COVID-19: will optics and politics derail aid for US airlines?

Summary

• Payroll grants for airlines offered by the US government now have onerous strings attached.
• Unions are warning that those strings are creating roadblocks to airlines that are seeking aid, as their cash burn continues at unsustainable levels.
• The US government is facing the grim reality of airline bankruptcies if some form of logic does not prevail.

Unions warn of dire consequences of attaching warrants to US payroll grants

The broad aspects of the CARES package for airlines are widely known - broadly, USD25 billion in payroll grants and USD25 billion in loans to airlines.

At the time the legislation was tabled, it was tough to interpret the specific stipulations the government would place on airlines receiving aid. The general consensus was that if airlines sought loans, the government could reserve the right to receive warrants from those airlines as a means to showcase that those companies were not receiving a bailout.

But the final legislation includes a provision that allows the government to take a stake in airlines if they applied for the grants or a loan.

It adds a significant layer of complexity for airlines as they embark on negotiations with the US Treasury Department for the funding, and unions are warning that the ownership provision attached to the payroll grants could be a death knell for the grant programme.

"…An eleventh-hour provision snuck into the bill threatens whether workers will ever see promised relief," said Sara Nelson, president of the Association of Flight Attendants-CWA in a letter to Treasury Secretary Steve Mnuchin.

Other union leaders joined Ms Nelson in signing off on the letter - Julie Hedrick, the president of the Association of Professional Flight Attendants (APFA), and Lyn Montgomery, the president of TWU 556.

The letter warned that if airlines were required to pay back those grants in full with an equity position of USD15 billion, the government would receive the equivalent of keeping workers on the payroll for six months.

"This effectively renders the payroll grants a poison pill that will cost us our jobs and push us onto taxpayer-funded unemployment insurance - the opposite of what this bipartisan agreement intended", the letter warned.

The government drags its feet on aid as US airlines quickly burn through their cash

Unions and airlines both supported the payroll grants, and in an interview with 'The Hill' Ms Nelson highlighted that never before has the US Congress directed airlines on how to spend money, and that airlines also applauded the grants, noting that they would directly support airline workers.

But now the ultimate outcome of the negotiations that are under way between airlines and the US Treasury over aid is uncertain.

Ms Nelson told The Hill that there had never been a grant issued in US history that had an equity stake attached to it, and said that Mr Mnuchin was using the provision for potential equity stakes in airlines "to slow down the application process and get the money to the people".

US airlines are in the midst of negotiating government aid with the Treasury Department, since they have bled cash at an alarming rate on a daily basis. That cash burn has been widely reported, but it is worth highlighting again that Delta has stated that it is burning through USD60 million in cash per day, and it has not hit bottom yet.

Delta has estimated a revenue decline of 90% year-on-year in 2Q2020. United has also stated that it expects a drop in revenue of at least 30% for 4Q2020.

United Airlines has stated that it estimates a loss of revenue of more than USD100 million per day in Mar-2020, and JetBlue is burning through approximately USD10 million per day and has stressed that despite its financial strength, that level of cash burn is obviously unsustainable.

IATA has estimated that among North American airlines, the median period of time that those airlines can survive on existing cash reserves is just under two months; some airlines have enough cash for operations for just under five months.

IATA: estimated minimum, max and medium cash levels by number of months for global airlines

Source: IATA.

At the onset of the COVID-19 crisis, which later became a pandemic, the general consensus was that most US airlines would emerge reasonably intact and bankruptcy was not a scenario under consideration.

But the global aviation industry has changed dramatically in just a matter of weeks, and Ms Nelson in her interview with The Hill warned that due to the application process being dragged out, some airlines could have to make a decision to file for bankruptcy - because of their cash burn.

The US Treasury shows little appetite for changing its stance on payroll grants

There is conjecture about why the last minute provision to attach strings to the payroll grants was enacted - one view is that it is for political manoeuvring, and to project the scenario where the government is not engaging in a bailout of airlines.

For its part, the US Treasury Department shows no signs of changing its stance on possible ownership provisions attached to the payroll grants. Mr Mnuchin has consistently stuck to his message that taxpayers should be compensated for the payroll grants.

But as Ms Nelson and her labour colleagues highlighted in their letter to Mr Mnuchin: "Aviation workers are taxpayers. We believe that when the public steps in to keep companies afloat, the public deserves a share of corporate profits. That's why we support the inclusion of warrants on the loans that carriers can receive. But these payroll grants are different. They're not loans to help replenish corporate coffers, and they can't be spent on general business purposes."

The US government should focus on ensuring airline employee longevity

Airlines in the US and worldwide are facing a crisis that will change the dynamics in demand for years to come. US operators have faced a nearly instantaneous dissolution of demand and at the same time, drawn criticism for their paying out of shareholder returns and not hoarding cash during the past few years.

Some of that criticism could be warranted, but US airlines are also publicly traded companies and are subject to shareholder demands.

Those arguments should be set aside for another time, and the Treasury Department should set optics aside to step up and keep the integrity of payroll grants intact. If airline workers are ultimately forced off work due to bankruptcy, the CARES act will have done little to stimulate the US economy.

US Airlines are not perfect, but bankruptcies will harm the economy for the long term. That is not in the public interest; nor is it a problem that can be resolved retrospectively.

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