Given the circumstances, U.S. airlines are getting good terms from their proposed government bailout. They should be grateful.
With the U.S. government on the cusp of providing airlines with a bailout, travelers might wonder how flying may change, since the Treasury Department soon may take equity stakes in carriers in exchange for government assistance due to coronavirus. But travelers may be disappointed.
Yes, the government could own pieces of airlines, and airlines will need to cancel dividends and stock buybacks for awhile. And yes, the government could have sway over where airlines fly, with politicians seeking to ensure airlines don’t pull out of their community after taking federal money. There will be executive pay controls, too.
All that matters to investors, who may see their stakes diluted after the bailout. But If history is a guide, once the terms of the bailout are set, the U.S. government is unlikely to tell airlines how to operate. Recipients of earlier bailouts, including airlines after 9/11 and insurance company AIG during the 2008-09 financial crisis, generally were permitted to make business decisions according to commercial needs. That should be true here, whether airlines accept loans, grants, or both, said Jay Shabat, senior analyst at Skift Airline Weekly.
“There was never anyone in the Treasury Department that went back to AIG and said, ‘you have to start insuring my friends here in this industry,”‘ he said. “It’s just not like that. There was never any interference in any of those bailouts and it didn’t happen with the airlines last time. The federal government has better things to do.”
Under the bill passed unanimously Wednesday by the U.S. Senate, passenger airlines would have access to $50 billion in bailouts. Half would be grants, meant to pay worker wages through the summer, while half would be loans or loan guarantees. The U.S. House soon will vote on its bill, likely on Friday.
Insiders expect most airlines will take the grants — they need them to pay employees — but say some carriers may balk at the loans, since they potentially have more onerous terms. (Nothing is set yet, officially.)
“They are all going to run out of cash before long if this current state of affairs continues,” Shabat said. “They just need the money. I think they are pretty much happy with what they are getting. Maybe they would rather that the government not take a stake, but this buys them time, if nothing else. It’s enough cash until September-ish.”
While airlines mostly will be free to run their companies as they wish, this isn’t free money. In fact, some investment analysts say they’re wary, noting the hastily composed Senate stimulus bill lacks clarity. No one is sure about terms.
For example, for the grants, the Senate bill requires airlines to provide “appropriate compensation” for the money, but does not define what that is, said Hunter Keay, an analyst with Wolfe Research. “Right now, the airlines are in a tough spot – taking grants without some assurance what the ‘appropriate compensation’ may look like,” Keay said Thursday in a report.
Keay said he expects the Treasury Department will confer with the Secretary of Transportation to determine terms. It’s a potential issue, but Keay noted Secretary of Transportation Elaine Chao is a “a friend of the airlines,” and likely would confer with airline executives and lobbyists to reach an agreement palatable to all.
“Our base case assumption: airlines take grants in exchange for dilution of some sort in the future, but we won’t rule out some airlines turning it down altogether,” Keay said.
Another analyst, Jamie Baker of JP Morgan, also cited what he called the “vague language regarding equity and/or warrants,” adding he expects airlines to apply for the grant money, saying they need it to pay their employees.
“For labor and stakeholders this represents the best case scenario (as it relates to this topic), as passage will take the risk of any near-term bankruptcy filings off the table in the near to medium term,” Baker wrote.
The two analysts expressed more concern about loans. According to Keay, equity stakes would be mandatory for loans, and “capital deployment activity is prohibited” until at least one year after an airline repays the money. “It’s also not clear who administers the loans or what sort of conditions the government may require before awarding them,” Keay said.
Still, it may be moot, Baker said, noting the Senate bill requires airlines to show no other sources of capital exist before they can apply.
“This will preclude any airline in our coverage universe from applying, at least for the time being, as we believe alternative sources of capital are still available, though likely growing more expensive and challenging to lock down with every passing day,” Baker said. “Should any airline ultimately apply for a loan, language on securitization is vague, stating that applicants would have to post collateral or that loans be made at a rate that reflects risk, suggesting unsecured borrowing may be possible, but at potentially unattractive rates.”
Then again, if comes to that, airlines and investors probably will accept terms, Shabat said.
“Your stock is going to be worth less,” he said.”Existing shareholders don’t like it, that’s for sure. But whatever. It is an emergency. They will have to swallow that.”
Few Consumer Protections
While investors fret about terms, few seem concerned about other aspects of the proposed legislation, including restrictions on buybacks and executive pay.
“Limits on buybacks and dividends don’t concern us, as our base assumption has been that capital returns will no longer have a place in the post-virus environment, as stakeholders are likely to demand fortress balance sheets,” Baker said. “Executive compensation also doesn’t concern us, nor does any language that limits reductions in headcount over the next six months.”
Congress might have used this opportunity to place other restrictions on airlines, like increasing consumer protections, but lawmakers decided not to bother. In a statement on Thursday, Sally Greenberg, executive director of the National Consumers League, blasted Congress for at least not making it easier for travelers to receive refunds.
“Airlines are canceling flights by the hundreds, leaving consumers who have spent hundreds or thousands of dollars on planned vacations and other travel high and dry,” she said. “In spite of this, the Senate approved a Covid-19 relief package that did not require even the most basic of passenger protections of the airlines.”
The closest the Senate bill gets to protecting consumers is a section about maintaining air service to smaller communities. In previous downturns, airlines sometimes reduced service to non-urban areas, instead focusing on major cities. After the Great Recession, airfares to smaller communities jumped as capacity dropped.
“It will be interesting to see how networks change — if they do — as the Transportation Department has a voice in where airlines fly,” said Madhu Unnikrishnan, editor of Skift Airline Weekly.
The public could also win another way, Shabat said. If airlines take money and all goes well, the government might turn a profit on its investment, indirectly boosting taxpayers.
“If you tell me that we are all still working with our children at home in December, maybe not,” Shabat said. “But my guess is that the airlines will snap back pretty quick once the economy gets back to normal, and the taxpayer will be fine. The taxpayer is buying perfectly healthy companies under normal demand conditions.”
Photo credit: Southwest Airlines has an excellent balance sheet by airline standards. But even it may take bailout money. David Paul Morris / Bloomberg