Here's why buying years of plane tickets to buoy airlines probably wouldn't work
President Donald Trump pitched an idea on Friday to buy years of plane tickets from airlines to further proper up the industry hard hit by the coronavirus pandemic.
The U.S. government could buy tickets from airlines in bulk at a discount for flights over the next five years to get needed cash to carriers today, President Trump said during his daily press briefing on April 24. It could then either resell those tickets and recoup some of the taxpayer funds that it fronted airlines, or use them for government travel in the future.
The idea has some merit. Airlines would get cash today, which they need, and Americans -- or the U.S. government -- could then get cheap flights in the future.
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While good in theory, the idea has not worked well in practice. Tried before by President Trump's friend and former adviser Carl Ichan, a similar scheme helped drive legendary airline Trans World Airlines (TWA) into the ground.
Rewind 25 years to July 1995. "Waterfalls" by TLC was the number one song in America, Apollo 13 held the top spot at the box office, and TWA was in its second Chapter 11 bankruptcy restructuring in less than four years.
In those proceedings, TWA agreed to settle a debt with its former owner Ichan with an innovative ticket agreement. The financier could buy tickets that did not begin or end at the airline's St. Louis (STL) base at a steep discount and then resell them on his own website -- effectively competing with TWA itself and driving down the amount the airline could charge for tickets.
Many credit that deal, known as the "Karabu ticket agreement," as furthering TWA's slow decline -- even during the relatively prosperous late 1990s -- and eventual purchase by American Airlines in 2001. The deal with Ichan was due to expire in 2003.
Related: How long will US airlines’ cash last? Between 4 months and a year, analyst says
Any comparable deal done today could have similar negative long-term effects on airline finances as the TWA one did in 1995. And while some may question whether the government has the same financial savvy of Icahn, think again.
"We’re impressed, and concerned, with the government’s hard-line approach," wrote J.P. Morgan analysts on the U.S. Treasury's approach to the payroll assistance to airlines from the government's $2 trillion aid package, the CARES Act, earlier in April. "Frankly, the grant applications themselves implied a far more sophisticated grasp of airline finances, profit streams, and capital structures than we would have expected from a government agency."
TWA appears to have had no other option but to take the deal with Ichan in 1995. As former vice president of corporate communications Mark Abels told St. Louis Magazine in 2005: “There was no $190 million. There was nowhere to get $190 million. TWA had two choices: accept the agreement or shut down."
Related: US begins aid payments to airlines; American, Delta and United among first recipients
Today, while the COVID-19 crisis is bad and airlines need all the cash they can get, the situation does not appear to be as bad as it was for TWA in 1995. Carriers still have assets, like airplanes, that they can use as collateral for new loans, or sale-and-leaseback deals like the one United Airlines just closed.
In addition, the government still has another pot of $25 billion from the CARES Act that it can loan to airlines. Several carriers have or plan to apply though some executives have not committed to accepting funds -- and the strings that come with them -- if they are offered.
Delta Air Lines chief financial officer Paul Jacobson told investors on April 22 that the airline will apply for an up to $4.6 billion loan from the government. However, it will wait until Sept. 30 -- the final deadline -- before it decides whether to accept a loan, he said citing the fact that Delta still has numerous fundraising options available.
Related: Travelers are nervous about flying again after coronavirus
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- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
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Rewards Rate
| 4X | Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 4X | Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 3X | Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com. |
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Intro Offer
You may be eligible for as high as 100,000 Membership Rewards® Points after spending $6,000 in eligible purchases on your new Card in your first 6 months of Membership. Welcome offers vary and you may not be eligible for an offer.As High As 100,000 points. Find Out Your Offer.Annual Fee
$325Recommended Credit
Credit ranges are a variation of FICO® Score 8, one of many types of credit scores lenders may use when considering your credit card application.Excellent to Good
Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits. (Partner offer)Pros
- 4 points per dollar spent on dining at restaurants worldwide and U.S. supermarkets (on the first $50,000 in purchases per calendar year; then 1 point per dollar spent thereafter and $25,000 in purchases per calendar year; then 1 point per dollar spent thereafter, respectively)
- 3 points per dollar spent on flights booked directly with the airline or with amextravel.com
- Packed with credits foodies will enjoy
- Solid welcome bonus
Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.