Money May Be Flowing, But This Government Stimulus Isn’t a Great Plan

Government Regulation

Almost since the first government stimulus passed earlier this year, airlines have been begging for an extension. They knew without question fairly quickly that they wouldn’t be anywhere near normal by the time it expired on September 30. But, as it’s wont to do, the government failed to act before the program ended and mass furloughs followed. Now, the feds are finally back with an agreement that’s likely to be signed soon. That may sound good, but it’s going to be, shall we say, messy.

Back in the spring, the government rolled out the Payroll Support Program (PSP) for the airline industry. If airlines agreed not to furlough anyone, not to pay dividends, not to buy back stock, and not to pull out of any cities… well, then they’d get a ton of money. That “ton” of money was actually full payroll costs covered for six months. That’s a great deal, and so the airlines eagerly took it.

At the time, this was supposed to be a bridge over a near-term disruption, but that is not how this played out. It is going to be a long time until there’s enough demand to provide work for everyone who had a job in this industry previously. So, as the September deadline approached, the airlines warned that if PSP wasn’t extended, tens of thousands of people would be furloughed in addition to all the people who have voluntarily stepped away. The government couldn’t get anything done, and so PSP expired. It didn’t take long to find out that most airlines were not bluffing.

Sure, Delta came to an agreement to avoid furloughs, and Southwest kept delaying its decision, but led by American and United, more than 32,000 airline employees were furloughed. Those people either went on unemployment or found another job. I’d imagine many front line workers are sticking it out, hoping to be recalled. Meanwhile, management and administrative workers are more likely to have left the industry entirely for something more stable.

Fast forward a couple of months, and the feds have now gotten around to extending PSP. The language in the current version of the bill says that $15 billion will be set aside to pay salaries and benefits retroactively from December 1 through the end of March. All the same restrictions appear to apply, but it’s a completely different situation now. So, what happens?

American CEO Doug Parker is pretty happy about it. Here’s a short video he put on Instagram.

If the feds act quickly, American will have paychecks to furloughed workers in hand before Christmas. That’ll feel nice to be able to provide that, but that’s about as much praise as I can offer for this plan.

All of these people are being recalled to work… but there is no work that actually needs to be done. It’s not like there’s demand for a ton more flying right now. Even if there was, there is training required for many of the front line folks to get them back up and running again. That will take time. What’s more likely to happen is what I call the “bad public school teacher” scenario. Airlines will just pay people to stay home and do nothing. It is effectively unemployment insurance, but it’s a VERY expensive version of it.

If you take $15 billion and divide it by the 32,000 people who will get their paychecks back, that comes up to just over $468,000 per job. Sure, you could argue that Southwest, for example, is going to furlough some people if the money doesn’t come through. Fine. Let’s say there were 50,000 people saved here. That’s still $300,000 a person. Those numbers are absolutely ridiculous. If the government had just put that money into better unemployment benefits, it would have been a lot cheaper and more useful. Instead, it’s just funding the jobs of people who would be employed by the airlines either way. It just lets the airlines off the hook from having to pay.

Even with that windfall for the airlines, it’s still going to be disruptive. Airlines now have to shift to bring all these people back in from an HR perspective, and they have to figure out training, if there’s training to be done. Just as soon as things start getting comfortable, it’ll be March 31… and then PSP part deux expires again. Does that mean everyone will be gone that day? American didn’t say that, but as has often been the case, United gave the most blunt and fair assessment here. In a letter to the troops, United leadership said what everyone was thinking:

United has been realistic about our outlook throughout the crisis, and we’ve tried to give you an honest assessment every step of the way. The truth is, we just don’t see anything in the data that shows a huge difference in bookings over the next few months. That is why we expect the recall will be temporary.

And then we’re right back to square one again. If the government just paid them $200,000 each, we’d save billions. I’m not actually suggesting that happen, but I’m merely pointing out this plan is pure madness as is.

Think it can’t get worse? Consider all those people who took voluntary leaves after doing the math to figure out what was best for them. That math has now changed, and they might not have taken that same deal had they known otherwise. Now when they do come back, they probably won’t be nearly as positive about the whole situation as when they left.

This whole program is wasteful and messy, but then again, I suppose we could say that about the entire federal response during the pandemic. It’s just a shame money couldn’t be put to better use in the hands of those who really need it most.

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31 comments on “Money May Be Flowing, But This Government Stimulus Isn’t a Great Plan

  1. well said, CF.

