The US Treasury department has reached an agreement with US airlines that paves the way for the sector to receive billions of dollars in aid to cover payroll costs during the coronavirus pandemic and could see the government emerge as a shareholder in several public companies.
The deal comes after days of testy exchanges between President Donald Trump's administration and America's leading passenger carriers over the terms of US$25 billion ($41.7b) in funding allocated to the industry in the US$2 trillion stimulus legislation enacted last month.
Airlines tried to resist the idea of US taxpayers taking an equity interest in their companies, while unions representing flight attendants and pilots criticised the government for moving too slowly on aid designed to safeguard jobs.
American, Delta and Southwest airlines all will grant warrants — the right to buy shares at a pre-determined price — to the US government as part of the bailout deal. JetBlue Airways and Alaska Airlines will do the same.
Southwest Airlines expects to receive US$3.2b under the programme, with US$2.3b as a grant and the rest as an unsecured, low-interest 10-year loan. The loan agreement is expected to include warrants issued to the US Treasury to buy 2.6m Southwest shares.
"We applaud the quick action by the US Department of Treasury to infuse liquidity into the economy and try to keep businesses open and people on the job," said Gary Kelly, Southwest chief executive.
Every airline will receive a payment equal to roughly three-quarters of its payroll for the second and third quarters of 2019, said JetBlue chief executive Robin Hayes. For JetBlue, that totals about US$936 million. Just over a quarter will come in the form of a loan that will require repayment starting in October, and the airline also must maintain a minimum level of domestic service.
"While I am happy we are receiving this much-needed cash for payroll now, it adds to the significant debt we are taking on as we burn through our cash reserves," Hayes said.
"Thankfully, we entered this crisis with one of the stronger balance sheets in the industry, but we will come out of this with significant debt to pay down."
The aid packages prevent airlines from furloughing staff or cutting employee pay until September 30, ban share repurchases and dividends until September 2021, and limit executive compensation until March 2022.
The government has negotiated individually with the airlines, in contrast to the blanket agreement imposed on banks when they received bailout funds during the 2008 financial crisis.
American Airlines, the most heavily leveraged of the major US carriers, will receive US$5.8b from the US$25b pot. The Fort Worth, Texas-based airline said it would receive a direct grant of US$4.1b and a low-interest loan of US$1.7b.
It also plans to apply to the Treasury for a separate loan of almost US$4.8b from a second US$25b pool set aside for the airline industry in the same law, money that is not limited to spending on payrolls.
American Airlines will issue warrants to the Treasury to buy 13.7m shares at US$12.51 each in exchange for the payroll support funds. The US$4.8b loan will require warrants for another 38m shares, plus undetermined collateral. Airlines often pledge planes or lucrative routes as collateral.
Delta will receive US$5.4b from the payroll support programme, including a 10-year, low-interest loan for US$1.6b, according to its chief executive, Ed Bastian. The government will receive warrants to acquire about 1 per cent of Delta stock at US$24.39 per share over five years.
Delta shares closed at US$24.54 on Tuesday. The airline has been burning US$60m in cash per day and accepted offers from 35,000 employees to take unpaid leave.
Allegiant Air, Frontier Airlines, Hawaiian Airlines and SkyWest have also signed on, the Treasury said. United said it was still working out the final details of its package with the government.
Trump, speaking at his daily White House press conference, said the deal would support jobs and protect taxpayers. "Our airlines are now in good shape and they will get over a very tough period of time that was not caused by them," he said.
The aviation sector has been among the hardest hit, with travel grinding to a halt during the pandemic. Leading carriers are facing a dangerous cash crunch. As airlines resisted some of the conditions that the US Treasury was trying to impose on the aid, concern mounted that they might choose bankruptcy as a better option.
Peter DeFazio, chairman of the House of Representatives transportation committee, praised the agreement but said he would monitor the next phase of the deal.
"The US Treasury still has critical work to do to get funds provided by Congress into the hands of airline contractors' employees, often the lowest-paid employees in the aviation industry," he said.
Written by: Claire Bushey and James Politi
© Financial Times