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.