The Government Stimulus is Done, Now We Wait to See the Results

Government Regulation

Congress finally came to an agreement, and the President signed the bill. Now, the CARES Act is about to pump an unfathomable $2 trillion into the economy with more than $50 billion marked for the airlines. Is this good or bad? Yes, yes it is.

I suppose we should start with a rundown of what exactly the airlines will be getting here. I’m leaving off the cargo carriers and will focus on the passenger airlines. Here’s what they get:

  • $25 billion as a grant
    • This is solely to be used for employee compensation, and the money will be divvied up proportionally based on current payrolls
    • There will be no furloughs or wage/benefit reductions through September 30, 2020.
    • Requires granting of some TBD amount of equity/options in exchange
  • $25 billion in loans/loan guarantees
    • Loans must be 5 years or less in duration.
    • Airlines must keep employment levels at those set on March 24, 2020 “to the extent practicable.” There is a little wiggle room to get down 10 percent off March levels but no more.

For both the loans and grants, the following rules apply.

  • Until 12 months after the loan is paid off (for the loan) and September 21, 2021 (for the grant), airlines cannot participate in stock buybacks or pay dividends.
  • Until 12 months after the loan is paid off (for the loan) and September 21, 2021 (for the grant), no officer or employee who makes more than $425,000 can get any increase in compensation nor can they get severance worth more than double the annual compensation. Anyone who makes more than $3,000,000 must cut all compensation over $3,000,000 in half.
  • Until March 1, 2022, the DOT can require airlines to keep service to every destination served before March 1, 2020, if desired.
  • Air ticket excise taxes and fuel taxes will be suspended through the end of the year

Feel free to read the entire bill text yourself (the airline details are in the 4000 section). It’s probably more than your elected representative has done, but then again, that’s why they have staff.

If you read all the fawning coming from airlines, you’d think this was the greatest thing since sliced bread. After all, it is a lot of money rolling in the door, and government decorum requires that you publicly and profusely thank them for blessing you with their attention and money. But it is something of a mixed bag.

The grant part of the program is pretty much what I had suggested a couple weeks ago. I like it, but I really like it more broadly for the entire economy. I do like that the government gets a stake as well. This is likely to make the government a lot of money… eventually. And the loans/loan guarantees are useful tools for those airlines that want them. The issues, as always, lie in the details.

Airlines continue to see demand tank. A flight booked more than 20 percent full is an outlier at this point in time. The right solution here is to nearly shut down the airlines. In fact, as I’ve said previously, bring back a version of the CAB for the short term. Have this central board assign routes to airlines and set fares. Keep a skeleton network in place for essential travel until demand rebounds.

But that doesn’t seem to be what the government is thinking here. President Trump had been clear that he wanted to open things up by Easter despite the universal belief in the medical community that this was a terrible idea. It appears, thankfully, that he is finally backing off this idea, but he still seems to think that this is going to be a very short term issue. For that reason, he wants airlines to be able to re-launch quickly. The best way to make that possible is to keep everyone employed in their jobs and keep airplanes flying. Then there’s no issue with re-training requirements or having to restart the airline. That takes time..

In what I can only assume is a bid to pander to voters in small towns, this bill requires every US city that had service before this crisis to maintain it now, if the DOT wants that to happen. That fits into the president’s narrative. This doesn’t mean all the flights have to continue, but not even a city like Mammoth Lakes (which United cut off recently) would be allowed to go to zero if DOT exercises its authority. That makes no sense if implemented.

The more flights you keep operating, the more you expose employees to potential illness. With limited to no demand in most markets, that’s just not necessary at best. It’s downright irresponsible at worst. Granted, with such thinned herds flying, it’s not as risky as it would have been just a month ago, but leaving your house for anything carries some risk at this point in time. And that risk seems unnecessary outside of a skeleton operation.

So right now, the airlines remain in limbo. Everyone has to stay employed through September 30 — which is good — but you can be assured that many if not all people will end up working fewer hours. Then what happens? If you truly believe this is a short battle, then this works well. But if you join the consensus that this will be more drawn out in its impact on this industry, this simply delays the pain. Airline employees will be happy to have a job but this won’t make them secure enough to start spending.

While I like seeing all these people employed, I don’t like seeing airlines effectively forced to fly nearly-empty flights due to lack of demand. Pay salaries, but don’t make flights go that don’t need to operate. There has to be a better way to ensure continuity of essential service and nothing more.