    Most significantly, I have yet to see the actual form that the aid will come in but it is almost certain to involve at least a portion of it in loans, not 100% outright cash grants. Not even the first round of PPP for airlines came as 100% grants but was only about 70% grants and 30% loans.

    The Federal government is making money off of the airline industry even while holding tens of billions of dollars of airline assets as collateral. They also have gained control over many executive decisions regarding airlines. And don’t think for a minute that they won’t be active in restructuring the industry and its assets when it is inevitably clear that the industry cannot pay back all of the debt – government and private sector – that it has taken on to survive.

    Delta and Southwest did not take CARES Act 2 loans because they were able to obtain loans in the private sector and can keep the government out of their business. Nearly all of the rest of the industry is on the opposite side of the room from DL and WN.

    Most other businesses that are getting “aid” are getting it in the form of loans; consumers are getting their “aid” in the form of cash to spend, a good chunk of which will go to buy imported consumer products.

    The entire world has survived this crisis through the issuance of debt. Airlines, which have long had razor thin margins and high debt, will struggle to recover as they never have before from any other crisis.

    Of course, American is thrilled. They have kicked the can of running out of money past the summer and well into the Biden Administration and the fall of 2021. The fundamentals of American’s finances, just like the bottom sector of many industries, won’t change. Major chunks of the American economy – and the airline industry – cannot survive the debt and decreased revenue that will follow the covid crisis.

    Any short-term gains, as costly as they are, will be followed by a much more sober reckoning in the not-too-distant future.

    1. What a classic tim response. Delta rocks (turned sky miles into a third party based out of the Cayman Islands and disclosed everything about it to their competitors while mortgaging the whole thing … but apparently that’s cool). No significantly better rate or amount than AA got using it for the federal loan. And all so Ed and Glen can take their stock options sooner…
      And AA is awful.
      Thanks for the usual hard-hitting Tim Dunn perspective

      1. United actually took private loans against its loyalty program so I’m not sure why you think there is anything special in that regard. American just hawked its loyalty program for government loans. THAT is the difference.

        And AA’s network and financial problems preceded this crisis.

        United did a relatively good job of strengthening their finances but their network was much more competitive than the other big players except for B6. That is the major crisis that UA faces.

        DL and WN didn’t take government loans in CARES Act 2. Either both execs are motivated by the same thing or they recognize there will be huge advantages of having the least amount of government control as the industry undoubtedly consolidates and shrinks.

        DL and WN were the benchmarks for the industry before covid and they will be afterwards as well. Given that just about every industry analyst sees the very same thing and also sees AA as the weakest, I’m not sure why you think I am picking on AA.

        1. Well, Tim
          Delta was the financial Darling pre Covid.

          Nothing suggests they will be again. Surely by now, their employees are smart enough to realize how badly delta treated them and will consider unionization.
          Every other airline: 100% pay per psp for frontline. Delta: here’s a 25% pay cut since March and you can go work in catering as a flight attendant. And no end in sight to 25% pay cuts. But hey, it pays for an ill thought out middle seat marketing policy that has zero basis in science.

          Their debt levels are as high as AA’s debt levels at 3q. You can scream airport debt all you want but it’s on delta’s balance sheet and it’s debt like lax and LGA where they may not make a profit for a while but they’re still stuck with the debt and it’s a giant burden especially since it’s at two airports where they may not want to be as large in 3 years.

          Delta’s network strategy was unique among the big 3: pay for friends since no one seemed to want to be their friend. That backfired. Badly. Their equity is all but lost in nearly all investments or, at best, is tbd.
          American doesn’t have that issue with their JVs where their partners are financially forced to be with them. Neither does United: their partners are willing and not coerced.

          Delta will have to redevelop a new strategy. The latest schedule changes suggest delta has given up on focus cities. We’ll see how long they last in Seattle but it’s hard to imagine very long given Alaska’s new friends.
          They’ll probably be ok in New York but their profitability will suffer as AA found a low cost and cost free way to challenge them again with B6, to say nothing of United’s incredible strength that delta will never match.

          In the SE, ATL will always be powerful but if you’ve even bothered looking at any random SE cities market share over the Last few years, you’d see how powerful CLT & Dfw combined have become and how well they compete against ATL
          In LAX: AA/AS are still Figuring out their partnership but delta will be a US carrier in LAX with no Oceania partner. No Japan partner. Good luck with that Sydney flight based on US POS only… the market is heavily OZ-based.
          Boston… again. Delta will be the high cost airline while JetBlue will be stronger with AA.
          Delta in Miami: there’s a joke now. Poor LATAM will Suffer alone.

