For once, there is a delay in the airline industry that nearly everyone is happy about. After much haggling with the Department of the Treasury, the airline stimulus money is about to start flowing. This is good in that it prevents airline death in the near-term, but if you think this solves the problem forever, think again. Barring a demand miracle, this is just delaying hard decisions by a few months.
The government was slow to get this together, and the airlines pushed back when the rules started shifting, but in the end, the airlines needed money and an agreement was reached.
There was $25 billion set aside for grants to passenger airlines, but Treasury Secretary Steven Mnuchin decided to attach a whole lot more strings than Congress (and airlines) expected. In fact, after negotiations helped to reduce the burden, there will still only be 70 percent of those funds doled out as grants. The remaining 30 percent are given as low-interest loans with a 10-year term. In addition, airlines had to give 10 percent of the loan amount in stock warrants to the government.
Those warrants allow the government to purchase shares at the closing price on April 9 at some point within the next five years. If the airlines fail or stock prices somehow decline, then the government gets nothing. But if the prices rise, then the government can buy at the low price and then sell for a tidy profit at the higher market value. The government will have no voting power at all, so this is really just a way for taxpayers to recoup their investment if the stock prices rise.
With those terms set, the feds had to figure out exactly how to divvy up the money. Remember, this was supposed to be a payroll loan used to pay employees and nothing beyond that. So the amounts were divvied up proprotionately based upon the second and third quarter 2019 payrolls at each airline. The airlines ended up with about three-quarters of their payrolls from those months.
Of course, there were additional restrictions that were entirely expected. Those are:
- No furloughs or wage cuts through September 30, 2020
- No dividends paid out or stock buybacks through September 30, 2021
- Limits on exec compensation through March 24, 2022
- Minimum service requirements must be met through September 30, 2020 or longer if DOT decides to extend
Airlines are slowly trickling out details about what they’re getting, and as of the time of writing, here’s what is known for sure.
- $725m in grants
- $267m in loans
- 847,000 warrants at $31.61 per share
- $4.1b in grants
- $1.7b in loans
- 13.7m warrants at $12.51 per share
- $3.8b in grants
- $1.6b in loans
- warrants equivalent to 1% of Delta at $24.39 per share
- $685.1m in grants
- $250.7m in loans
- warrants undisclosed
- $2.3b in grants
- $900m in loans
- 2.6m warrants
- $3.5b in grants
- $1.5b in loans
- 4.6m warrants
You can see that there are some blanks in here, and we don’t have the details from Allegiant, Frontier, Hawaiian, and SkyWest. I’m sure it will all be announced and filed with the SEC as an 8-K in due time, but if you really want, you can do the calculations pretty easily on your own since the final numbers are based off public information regarding historical payroll, share price, loan amounts, etc.
The only two things we don’t know right now are how Mesa and Spirit will be participating. The expectation is that they will join in, but they are apparently still in negotiations.
When the dust settles, this means airlines will effectively be frozen in place through September 30 of this year. They will need to keep serving most if not all markets in the US — depending upon how the Department of Transportation handles exemption requests — and they can’t furlough anyone. Sure, they can cut flying and reduce hours (while pay rates can’t be cut, hours can), they’re still operating way above demand would require. Even with massive cuts, airplanes will be empty. This is now officially a zombie industry through the summer.
In the meantime, airlines will continue to bleed money despite these injections. Alaska says this will cover 70 percent of payroll through September 30. That is a big chunk of money, but with near-zero demand, the airlines will all still be deep in the red. Despite that, they have to remain frozen in time, hoping that a recovery will occur before September… which it won’t.
If anyone thinks that the airlines will be able to stand on their own two legs, er, engines, by the end of September, you should think again. I can’t imagine a world where that happens. I guess that means you can think of this as a starter kit for airline solvency. If October 1 rolls around, you can be sure that the administration isn’t going to let airlines lay off a ton of people. Those are people they want to vote for them a mere month later.
In my mind, the question now is more about how long it will be before airlines are able to actually make big adjustments to deal with the near certainty that demand will be significantly lowered into next year. That doesn’t mean it won’t rebound from where it is now — it will — but it’s going to be far below where it was before this coronavirus hit.
Unless the government is going to step in forever, the airlines are still going to have to make hard decisions. At this point, they’ve just been deferred.