Mnuchin’s $29 Billion Loan Fund Untapped as Airlines Eye Rebound

U.S. airlines have yet to tap $29 billion in federal pandemic relief loans as they wait to see whether the re-opening of the economy revives demand and diminishes the need for money that comes with government strings attached.

Although the four largest U.S. passenger airlines have applied for the Treasury Department program, only American Airlines Group Inc. has said it intends to tap the pool of funds. Southwest Airlines Co., United Airlines Holdings and Delta Air Lines Inc. say they plan to wait until fall before deciding whether to take the money—after a summer travel season that could see more people return to the skies.

The wait-and-see approach illustrates how airlines are preparing for an uncertain future amid early signs of a recovery after Americans all but stopped flying in April due to the coronavirus and travel restrictions. A second wave of infections could make the situation worse.

It also highlights how only a small portion of hundreds of billions of dollars available to the Treasury Department has actually been doled out to help companies.

“That pool of money is designed as backstop financing and for those who can’t raise money elsewhere,” said Helane Becker, an analyst at Cowen & Co. in New York.

U.S. airlines have separately raised billions in capital through methods including secured loans, bond offerings and equity sales, and Becker said that the federal loans are a last resort. The government loans would impose restrictions such as a cap on executive compensation and require carriers to offer equity or other financial stakes to the government in exchange for the aid.

“The hope is that by September, the worst of the pandemic is behind us and people will be booking for travel in the fall and the holidays, and airlines won’t need to take the money,” Becker said.

A Treasury Department spokeswoman declined to comment on the number of loan applications received and when the money would be distributed. The department has separately has disbursed $25 billion from its payroll support program. Airlines accepting the funds, which are a mix of grants and loans, are required to refrain from layoffs until after Sept. 30.

Airlines have pointed to signs that travel demand is beginning to perk up in recent weeks, fueling hopes that the stress on beleaguered carriers could begin to wane. Passengers taking flights over Memorial Day weekend, an early test of consumer confidence and the unofficial start of the summer travel season, reached levels unseen since late March. Airlines say bookings are outpacing cancellations, and airplanes that have been almost empty are starting to fill up.

Carriers are far from out of the woods, however. Just 261,170 people passed through security at U.S. airports on Wednesday, down 88% from the equivalent day last year, according to the U.S. Transportation Security Administration. Airlines have openly discussed the likely need to shed thousands of workers after a prohibition on job cuts tied to the payroll support program expires.

On Thursday, for example, American Airlines announced plans to shed 30% of its management and support staff to align its operations with dramatic declines in travel.

“While I don’t want to get into specifics, we continue to have very productive conversations with Treasury Department and its advisers,” American Airlines President Robert Isom said at an industry conference May 19. “Treasury has been nothing but fantastic to work with through these unprecedented times, and we remain very confident that we will move forward with this loan in a prudent and efficient manner.”

Delta, Southwest

The Treasury Department launched the loan program April 8, and has made no further announcements since it closed on April 17. The agency is weighing whether it will disburse the money in one or several tranches as the outlook for the industry’s recovery becomes clear, a person familiar with the matter said. The program may also evolve as Treasury Secretary Steven Mnuchin hasn’t settled on the details, the person said.

Delta has applied for the additional Treasury loan “to hold our place in line,” Chief Financial Officer Paul Jacobson said at the same Wolfe Research conference. “We have until September to make a decision about that as well as other financing sources should we need them.”

“We’ve applied for it,” Southwest Chief Executive Officer Gary Kelly said of the potential $2.8 billion loan at the carrier’s annual shareholder meeting May 21. “We’ve not committed to take that money and we have until September 30 to make that decision.”

The airline loan program is yet another piece of the pandemic rescue funds enacted on March 27—when Congress and the White House were so panicked that Covid-19 would ravage the U.S. economy that they quickly came together—that may not be working as designed.

Virus Rescue

Mnuchin has only used $37.5 billion out of a $454 billion fund to backstop central bank emergency lending, though $195 billion has been committed for use. A Main Street lending facility that Congress asked the Federal Reserve to launch to support small and medium-sized companies is still not operational even as businesses lay off workers, shutter and eye bankruptcy. The Paycheck Protection Program for smaller companies has been riddled with glitches, and now needs to be fixed to extend the relief.

Mnuchin also hasn’t disbursed a $17 billion pot of money reserved for companies deemed critical to national security. The largest expected recipient, Boeing Co., got help from private investors. For the hundreds of thousands of other defense contractors in the Pentagon’s supply chain, Treasury’s criteria is too strict to qualify.

The loan packages for airlines and companies critical to national security, if untapped, can be used to backstop additional lending by the Fed.

“With a lot of these programs it turns out they’re not for everybody, said Ian Katz, an analyst at Capital Alpha Partners in Washington. “There’s a general feeling of anguish and pain as people are unemployed, underemployed and businesses shut down—surely the government can do more for them.”

Not a Bailout

Federal loans for the airline industry, which Mnuchin has repeatedly said are not a “bailout,” come with strings attached that analysts say may be less attractive than private markets. Any company tapping the loan pool must assure the government that credit is “not reasonably available” elsewhere.

United Airlines, for example, is eligible for a loan of as much as $4.5 billion and the company expects to issue the department warrants to purchase 14.2 million shares of the company’s common stock, CFO Gerald Laderman said in a May 1 earnings call.

Savanthi Syth, an analyst at Raymond James, said the department’s terms are not excessive but are onerous enough for airlines to turn first to the private sector.

“The test for whether airlines will need this will be how much demand comes back this summer,” she said. “If we see demand getting back to 50% levels of last year, they might not need to tap it.”

The $2.2 trillion pandemic stimulus package that authorized the airline loans gives Treasury until the end of the year to disburse them.