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Airlines strike bailout deal with feds to stave off layoffs

April 14, 2020
5 min read
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Airlines strike bailout deal with feds to stave off layoffs
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Help is on its way for the beleaguered airline industry.

At least 10 big U.S. carriers will seek some of the billions of dollars being made available to them in the federal stimulus package known as the CARES Act, the U.S. Treasury Department announced late Tuesday.

"The deals aren't final, but the assistance is almost certain to be a mix of cash and loans, and the government could take a small ownership stake in the leading airlines," The Associated Press notes.

With that, the move appears to end wrangling that was reported to be going on between the government and the airlines over conditions for the aid, setting up the airlines to apply for some of the $25 billion in payroll grants.

“We welcome the news that a number of major airlines intend to participate in the Payroll Support Program,” Treasury Secretary Steven Mnuchin said in a statement. “This is an important CARES Act program that will support American workers and help preserve the strategic importance of the airline industry while allowing for appropriate compensation to the taxpayers.

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As a condition to the grants, airlines cannot furlough staff and must maintain current pay rates through Sept. 30.

Among the airlines applying for assistance are the nation’s six biggest carriers: Alaska Airlines, American, Delta, JetBlue, Southwest and United. Also applying for aid are Hawaiian Airlines, budget carriers Frontier and Allegiant, and regional airline SkyWest.

Mnuchin said those 10 carriers “have told us that they plan to participate in the Payroll Support Program,” adding that “conversations continue with other airlines regarding their potential participation.”

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Funds from the CARES Act, which was signed into law on March 27, have been eagerly anticipated by airlines facing a sudden cash crunch caused by the coronavirus-related fall in demand and spike in refund requests from customers.

More: 5 key elements of the $50 billion airline aid package

While the legislation was passed two weeks ago, recent reports indicated the payouts were tied up as the government attached conditions that were said to surprise the airlines. Now, with the apparent hold-up resolved, Mnuchin promised swift action.

“We look forward to working with the airlines to finalize the necessary agreements and disburse funds as quickly as possible,” he said in the statement.

At American Airlines, leaders at the nation's biggest carrier lauded the developments as "fantastic news."

In a memo to employees, American CEO Doug Parker and president Robert Isom said the carrier expects $5.8 billion in financial assistance from the legislation's Payroll Support Program (PSP). Of that, $4.1 billion will be in grants and the remaining $1.7 billion as a loan.

Related: Airlines ask DOT to suspend flights to more US airports, small cities fare worst

"With this level of assistance, we now believe we have the financial resources necessary to help us withstand this crisis and be in position to serve the traveling public when they are ready to start flying again," the executives said in the memo.

American also said it would apply for more assistance beyond the payroll package, detailing plans "to separately apply for a loan from the U.S. Treasury of approximately $4.75 billion."

Still, praise from the industry was not unanimous.

The Air Lines Pilots Association — the nation's largest pilots union — pushed back at conditions for the payroll aid.

“Unfortunately, Treasury is undermining the intent of the CARES Act by treating a portion of the grants designed to protect jobs not as grants, but as loans, which will make it harder to stop layoffs and slow the recovery," ALPA president Capt. Joe DePete said in a statement. "In spite of this, we remain optimistic that more carriers will avail themselves of this funding — and that Congress will seek to overturn the constraints placed on this worker assistance program.”

More: How long will US airlines’ cash last? Between 4 months and a year, analyst says

When the stimulus package was first passed, the airline industry expected the $25 billion payroll protection portion to be issued solely in grants that need not be repaid. However, in a story initially reported by Reuters last week, Treasury eventually added conditions. Carriers that take more than $100 million will have to repay 30% of the funds, and the government will take warrants — or the right to an ownership stake — equal 10% of the loaned amount.

The country’s largest carriers — American Airlines, Delta Air Lines, Southwest Airlines and United Airlines — would all be required to repay some of the grant funding and give the government warrants, an analysis by Raymond James finds. The warrants could amount to as much as a 3% equity stake in American to as little as a 1% stake in Delta and Southwest.

Still the payroll assistance will be a welcome arrival for most carriers, even if the recently added strings were a bitter pill for airlines and labor groups that pushed back against it.

"We are pleased that a number of airlines have decided to participate in the Payroll Support Program, despite the constraints placed on this grant funding by the Treasury Department," DePete said.

Related: It may be years until passenger demand returns to 2019 levels for US airlines

Contributing: Edward Russell, TPG

Featured image by Getty Images