          1. “Every other airline: 100% pay per psp for frontline. Delta: here’s a 25% pay cut since March and you can go work in catering as a flight attendant. And no end in sight to 25% pay cuts.”

            Quick point of order: All DL employees are back at 100% (or will be by the start of the year). My station went back at the beginning of November.

            I commented earlier, but it’ll be interesting to see how this all plays out. The hour cuts & creative reassignments were sold to the rank-and-file as a way to avoid furloughs. Tbh, that’s a pretty easy sell when the news is full of cuts at places like AA & UA. With those workers now being made whole, the narrative shifts.

          2. Since you bothered to take so much time to write your response, I’ll at least give you the courtesy of a response.

            Delta and its employees have to figure out how to address the point Kevin raised which is absolutely valid.

            This is not the first crisis the airline industry has faced; Delta’s largest non-pilot employee groups have had many opportunities to vote for unions but have not done so. It is their choice.

            Delta’s equity in its equity partners is far from gone. Air France/KLM and Korean form the largest joint ventures across the Atlantic and Pacific, respectively. The joint ventures with AeroMexico and Virgin Atlantic are still there, equity or not. Latam is still flying more capacity from the US to S. America than any other carrier.

            I get the tit for tat mindset. Your statements just aren’t backed up by facts and data including about the SE. When you get that data, please be sure and post it.

            If Delta’s debt is so bad, please let the Wall Street analysts know. They aren’t convinced. Last time I checked, Delta has the second best credit rating in the industry, behind LUV just like market caps which are just a few percent different – not bad considering that DAL flies a lot of longhaul international capacity that isn’t operating right now, a problem that LUV doesn’t have.

            Nothing is set in stone nor is success guaranteed. But there is every evidence that Delta is navigating this far better than its peers and the fact that there aren’t huge amounts of capacity being dumped into DL’s markets and DL isn’t doing it in other carriers is not an insignificant reality.

            Whether the facts are comfortable to you or not, American is at one end of the industry in terms of financial strength and Delta is right up there with Southwest at the other end.

            And to masters below, when multiple WN employees post on public websites that they have lost confidence in the company, I have to believe that the ironclad wall that you think exists is not as strong as you want to believe. And it still doesn’t change that WN is gong to have figure out ways to get employee costs down long-term – which was the whole reason they brought up the possibility of furloughs in the first place. Other carriers are doing a better job of getting costs out than WN and federal aid doesn’t change that for any carrier – it just moves the conversation further down the road.

  2. The entire things looks to be a clown show. We are giving airlines $15 billion so that 30k furloughed workers can be paid for 4 more months. Why don’t we just pay those 30k furloughed workers directly and be done with?

    1. “Why don’t we just pay those 30k furloughed workers directly and be done with?”

      Because that would be socialism & we cant have that like every advanced nation does. USA! USA!

    2. The money is going to all airlines (presumably if it contains any grants, all airlines will take it) to reduce all labor expenses.

      The requirement is just to rehire furloughed employees and not furlough until March 31 or something which means that AA and UA get the least real benefit.

      Also, airlines will have to restart routes they dropped – it will be interesting to see which of those are re-added.

  3. With people that were laid off being made whole, it’ll be interesting to see what DL does/doesn’t do for those that took a 25% cut in hours for 8 mos.

  4. Thank you, finally someone who nailed it on the head. I’m no expert (though a retired airline employee) and I’ve been saying/ commenting (the same) on all of this since the first bailout. ….. Paying people UNEMPLOYMENT to either stay home or come in and stand around and look at one another. Must be nice to collect a salary, company benefits and travel benefits as well and basically have nothing to do.
    I guess all those people who are on food lines, $300/week unemployment, evicted, lost their small businesses and landlords/banks who can’t collect rents and mortgages think this is a great idea as well. What twisted, convoluted, corrupt, disparate “solutions” we are seeing. Despicable.

  5. Crash Course by Paul Ingrassia calls out a similar issue in the Auto Industry. Basically the UAW promised jobs, the Automotive industry created a job bank, and paid full salaries to people to sit in a library and read books.

    As everyone knows, in the end, this was not such a great idea, nor was it sustainable.

    The UAW job bank of course was created for different reasons, in a different environment.

    My Dad had a Job bank “job” and he hated it. He said it was the most demoralizing thing he ever had to do.