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54 comments on “The Government Stimulus is Done, Now We Wait to See the Results

  1. This is another case of fighting the last battle while you are in the midst of a new battle, and you don’t even know the outcome of this existing battle.

    People may reduce flying significantly permanently (partly because there is less disposable income since we might burn through real capital, not made up federal dollars through the wave of Congress’ magical wand), or it might go through the roof and the airlines might have never needed this.

    Central planning fails is the only thing we know. We all need to read Ludwig von Mises during our downtime, especially his theory on the socialist calculation problem.

    And I personally know this disease is a bear I do not wish on others, even when mild.

    1. I wonder if it will depend on the route & or lobbying by special interests. As an example, Walmart will want service to it’s hometown Bentonville even if service isn’t going to be profitable to the network as a whole. That will present logistical complexity.

      1. Given what the airlines charge to get to XNA, I have no doubt that it will remain one of the most profitable routes, even with minimal PAX. I once paid $1300 R/T for a last minute ticket there from ORD. I’ve never done the analysis but XNA has to be one of the most expensive airports there is.

        1. For many years XNA has been consistently ranked as one of the most expensive airports in the country in terms of fares, both compared to airports of similar size and compared to all airports. I’d link to a source or two, but it’s hard to choose just one or two; plenty of analyses and articles out there for those who want more details.

          While many (if not most) companies have essentially eliminated/banned all but the most essential travel, I assume that sending a VP to their Bentonville sales office to help manage a conversation with their #1 customer (or to help pitch new products) would be a clear exception to that policy.

          I’m not sure what the policies are at Walmart HQ these days around meeting vendors, etc, but I’d be very concerned about the potential for COVID-19 outbreaks in the Bentonville area spread by outsiders flying in for quick meetings.

      1. Sorry if my example wasn’t a good one, as I know small town airports are not created equal. In central Florida between Fort Myers, Tampa & east to Orlando there are many small airports with commercial service & I wonder how many of them will remain viable going forward.

  2. The first 25 billion for the employees I can agree with , but the second 25 billion may as well be set on fire. I don’t see air travel being what it was just a few weeks ago anytime soon if ever.

    1. I wonder if the 125,000 Macy’s employees facing furloughs will agree with the first 25 billion. Or the masses of laid off restaurant workers. Or the masses of laid off hotel workers. Or …

      1. I know what you are saying Oliver & you aren’t wrong. Each of those groups that you mentioned also deserve a similar degree of assistance, but I was focusing on the airline workers as that was the topic at hand. If this were only a “bailout” where top management make out like bandits, then you know my feelings on the matter.

    2. Actually, I think you have it exactly backwards. The $25 billion to employees is money lit on fire — unless you’re on the receiving end of it, of course. There is no logical reason to allow airline employees to keep all their pay and benefits when tens of millions of other workers in America will get unemployment checks that are only a tiny fraction of their former pay.
      Helping the airlines keep the lights on — so they can rehire most of their employees when demand returns — is a far better and fairer use of taxpayer dollars, especially when it is in the form of loans that are very likely to be repaid.

  3. I’m not familiar with the details of the bailout money for cargo carriers, but it makes no sense to me at all.

    If you own a cargo plane capable of crossing the Atlantic or Pacific (even in shorter, 1,000-2,000 mile hops), you should be making money hand over fist right now. As a shipper, with most international widebody pax planes out of service (which have tons of space for cargo in their bellies, and which carry it relatively cheaply, as it’s basically gravy money to the airlines), cargo rates are through the roof on many lanes, often 5-10x normal… And that is when you can even get space, as availability (and prices) can change by the hour.

    I’m not complaining, mind you, as it is what it is, but I don’t have much sympathy for cargo airlines at all. Between the shift from B&M retail to online shopping as people try to avoid going into public and the huge reduction in (relatively cheap) cargo capacity on passenger planes, cargo airlines should be doing okay.

    Similarly, trucking rates are also up significantly in the US. With schools closed and many realizing just how important they depend on transportation workers, at least one high school is allowing truckers (who often have difficulty finding safe parking, as truck stops and rest areas frequently fill up) to park at the school during breaks and use the school’s facilities for breaks, showers, bathrooms, etc.

  4. The notion of bringing back the CAB, even temporarily, sends chills up my spine. Love your work, Brent, but that one is a terrible idea!

