Here’s why buying years of plane tickets to buoy airlines probably wouldn’t work
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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.
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.
Trump suggested the US buy 4-5 yrs of tix at 50% discount to inject US airlines w/ $. https://t.co/rBEE3aTR7T
Carl Icahn did similar with TWA, destroy yield for years in desperate cash-now move. One of many reasons TWA decline to disappearing occurred.
— Scott Hamilton (@LeehamNews) April 25, 2020
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.”
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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.
Featured image by Bill Greenblatt/Liaison.
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