US airlines accept government’s workforce aid

Every airline is eligible for funding equivalent to about three-quarters of its payroll. The amount available was less than airline executives had anticipated because the payroll assistance program was oversubscribed. The money is available as long as airlines don’t release any workers, or reduce their pay and benefits, for six months and maintain a minimum level of service. Airlines also are not allowed to buy back stock or pay dividends until after September 2021 and are limited in how much they can pay executives.

The money is a temporary lifeline for an industry with 750,000 workers that has been decimated by the coronavirus crisis, which forced most travel to cease. Hawaiian Airlines on Thursday, for example, reported a 45% decline in systemwide traffic in March and has cut 95% of its service for April. The number of paying customers going through Transportation Security Administration checkpoints is less than 4% from this time a year ago.

Airlines are taking drastic steps to stay afloat, grounding nearly all their fleets, closing club lounges, borrowing from banks, canceling capital and nonessential expenditures, asking workers to take unpaid leave and sharply cutting executive pay. Earlier Tuesday, the International Air Transport Association forecast airlines worldwide would generate $314 billion less revenue this year than in 2019. 

American Airlines (NASDAQ: AAL) announced it will receive $5.8 billion in financial assistance for preserving jobs, with $4.1 billion in the form of a direct grant and the balance through a low-interest loan. The Dallas-based carrier will also seek to borrow about $4.75 billion from a separate $25 billion pot for loans and loan guarantees.

Southwest (NYSE: LUV) said it will take $3.2 billion in direct payroll support, including a nearly $1 billion loan with a 10-year term. In exchange, the U.S. government will receive about 2.6 million warrants — rights to buy shares at a predetermined price.

“We are extremely appreciative of the work of our federal leaders. President Trump, Secretaries [Steve] Mnuchin [Treasury] and [Elaine] Chao [Transportation], and the entire United States Congress recognize the unprecedented health and economic crisis that our nation is currently facing due to COVID-19, as well as the importance of airlines to our overall national economy, the supply chain, and the nation’s future recovery after this crisis subsides,” said Southwest Chairman and CEO Gary Kelly in a statement. “As we are now in the implementation phase of the CARES Act, we applaud the quick action by the U.S. Department of Treasury to infuse liquidity into the economy and try to keep businesses open and people on the job — and that certainly includes the airlines and our employees.”

Delta Air Lines (NYSE: DAL) is the beneficiary of $5.4 billion in workforce subsidies. The payment includes an unsecured 10-year low-interest loan of $1.6 billion, and Delta will provide the government with warrants to acquire about 1 percent of Delta stock at $24.39 per share over five years, the company said.

In a letter to employees, CEO Ed Bastian said 35,000 staff members have taken short-term and long-term unpaid leave and asked for more volunteers. Delta raised more than $3 billion in cash during the first quarter.

The Payroll Protection Program will provide Alaska Airlines and sister Horizon Airlines with $992 million, which is expected to cover about 70% of budgeted costs through September, Alaska Air Group (NYSE: ALK) said.

Of the $992 million in funding, $267 million will be in the form of a loan. The Treasury will receive the right to buy 847,000 nonvoting shares of Alaska Air at a price of $31.61 per share. Alaska and Horizon also said they will apply for $1.13 billion in federal loans.

JetBlue (NASDAQ: JBLU) said it will get $685 million in direct support and an additional $251 million in low-interest loans. The airline last week temporarily consolidated service in five major metropolitan areas — New York, San Francisco, Los Angeles, Boston and Washington — through June 10 in an effort to further reduce losses at a time when it is flying fewer than 150 flights per day and planes are only about 10% full.

United Airlines (NASDAQ: UAL) said it expects to receive $5 billion, including $3.5 billion in direct grants.

Bait and switch?

Airlines and labor unions were upset when Mnuchin changed the rules regarding the CARES Act aid. Congress intended the payroll protection money to be grants that directly pass through to workers’ paychecks, but the law gave the Treasury secretary power to set terms and conditions for the grants and loans.

Mnuchin said airlines seeking more than $100 million in grants would need to repay the government. The decision to turn 30% of the cash grants into low-interest loans effectively limits grants to $17.5 billion, adding debt to balance sheets that will likely slow future growth and the rehiring of furloughed employees. The administration position appears to be a reaction to criticism of how banks were bailed out during the 2009 financial crisis with few strings attached.

Union officials are especially concerned that the extra debt could lead to layoffs. Airlines have been less public in their criticism, but officials insist the direct payroll assistance was supposed to be only in grants. 

“Unfortunately, the Treasury is undermining the intent of the CARES Act by treating a portion of the grants designed to protect jobs … as loans, which will make it harder to stop layoffs and slow the recovery. In spite of this, we remain optimistic that more carriers will avail themselves of this funding — and that Congress will seek to overturn the constraints placed on this worker assistance program,” Joe DePete, president of the Air Line Pilots Association, said in a statement.

Analysts were negative about the government’s approach and the industry’s long-term prospects.

“We simply don’t see any way for most U.S. airlines to avoid massive layoffs unless the industry specific payroll protection grants/loans are extended. And therein lies why we have viewed the progression of the aid from 100% grants to only 70% grants plus 30% loans (for the grant portion) as a significant negative development for the sector,” JP Morgan analyst Jamie Baker said in a client update.

“Although companies and industries have generally witnessed a brief rally immediately following government relief, the outperformance has not usually persisted over a longer-term horizon,” Goldman Sachs warned Monday.

In a research note, Cowen analyst Helane Becker said U.S. domestic airlines will be 20% to 30% smaller by the end of the year, with 100,000 to 200,000 fewer employees and 800 to 1,000 planes retired.

“Demand is 5% of what it was in February, and we continue to believe it will take three to five years for domestic demand to return to 2019 levels and four to six years for international demand to get back to those levels,” she said.

Fitch Ratings, which downgraded Delta’s credit to junk status, said airlines will need to reduce their workforce after the federal aid expires to adjust to their smaller size for at least two years.

Final details of the aid deals are still being worked out, according to the airlines.

The Treasury Department said it is continuing talks with other airlines regarding their potential participation in the Payroll Protection Program, is working to approve applications for smaller carriers and will provide further guidance for cargo carriers and contractors very soon.

The Department of Transportation also released $10 billion in funds for airports provided for in the CARES Act.