In case you’re curious how the aid process works for U.S. passenger airlines, the Treasury Department has made the application process quite transparent.
Posted on its website (.pdf) with detailed instructions, airlines have until 5:00PM EDT on April 3, 2020 to submit requests for billions of dollars in taxpayer money.
The application confirms that in exchange for money ($25 billion is on the table), airlines must agree to the following conditions:
- Use such payments exclusively for the continuation of employee wages, salaries, and benefits;
- Refrain from conducting involuntary layoffs or furloughs, or reducing pay rates and benefits, of employees of the applicant and its subsidiaries (or, in the discretion of the Secretary of the Treasury, any affiliated entity) until September 30, 2020;
- Through September 30, 2021, ensure that neither the applicant nor any subsidiary or affiliate thereof purchases, in any transaction, an equity security of the applicant or the direct or indirect parent company of the applicant that is listed on a national securities exchange; and
- Through September 30, 2021, ensure that the applicant shall not pay dividends, or make other capital distributions, with respect to the common stock (or equivalent interest) of the applicant or any subsidiary thereof.
These stipulations are pursuant to §4113(b)(1)(A) and 4114 of the CARES Act.
Furthermore, this does not appear to be a slush fund for shareholders, though of course this frees up money on the airline side for other projects of questionable value. Aide will be directly in proportional to payroll costs from the same period in 2019:
Under Section 4113(a) of the Act, payroll support will be awardable to an approved applicant in an amount equal to the compensation paid by the applicant to its employees, as determined by the Secretary of the Treasury in his sole discretion, for the period from April 1, 2019 through September 30, 2019.
Interestingly, we have a “taxpayer protection” section toward the end of the product.
Each applicant must identify financial instruments to be issued to the Secretary that, in the sole determination of the Secretary, provide appropriate compensation to the Federal Government for the provision of payroll support. Such financial instruments may include warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by the applicant.
That’s rather open-ended, isn’t it? My reading is that this is to satisfy the clawback provision, which will allow the Treasure Department to reclaim money if airlines break one of the four guidelines above.
CONCLUSION
American Airlines has already completed the application and asked for $12 billion in aid. Otherwise will follow. It seems almost too easy, doesn’t it? Well, that’s not the only step in the process. There will be all sorts of politics likely as play as precise requested are winnowed down and final amounts settled upon.
Do you think individual shareholders should worry about investing in airlines at the moment? Would government taking equity in airlines wipe out shareholders?
This really doesn’t help the airlines. Either they take the money to keep employees on payroll and dilute shareholders or they fire, furlough or lower wages given that they won’t be flying either way. No one is going to make money flying. No point in keeping people on. Let them get unemployment insurance benefits and be done with it. Airlines just have to sit for 4 months until they can fly some routes profitably and bring back people at fair market wages. There are going to be 100,000 flight attendants looking for jobs. People are receiving stimulus checks from the government they don’t have to pay back. But airlines are essentially receiving 0 aid. Hurting shareholders to get payroll coverage when they even aren’t going to fly planes doesn’t help them. It is illogical for them to take it.