    When President Carter signed the Airline Deregulation Act of 1978, he put in place the mechanisms that allowed most of the people in the United States to fly on a semi-regular basis. Without the government telling the industry when and how it can go to the bathroom, airline operations finally caught up with airline technology. Prices fell to never-before-seen levels and communities that had tightly regulated, controlled service and airfares, suddenly received service they had never seen before. I’m not sure anyone wants to ever go back to pre-1978.

    The last thing any airline should EVER do is abdicate its management decisions to the government. If Management doesn’t have the strength to do what it has to do to ensure survival and, ultimately, profitability, then a company’s board should fire management and bring someone in who can do what is necessary.

  5. The last thing any airline should EVER do is abdicate its management decisions to the government. If Management doesn’t have the strength to do what it has to do to ensure survival and, ultimately, profitability, then a company’s board should fire management and bring someone in who can do what is necessary.

    Perhaps that airline wasn’t ment to survive & we need to except that. To big to fail defies Darwin’s law of natural selection, survival of the fittest.

  6. Economically speaking divvying up routes in the short term makes sense however, from the perspective of some pilot/fight attendant friends of mine, putting more people on fewer flights is something they don’t want to see. Social distancing you know. Most of my very small personal sample would just like to see the whole thing shut down for a month.

    1. This is why San Diego’s Metropolitan Transit Services (operator of buses and light rail) is maintaining their full schedule despite the drastically decreased ridership. People who rely on MTS services to get to work at their jobs deemed essential benefit from increased social distancing by having fewer people on each bus or train.

      1. Not the case everywhere, though. In the Bay Area Caltrain cut schedule in half and VTA shut down light rail, I think. Muni in SF also cut some services.

        1. King County Metro in Seattle has cut lots of runs, but they recently restored some runs because the busses were “over capacity” in the COVID-19 sense of the term. Everyone is figuring this out as they go along.

  7. Your suggestion of implementing a short term version of the CAB makes sense to me. In our society, he who writes the checks usually runs the show. The government is already involved in some route control ie. “Until March 1, 2022, the DOT can require airlines to keep service to every destination served before March 1, 2020, if desired”.
    Starting off with anticipated very light loads, perhaps the airlines will assign seating so no one is seated directly next to, or behind, another passenger.

    1. Itami – It’s a step, but it would be better to have more top-down coordination so that it was done in the best interest of the entire country instead of each company.

  8. Hello Reservations: When are you flying to Podunk?

    Dear Valued Customer: When can you fly? Which airport is best from which you can depart? For the record, can you certify to us that someone to where you are going can get you out of the airport to your final desination? If you are not heading home, or to friends or relatives, can you assure us you will have a place to stay and eat? We trust that someone at your destination actually can and wants to see you. Just checking.

    Dear Airline: Of course, people need jobs and would like to be kept on the payroll. But, before the government and American gives, grants, or loans you all of this money, please tell us what you have done, are doing to get us through this horrific situation? We would appreciate it if you told us how many masks, swabs, supplies, and respirators, and doctors, nurses, hospital workers you have transported, when, from where, to where, and are gearing up for the next few months? Thanking you in advance for your service.

  9. Do these loans the airlines could take from the government minimize the chance of airline bankruptcies, or are they still not enough to take the idea off the table?

    Would airlines continue to put together loans from more traditional sources to minimize government equity or are the terms of the government loans much more favorable?

    1. Mark – It certainly minimizes the chance of bankruptcy but it in no way prevents it. We have no idea how much airlines would need to survive at this point, because we have no idea how long this will last.

      As for the loans/loan guarantees, it’s about providing options to companies that can’t get them on their own. Specifically it says “the applicant is an eligible business for which credit is not reasonably available at the time of the transaction.” The rates are also supposed to be “not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of the coronavirus disease 2019.”

  10. No matter how it’s done, it’s going to be difficult to intelligently match capacity with demand until some kind of a bottom is reached. The difficulty is that the airlines may never be able to pinpoint the exact bottom with a modicum of accuracy. There are simply too many unknowns to contend with.

  11. Serious question, albeit one that I probably shouldn’t be asking at this time: With jet fuel prices down significantly (down 50% from where they were a month ago, and down 65% from where they were at the start of the year), are the airlines going to roll back the “temporary” surcharges and other fees that they tacked in in the past, under the guise/excuse of higher fuel prices?

    1. Kilroy – Of course not. And I don’t recall any of them adding on fuel surcharges recently, at least not the US carriers. They know better than to call them fuel surcharges now.