  6. The airline industry is now beginning to shift its focus from a medical crisis to a financial crisis. The carriers that have excelled in the “down times” before should do the same again. Some are strategically growing (Southwest and JetBlue), some are trying to make the best of what’s left (American and, to a lesser extent, United), and some are hunkered down (Delta and Alaska). As an amateur observer, it has been fascinating watching the various airline’s corporate “personalities” play out in real time. It will be interesting to see if ANY of them can break out of their traditional molds moving forward. I somewhat doubt it: Corporate culture is just too powerful.

    But if we pay close attention, we might be on the cusp of history. One thing we can all agree on is that Cares Act 1 & 2 have saved the industry. Every carrier has benefited tremendously from these programs, from the strongest to the weakest. But when the vaccines take hold, tremendous pent-up travel demand is unleashed, and masks become fashion accessories, it is entirely possible that ONE airline will have still NEVER laid off a single employee nor has any employee of that airline EVER taken a pay cut. For the record, that airline would be Southwest Airlines. It would be an incredible testament to Gary Kelly and all the employees of Southwest if they could pull that off. When the entire history of the industry is written, this could be Southwest’s finest hour. With my fingers crossed for ALL the airlines, let’s see what happens next.

    1. WN wasn’t a legacy carrier with legacy costs including defined benefit pension plans. Most of the rest of private sector companies have walked away from DB plans but it took chapter 11 for airlines to do it.

      The measure of how well companies will come out of this is if they can restructure costs to new revenues and still make a profit. Demand will be smaller and there will be a certain amount of business demand that will take much longer to come back and some may not return; it will take time to figure both of those pieces out.

      Flailing around looking for markets that work in the middle of a crisis is not a sign of strength.

      WN is no more assured of success in the future because of their track record; that is true for any company just as it is with investments.

      WN has demonstrated a very strong ability to adapt to changing market conditions and to have the financial strength to endure transitions – but they are not the only airline that will do that. There will be some that cannot successfully negotiate the transition – just as they haven’t negotiated other changes to the industry in the past.

      Just by threatening to furlough, WN has alienated some employees and broken trust. But the reason they did it is not because they were in dire financial shape but because other airlines may well do a better job of cutting costs than WN and that is a much longer term threat to WN.

      The CARES Act 1 threw a very necessary lifeline to the airline industry and opened credit markets not just for airlines but for companies as a whole. The longer airlines continually to be propped up by government money, the longer it will take for real market-based recovery of the industry to take place.

      1. You are, once again, mistaken. Several Southwest employees texted me today that it was general knowledge within the company that issueing WARN notices 105 days in advance of furlough, as opposed to the 60 day federal law requirement, was the airline’s way of telling Uncle Sam to get something done NOW on the stimulus bill.

    2. “One thing we can all agree on is that Cares Act 1 & 2 have saved the industry.”

      I don’t agree with that at all and neither do many others. To make that statement you need to prove that without CARES the industry would have gone out of business – very difficult to do. The industry might have shrunk a lot, but that’s about all you could prove.

      What is clear is CARES was an incredibly stupid way to support the industry. We made the same mistake after 9/11 – we threw a lot of money at the industry, but over half of it (by capacity) went Ch 11 anyway. And none of the big companies that went Ch 11 went out of business.

      The lesson we failed to learn is that if you want to support the industry, put in mechanisms that do that *after* airlines are in Ch 11. In Ch 11, payments to vendors, to financiers, to aircraft lessors can all be reduced and therefore any support goes further.

      One of the main beneficiaries of all this cash that’s gone in are financiers – aircraft lessors, aircraft bankers, etc. None of them have been forced to take a bath, despite the fact that objectively the aircraft market is in the toilet. But all their pre-Covid contracts with airlines are still good.

      The airline industry needs restructuring, but because we keep throwing money at it pre-restructuring, all of its old contracts continue to endure, sucking too much money out of the business.

      1. The airline industry could not access the credit markets before CARES Act 1. That is not debatable. Carriers pulled down existing lines of credit but could not get new loans.

        After CARES Act money began to flow, airlines were able to borrow money based on their capacity to borrow.

        And the CARES Act was not just about opening credit markets for airlines but for multiple industries. Credit markets locked up in late March. It took the feds injecting trillions into the economy for credit to restart. The stock market fell dramatically.

        If you don’t know the details of the financial crisis the US faced in the early weeks of covid, you should read up. The US faced a financial crisis that could only by solved by spending lots of money to restart the economy.

        CARES Act 1 was absolutely needed – which was why it passed so quickly.

        Your last 2 paragraphs are correct but wholesale collapses of markets or industries don’t work.

