy?  Are bailouts helpful in the long run?