    2. Yeah, I feel like saying the next time I book a flight, “I hope you’re not planning to re-institute the $200 change fee, after you’ve been bailed out—again—at taxpayer expense.” But of ourse there’s no one to really say that to. It’s not the underpaid employee’s fault.

  12. Brett, given that most of us won’t be ‘allowed’ to fly for the best part of 6 months (all of mine has been wiped out), do you think any of the airlines will suspend their loyalty programme qualifications for 2020?

    1. Asking the really important questions. OK, for a lot of airline passengers, that will be (or at least, may be) a relevant question to which I suspect the answer is “yes” – 2021 status (if that’s still a thing) will be based on 2019.

      “The world’s ending!”, “Oh, hey, once the end of the world is over, will I still be Unobtainium Level on Delta?”

      (this late update from the Four Horsemen just in: post-apocalypse, don’t forget cover sheets for your TPS reports…)

    2. I think they will, but are still deciding on exact terms and seeing how long this will go before announcing changes.

      Hilton already has. People whose 2019 status was scheduled to lapse at the end of March 2020 will keep their 2019 status through March 2021, and 2020 status will extend through March 2022. No points will expire before the end of December 2020. https://www.hilton.com/en/corporate/coronavirus/

  13. Minor clarification in the part about the loans. “Airlines must keep employment levels at those set on March 24, 2020 ‘to the extent practicable.’ There is a little wiggle room to get down 10 percent off March levels but no more” makes it sound like they have to keep these staffing levels as long as the loan is outstanding, however the text of the bill states that this restriction expires on September 30, 2020 like the requirement attached to the grants.

  14. CF, no…it wasn’t a “terrible idea” that President Trump put the Easter date as a possibility to “open things up”. First, the language is intentionally vague. Second, it is perfectly rational to have a goal that is aspirational, with the understanding that the goal will be evaluated each day. Finally, we all must understand that the medicine can be much worse than the virus. In this case, the medicine is the shutting down of the world economy and bringing on a worldwide depression. This will certainly result in the killing of tens of millions of people. There is no doubt about this. Millions of lives ruined from financial collapse and trillions of dollars of wealth destroyed.

    The wealthy will be just fine. So will the top 10 percent of the world’s population. All others will, however, suffer greatly.

    My point is that everything has a cost. That is why we need to not focus on “saving every life” from this horrible virus, but look at the alternative scenario of how many lives will be lost and how many lives destroyed due to collapsing the world economy.

    This is a complex issue. It requires some nuanced thinking, which we will never get from big media outlets.

    1. Money is an abstract human concept. It’s presence or lack thereof has never directly killed anyone or will it kill anyone. Greed for it certainly has.

      COVID-19 causes poor oxygen saturation, which in turn causes cardiac stress, which in turn causes death. There is nothing complex there.

      If 100K dead Amercians is “winning” we need less winning. I’ll take “save people from COVID” vs “save people from being poor.”

      1. Jim, that is a ridiculous statement.

        Money may be indeed “abstract”, but the absence of having funds or any means to pay rent, mortgage, buy food, etc. is very real. There is nothing abstract about that.

        We are talking about the loss of tens of millions of lives from an economic collapse. We are also talking about untold lives ruined from the loss of businesses and the loss of trillions of dollars of wealth for millions of Americans and many others around the world.

        Do you understand how many will die from despair of the loss of a job, the loss of a business, the loss of their life savings? I don’t think you’ve thought of that.

        Let me ask this question: Is your income affected yet by this virus? If not, do you have any real threat of losing your income stream due to this virus? I can last for many months due to savings, but I also know that many Americans are not in that position. Most are a paycheck away from being in a financial crisis.

        Here is the point: Everything in life has a cost. Those who seem willing to take down the world economy and put it into a depression do not appear to be willing to consider the cost that this will impart on many millions of people. We need to think about this and consider all costs, not just the cost of those who will perish from this virus.

        1. The lack of food, water, and shelter can all be solved with government intervention. I’ll take the risks of suicide over COVID any day. Its a ridiculous argument to compare a loss of wealth to a loss of life. And yes I know people do risk analysis all the time like this but “winning” is 2x the number of Americans that died than what happened in Vietnam. Think about that.

          As for me I am due to be laid off in September, but the business I am in has suddenly hit a sharp upturn in production. I produce a consumer staple that was going out of favor (not toilet paper). So believe it or not, this is economically beneficial for me. Most of my friends and neighbors are the opposite.

    2. > Second, it is perfectly rational to have a goal that is aspirational, with the understanding that
      > the goal will be evaluated each day.

