Could airlines say 'no thanks' to payroll aid because of schedule requirements?
The U.S. government has weighed in on the desire by JetBlue Airways and Spirit Airlines to suspend flights to dozens of cities around the country. The results weren't pretty.
Of the 12 and 26 airports were JetBlue and Spirit, respectively, sought to suspend service, only two were approved: Aguadilla (BQN) and Ponce (PSE) in Puerto Rico. JetBlue serves both airports and Spirit just the former.
The airlines were seeking waivers for the air service strings of the government's $2 trillion coronavirus bailout package known as the CARES Act. The Department of Transportation oversees the aspect of the program and ruled on both applications on April 16.
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The DOT's decision means, for example, that JetBlue must continue flying to Houston Bush Intercontinental (IAH) where it says the percent of seats booked on its flights is below 15% in April. Based on the New York-based carrier's 14 weekly flights to Houston in February, it will have to serve the city with at least three-weekly flights through Sept. 30.
The question then is: is the cost of operating those flights to Houston — multiply that by the nine other cities JetBlue cannot end service to — worth the $936 million in payroll assistance that it has agreed to?
"It is easy to imagine that if the compliance costs are onerous enough, there is the possibility that an airline would seek to reduce costs immediately and attempt to secure credit on commercial terms, as opposed to agreeing to accept a Treasury Grant (or Loan) with onerous conditions," aviation analyst and former airline executive Robert Mann told TPG.
As Mann pointed out, an airline would also be free to furlough or layoff staff if it turns down CARES Act funds.
Related: JetBlue, Spirit rejected by DOT on nearly all bailout waiver requests
The cost of maintaining service to multiple cities with few — if any — travelers flying varies across airlines. The amount is based on their respective cost structures and includes factors from fuel expenses to ground-services arrangements. In its DOT application, Spirit pointed out that — as an ultra low-cost carrier — it outsources most ground services. In other words, those labor costs are not covered by its payroll assistance.
Allegiant Air estimates that it would cost roughly $4.7 million to continue service for six months to the 21 airports where it has sought waivers. While the Las Vegas-based carrier has not said how much aid it has agreed to take from the Treasury, its average monthly salary and benefit expenses were $37.5 million in 2019 — eight-fold more than the cost to continue the flights.
Assuming Allegiant is awarded roughly 75% of its payroll expenses as other airlines were, the carrier would receive around $28 million from the CARES Act. This calculus suggests that the financial benefit of the payroll funds outweigh the operational losses of the air service strings.
Related: US airlines’ first bailout aid was tougher to get and came with more strings than expected
Cowen analyst Helane Becker agreed that airlines are unlikely to turn down the assistance due to the DOT's decisions.
"We don’t think any airline is in a position to reject the financing at this point," she told TPG. "We have seen a 100% takedown of the airline industry and traffic is down 96% so not taking the money isn’t an option."
Spirit spokesperson Field Sutton told TPG that the airline would "fully comply with the U.S. Department of Transportation requirements," indicating they will accept the waivers decision.
JetBlue was immediately available to comment on the matter.
Industry organization Airlines for America (A4A) data shows there were on average less than 10 passengers per flight during the week ending April 14 as travelers stay home to avoid and stop the spread of COVID-19. In addition, net demand for future travel — new reservations minus cancellations — was down 99.5% year-over-year for the week ending March 29.
Related: It may be years until passenger demand returns to 2019 levels for US airlines
Forcing airlines to fly near-empty planes to dozens of cities around the country will have some consequences. Carriers could end up in worse shape financially after racking up unneeded fuel and airport expenses. In addition, the carbon emissions reduction that comes from grounding more aircraft will be lost.
The analyst consensus is that passenger numbers will be around 30% lower next year than in 2019. U.S. airlines will have to shrink, both their maps and their workforces, whether they they took CARES Act funds or not. The six-month flying obligation will give carriers time evaluate how many and where people are flying, and then make informed decisions on where they want to fly come Oct. 1.
“We have some tough decisions ahead as we plan for our airline, and our overall workforce, to be smaller than it is today, starting as early as October 1,” United Airlines CEO Oscar Munoz and president Scott Kirby said in a warning to staff on April 15.
Related: How will airlines rebuild their route maps after the coronavirus?
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- Earn bonus Medallion® Qualification Miles (MQMs) and an Medallion Qualifying Dollar (MQD) waiver when you hit specific spending thresholds with your card within a calendar year
- Receive a Domestic Main Cabin round-trip companion certificate each year
- Statement credit for TSA PreCheck/Global Entry fee (up to $100)
- First checked bag free
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- Doesn't make sense if you don't fly Delta
- SkyMiles aren't the most valuable airline currency
- Earn 90,000 bonus miles after you spend $4,000 in purchases on your new Card in your first 6 months.
- Receive a Domestic Main Cabin round-trip companion certificate each year upon renewal of your Card. Payment of the government imposed taxes and fees of no more than $80 for roundtrip domestic flights (for itineraries with up to four flight segments) is required. Baggage charges and other restrictions apply. See terms and conditions for details.
- Enjoy your first checked bag free on Delta flights. Plus enjoy Main Cabin 1 Priority Boarding and settle into your seat sooner.
- New: Card Members get 15% off when using miles to book Award Travel on Delta flights through delta.com and the Fly Delta app. Discount not applicable to partner-operated flights or to taxes and fees.
- Earn 3X Miles on Delta purchases and purchases made directly with hotels.
- Earn 2X Miles at restaurants worldwide including takeout and delivery in the U.S., and at U.S. supermarkets.
- Earn 1X Mile on all other eligible purchases.
- Enjoy a per-visit rate of $50 per person for Card Members and up to two guests to enter the Delta Sky Club when traveling on a Delta flight.
- Fee Credit for Global Entry or TSA PreCheck® after you apply through any Authorized Enrollment Provider. If approved for Global Entry, at no additional charge, you will receive access to TSA PreCheck.
- Earn up to 20,000 Medallion® Qualification Miles (MQMs) with Status Boost® per year. After you spend $25,000 in purchases on your Card in a calendar year, you can earn 10,000 MQMs up to two times per year, getting you closer to Medallion® Status. MQMs are used to determine Medallion® Status and are different than miles you earn toward flights.
- No Foreign Transaction Fees.
- $250 Annual Fee.
- Terms Apply.
- See Rates & Fees