US airlines’ lifeline is enough to limp along, but little more

U.S. airlines reached preliminary deals to access billions of dollars in federal aid, securing a temporary lifeline as the industry waits for customers to start flying again.

The agreements cover all major airlines, the Treasury Department said in a statement Tuesday, and position the government to start doling out $25 billion in assistance allocated for passenger carriers in the $2.2 trillion stimulus package signed into law March 27. American Airlines Group Inc. said it would get $5.8 billion in support, while Delta Air Lines Inc. said it would receive $5.4 billion.

“This is an essential step, but just one of many that will get us through the next several months,” Delta Chief Executive Officer Ed Bastian said in a message to employees. “The funding, along with self-help measures we have taken, will prevent furloughs and pay rate reductions through the end of September, despite the 95% drop we’ve seen in passenger traffic.”

The aid gives U.S. carriers room to limp along as the Covid-19 pandemic and government travel restrictions erase most demand for commercial flying and plunge the world’s airlines into their worst-ever crisis. In the U.S., the industry is projected to burn through $10 billion to $12 billion a month, according to trade group Airlines for America, and carriers have cut capacity as much as 80% while parking thousands of planes.

American slipped 1% to $11.83 at 10:01 a.m. in New York as the broader market slumped on dire economic and earnings reports. JetBlue Airways Corp., another aid recipient, climbed 3.8% to $9.59.

Concerns remain over the Treasury’s aggressive negotiating stance, said Jamie Baker, an analyst at JPMorgan Chase. The department insisted on taking potential equity stakes in companies receiving aid.

“What was once thought to be free, formulaic, and easy turned out to be drawn out, somewhat expensive, and intense,” Baker wrote in a note to clients. “Considering what turned out to be an arduous grant process, this level of sophistication and hard-line approach suggests (at least to us) that a difficult path for loan applicants may lay ahead.”

‘Strategic Importance’

United Airlines Holdings Inc., Southwest Airlines Co., Alaska Air Group Inc., Allegiant Airlines, Frontier Airlines, Hawaiian Airlines and SkyWest were among the carriers getting assistance, according to the Treasury.

The program “will support American workers and help preserve the strategic importance of the airline industry while allowing for appropriate compensation to the taxpayers,” Treasury Secretary Steven Mnuchin said in the statement.

The agency expects to start distributing the funds as soon as this week, according to a person familiar with the matter.

The government is requiring large carriers to repay some of the assistance at low interest. The Treasury also has the ability to take stock warrants, giving it an upside in any share rebound. Through Tuesday, a Standard & Poor’s index of nine airlines was down 55% from its 2020 high in mid-January.

Both provisions initially met with some pushback from airlines, their unions and some members of Congress, and still drew criticism after Mnuchin’s announcement.

Grants, Loans

Under American Airlines’ agreement, which has yet to be finalized, the Treasury would be issued warrants that could be converted to 13.7 million shares of stock at $12.51 each. The warrants, equivalent to about 3% of the current shares outstanding, expire after five years. American would issue warrants for another 38 million shares under its plan to seek a separate $4.75 billion loan from the government, the airline said in a regulatory filing Wednesday.

“Unfortunately, Treasury is undermining the intent of the CARES Act by treating a portion of the grants designed to protect jobs not as grants, but as loans, which will make it harder to stop layoffs and slow the recovery,” said Joe DePete, president of the Air Line Pilots Association, a labor union.

But Representative Peter DeFazio, an Oregon Democrat who has criticized previous bailout programs, said the aid to cover airline payrolls should be the model for all future assistance programs.

The process of hammering out deals was “neither easy nor perfect,” but it was needed to protect about 750,000 airline industry jobs, said DeFazio, who is chairman of the House Transportation Committee.

Republic, ExpressJet

Not all industry players have agreements in place. Two large regional airlines that work under contract to major carriers haven’t yet been able to make deals, the Regional Airline Association said. Talks with the Treasury are continuing, said the trade group.

“We remain hopeful that Treasury will work rapidly and flexibly to find a solution for those carriers facing unique hurdles,” RAA President Faye Malarkey Black said in a statement. “The alternative would be catastrophic and, we hope, unacceptable to both Congress and Treasury.”

The two carriers are Republic Airlines and ExpressJet Airlines, according to a person familiar with the talks. Neither is publicly traded, so can’t provide the stock warrants called for in deals with other majors. ExpressJet is partially owned by United.

ExpressJet and Republic employ about 10,000 people between them, according to the trade group.

Aid Details

Airlines aren’t depending on federal funds alone, having tapped credit markets for billions of dollars in new loans, as well as existing revolvers. Tens of thousands of employees have volunteered for time off, from unpaid short-term voluntary leave to early retirement.

While the funds will allow 750,000 airline employees to stay on payrolls through September, it is only the first step in “a long path to recovery,” according to Airlines for America. The International Air Transport Association, the biggest grouping of global airlines, warned Tuesday that the industry may surrender $314 billion in ticket sales this year due to the coronavirus.

Not all airlines have disclosed details of their aid packages yet, but a picture has emerged at several major carriers:

• Southwest will receive $3.2 billion, including a nearly $1 billion unsecured loan with a 10-year term. The Dallas-based carrier will issue 2.6 million warrants to the Treasury.
• Delta’s package includes $3.8 billion in a grant and $1.6 billion under a 10-year unsecured loan. The Atlanta-based carrier will provide the government with warrants to acquire about 1% of the company’s stock at $24.39 a share over five years.
• JetBlue’s $936 million includes a $685 million grant. That’s enough to cover about 56% of payroll costs from the second and third quarters a year ago, the period used to determine the Treasury payouts. The government will receive “a limited number” of stock warrants, the company said. “This law does not solve the long-term problems that the coronavirus pandemic is creating but it buys us some much-needed breathing room,” JetBlue CEO Robin Hayes told employees.

American’s package includes a payroll grant of $4.1 billion and a loan of $1.7 billion. The company said it would further reduce its flight schedule for June and beyond. About 32,000 employees have chosen to retire early, accept reduced work or take leave, and the Fort Worth, Texas-based airline will re-open opportunities for more to do the same as it seeks to use the government aid to survive the collapse of air travel.

“With this level of assistance, we now believe we have the financial resources necessary to help us withstand this crisis and be in position to serve the traveling public when they are ready to start flying again,” American CEO Doug Parker and President Robert Isom said in a message to employees.