      When I was a manager, I used aspirational goals for my team. They were achievable goals if the team worked hard enough. Setting unrealistic goals is not aspirational, it is demotivating.

      The Easter “goal” was not based on any scientific model. It was not aspirational. It was unrealistic, as proven by the immediate feedback from actual infectious disease experts and the very quick retraction of the goal. It was a BS goal the moment it was announced, and if I had given my team BS goals, it would have been demotivating and I as a manager would have lost credibility.

      1. Oliver, that is your opinion. Thanks for that opinion. But it is just that, your opinion.

        It was an aspirational goal, and if that crushed you, I”m sorry to hear that.

        You have no evidence that it was a de-motivational goal for others though. You are merely speculating.

        By the way, the new target date is no based on “science” either. Let’s remember that the early projections of deaths from this virus have been adjusted downward by many magnitudes by an oft-quoted epidemiologist (Neil Ferguson).

    3. I’ve contended for the past week+ that the response to the Coronavirus will kill far more than the actual virus will. I’ve heard of a couple suicides already due to depression. As a species we were not meant for isolation like this. How many more are financially destroyed and will decide they have nothing left to live for? I fear people like that will take not only themselves but spouses, kids, neighbors. This is stuff that gets very little coverage in the media vs. the scare fest about NYC or Italy or whatever hot spot is next.

      And, the flatten-the-curve mantra isn’t about keeping people from getting infected, it’s about slowing the rush on the hospitals. Theoretically if most of us are destined to get it anyway the death toll will be the same no matter what economic damage we self inflict. I say those in the low risk group should get back to work. People aged 65+ should voluntarily self-isolate.

      1. “I say those in the low risk group should get back to work.” – but it’s not about ‘you’ If you’re low risk, it’s about everybody else. The levels of selfishness on display in response to this crisis are astonishing.

        1. People in Italy are about to riot as there is no food in the stores in some towns. And the poor that live check to check have no money to buy food if they even could because they haven’t worked for a month. This could lead to social unrest, riots, crime, etc… Worrying about the airlines could easily be eclipsed by worrying about survival.

  15. if people actually care for their community, take that $1200 to your favorite local joint (restaurant bodega whatever), and tell the ones cooking to split the tip. if you only order delivery, then only the delivery guy makes anything at all.

    that’s far more useful than donating to some random charity, and that includes Red Cross and WHO and what not. Between the bureaucracy and corruption, your act of kindness will be lining someone’s coffers not preventing someone’s coffins.

    and stop patronizing the big stores/supermarkets. bezos is rich enough he can afford to keep his employees alive. your local joint don’t have that luxury. unless you long for a future just like the movie Demolition Man where every restaurant, including fancy fine dining, became a Taco Bell.

    1. never donate into a system that still cares about their own bottom lines during pandemics. It’s bad enough hospitals elsewhere have to triage between survival ability.

      The last thing you want to be helping is a system where they also triage you on a P&L.

    2. I do that every day even in normal times. Not exclusively, but most of my grocery and dining and coffee spend goes to locally owned independent stores/restaurants.

    3. unless you long for a future just like the movie Demolition Man where every restaurant, including fancy fine dining, became a Taco Bell.

      I was waiting for someone to make that movie reference.

  16. Mostly bad for AA (although good for AA shareholders and bondholders). They desperately need a chance to right-size their workforce, and Chapter 11 would have provided that. This is going to lock in their over-staffing and make sure that they can never compete on cost vs. Delta, much less vs. the LCCs.

    1. Hmmm, good question. I wonder about that as well as a high percent of flights are on regional jets & many of those hub to small city spokes may no longer be profitable at sub 15% load factors.

  17. If the aid package bought the airlines (at least) several months and multiple high-ranking government officials have said that there will be more aid to come if needed, why are the airline stocks still so hammered? I understand why they were before the initial aid but now it seems like there’s a significant safety net below them.

    They won’t be back to record profits for years but they just need to get to the point where they’re no longer hemorrhaging money to avoid the risk of bankruptcy. With assurances from the government they should be able to get to that point.

  18. I tend to think humans are too prone to Doomsday thinking, and the future will be brighter than many currently believe. That said, April is going to be horrific for the airline industry, and May probably won’t be much better. I suspect some travellers will return to the skies in June, and we’ll see a semblance of real airline industry in July. What nobody knows of course is at what level. I would think that, even after a year, we could easily only be back to 80% demand. There is going to be some pain, especially for airline employees.

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