        That would have happened w/o CARES Act 1. It wouldn’t have happened if this latest version had not passed and it won’t happen again unless there is a complete cessation of demand.

  7. I don’t think that is a fair assessment. This article only covers the 32,000 furloughed employees receiving support, but in fact, the payroll support extends to all who are currently employed by airlines (below management).

      1. Right, it pays for everyone but those people were going to get paid anyway. So it’s just a subsidy for the airlines that doesn’t benefit anyone beyond those 32,000 recalled workers.

        1. I work for UAL was made part time was told I had to make a decision if I want to go full time I said nothing. So they also get my money how convenient for them, no retro to. Not helping worker but they get the money.

    1. No it doesn’t. Airlines and Unions long ago agreed in negotiations to the conditions of what would happen when revenues do not equal labor costs (reverse seniority furloughs), and that is what is/has happened. Throwing money at airlines like this simply perverts that process and delays the inevitable. Just look at the timeline pointed out above, as not only was the process playing out as it should, now everything is to be reversed for ONLY those subset of employees forced to be recalled (or paid to sit at home due to lack of work), and ONLY until April 1st. It’s absolute madness that this is being allowed to happen at such a ridiculous cost. Let the airlines manage their own businesses, as every employee knew exactly what they were signing up for when they took the less flexible unionized jobs.

  8. Government actions are rarely, if ever, perfect. That’s because they require compromise. As the old saying goes: “A camel is a horse designed by a committee.” I’m guessing the operative words in Parker’s video are “more to come.” We’ll have to wait to see what form that takes.

  9. I think this was pretty well nuanced and well thought out. I’ll let the AA specific bashing slide — its Christmas.

    I am a little interested though in how the government has gained “control over many executive decisions regarding airlines.” Can you follow up on that for my own education? I certainly understand how the assets that are leveraged could be a ticking time bomb, but I don’t see any current heavy handed action — but I could be missing something. Thanks.

    1. All of the airlines have had to grant warrants to the US Treasury as part of receiving EVERY loan-based portion of the federal aid.

      In return, airlines cannot buy back their stock and engage in other actions and the Treasury does own stock in those airlines – or can. While they say they will be passive owners, I wouldn’t put anything past the government if push comes to shove.

      I am not at all suggesting that airlines should be buying back stock etc but that is control that those airlines don’t have.

      And it is also worth noting that multiple airlines have issued stock – which is permitted – which drives down the stock and reduces the likelihood that the stock will appreciate.

      As much as some think that stock prices are solely of interest to executives, most of the US airline industry is held by institutional investors that will look for the best place to invest – largely as part of running retirement funds for every day Americans. A weak stock price can set up challenges by investors – such as happened most recently to United. Alll of the increases instability for the company and can force management to make changes that will boost the stock price but hurt employees and the operation.

      The feds became the lender of last resort for the industry as a whole in March because private markets were effectively closed to everyone. After that point, further lending has merely propped up the weakest players and has reduced the incentives for weak performers to cut underperforming capacity which only adds more instability to the industry and less job security for employees.

      1. Got it. This is more of on the financial side then an operational side, and the comment that the govt’ is more of a passive partner today is appropriate. Thanks for the clarification.

  10. I won’t go far off in the weeds since this is an aviation industry blog but…

    I’ve skimmed about 1000 pages of the 5593 page “stimulus” bill and the money going to airlines is a pittance compared to the pork doled out in other areas.

    No member of Congress read the bill before voting and they should ALL be deeply ashamed of this monstrous BOONDOGGLE.

    I’ll NEVER vote for an incumbent for as long as I live.


  11. Any thoughts Cranky on why AA is being less transparent about what happens on April 1 to recalled employees should there not be a third extension of PSP? Are they just savoring this moment for now and burying their head in the sand about what is to come? Or is AA planning to keep all employees on payroll beyond March 31 regardless of whether there is a third PSP? Seems like a disservice to recalled employees whom have since found other work and may quit those jobs for what may turn out to be just a temporary assignment.

    1. Anon – That’s a question for AA management. I have to wonder if they are just hoping or assuming that this will get extended further under a new administration. I find it hard to believe they’d think that they could keep everyone onboard without additional support.

  12. It’s time to rip the band-aid off. The airline industry will not be back to what it was in 2019 for quite a while. They should not be keeping up their staffing levels like it’s 2019.

    We have many small businesses that can’t do things like get loans and use their own currency for collateral that are failing because of government mandates forcing them to greatly reduce businesses without any support to make up for the lost business.

    A single $600 stimulus check, if you are even eligible, is a pittance.

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