Could airlines say ‘no thanks’ to payroll aid because of schedule requirements?

Apr 17, 2020

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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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Major U.S. airline planned airport suspensions and waiver requests from CARES Act requirements. X denotes request denied.

 

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

JetBlue Airways Corp. aircraft sit with their engines covered at John F. Kennedy International Airport (JFK) in New York, U.S., on Thursday, April 9, 2020. Almost every day over the past three weeks the number of people flying in the U.S. has reached a record low as the coronavirus pandemic kept people home. Photographer: Angus Mordant/Bloomberg via Getty Images
JetBlue aircraft parked at New York JFK. (Image by Angus Mordant/Bloomberg via Getty Images

 

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?

Featured image by Alex Tai/SOPA Images/LightRocket via Getty Images.

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