Pontifications: What kind of aid could US airlines get?

By Scott Hamilton

March 16, 2020, © Leeham News: Airlines in Europe already asked governments for financial aid as coronavirus forces massive schedule cutbacks and in some cases, complete service suspension.

In the US, talk of aid began in earnest last week.

Delta Air Lines, which is parking 300 airplanes and cutting 40% of its capacity, said it plans to seek US financial assistance.

There is increasing talk that the US may order a complete suspension of domestic air service. If so, this would be like 9/11, when for the first time in history the US shut down its skies.

Trans-Atlantic flights were diverted to Gander as 9/11 unfolded. Source: i.pinimg.com

That lasted only three days.

With federal officials saying the crisis hasn’t peaked in the US and it may be a couple of months before the crisis subsides.

US carriers will almost certainly seek government assistance.

What kind of financial aid?

President Trump floated the idea of redirecting some of the fees airlines collect with every ticket purchase, allowing the carriers to keep the money instead.

I’m not sure how much good this approach will do. If there are no passengers, there are no fees. No fees means zero benefit to the policy of redirecting the money.

True, for whatever people do fly, the fees may be redirected. But this won’t be much relief for the airlines.

The federal aid to the US airline industry after 9/11 took the form of a newly created Air Transportation Stabilization Board (ATSB).

Congress created the agency within two weeks of the terrorist attacks. Ten billion dollars were allocated for aid.

But it wasn’t a freely-given largess. In the end, only $1.8bn was distributed.

Strict qualifications

Qualifying was strict. Only seven carriers ultimately qualified: America West Airlines, US Air, American Trans Air, Aloha Airlines, Frontier Airlines, Evergreen International Airlines and World Airways. America West had to submit a revised application after the first one was rejected.

Applications from nine airlines were rejected, including United, one of the two carriers victimized by the 9/11 attacks. United applied twice and was rejected twice.

The ATSB had to determine that credit was not reasonably available at the time of the load guarantee or funding.

The government received warrants, stock options, common or preferred stock and other consideration for loaning money to the airlines.

Several airlines went out of business in the post-9/11 era. The impact of the three-day shutdown and extended depressed traffic made it impossible for airlines with weak balance sheets before the attacks to survive.

Other carriers went through bankruptcy reorganizations.

As one who was involved in the airline industry when 9/11 occurred, and who has been through several other global shocks, I can unequivocally say this is the worst crisis I’ve seen for the airline industry.

Airline impacts

Airlines already are dropping like flies.

  • Carriers were quick to ask lessors for rent relief.
  • Cathay Pacific and Lufthansa were quick to cut capacity by 50%.
  • Norwegian, United, American and Delta—among many, many others—trimmed schedules.
  • Delta announced Friday is cutting capacity by 40%.
  • IAG, the parent of British Airways, Iberia, Aer Lingus and others, is taking action to reduce costs.
  • British Airways issued a memo to employees Friday using alarming language about its very survival.
  • Lufthansa and Norwegian are seeking government help.
  • In the US, none of the carriers as yet have asked for government relief, but the topic broadly has been discussed.
  • Alaska Airlines tapped a credit line of nearly $400m.
  • American and Delta are retiring entire fleet types early.
  • And so it goes.
Airbus, Boeing, Embraer
  • Boeing, already on the mat because of the MAX crisis, halted all discretionary spending and non-essential travel and is drawing down its $13bn bank facility arranged as a just-in-case scenario. (But so far, it still hasn’t cut dividends of $2/share.)
  • A hiring freeze was implemented at Boeing as well. R&D spending is curtailed.
  • It really doesn’t matter now if Boeing achieves recertification of the MAX by mid-year. What airline is going to want to take delivery of either the stored airplanes or new ones off the assembly line? This will exacerbate Boeing’s already stressed balance sheet.
  • Airbus hasn’t announced any impacts—this is likely to come with the first quarter financial results, if not shortly before. But as with Boeing, non-essential travel and spending is likely to be curtailed.
  • Unlike Boeing, where MAX contracts and delays are now beyond 12 months and can be canceled, Airbus has its full year 2020 inventory in production. What will deferrals look like?
  • The impacts to the supply chain will be driven by Airbus and Boeing.
  • Embraer, too, will see impacts. The lifeblood is the US regional airline industry. As go the majors, so goes the regionals.
Hospitality industry
  • Conferences, conventions and smaller group meetings are canceled right-and-left. This dries up demand for air travel.
  • Business meetings are being held by video, WebEx and phones. Impacts: airlines and hotels.

29 Comments on “Pontifications: What kind of aid could US airlines get?

  1. That’s definitely the Embraer JV cancelled completely, no way is Boeing going to put nearly $5 bill into another company until it’s own balance sheet is healthy.
    So much for future plans

  2. An excellent opportunity to study the effect of contrails on the environment and pollution around airports.
    Many people are pointing out to Richard Branson that if you want help in the bad times, you have to pay your taxes in the good ones.

  3. Airlines might issue stock thru auctions and the goverments pick up big chunks on the cheap that they later sell as the market opens up and pent up demand will fill the planes.

    • Airlines seem to be bringing forward retirement of older or less efficient aircraft to cut costs and preserve the cash they need to survive. I expect few semi permanent route cuts after the pandemic is over. Things are going to be different. I don’t think anyone is going to be allowed to travel from their country with even the mildest cold and if returning home measures will be taken such as masks, spare seats etc.

      • Things will go back to the same as before.

        Lessons are never learned. You can’t stop someone with the sniffles from flying. Not happening.

    • You could pick up Delta, Spirit and JetBlue and make a new “Eastern Airlines”…
      Another option would be United, Alaska, Hawaiian, Allegiant and Southwest for a new “Transcontinental and Western Airlines”

  4. I think Embraer / the Brasil government is now having it’s own ideas on the merger. Is this the best scenario for their (good) company?

    On a shut down of operations, unlikely. There maybe requirements to hand over a negative Corona test report before being allowed to board.

    • What a terrible (and ineffective) waste of scarce Coronavirus test kits.

      • Bruce:

        The idea is based on available test kits. If we are lucky those will be out there for all needs

        A negative is a ticket to work knowing you won’t infect others as well as allow travel and travel, hotels, meetings, sports are huge employers. Get it back working and the economic impact starts changing fro the bettter.

        South Korean is doing 15,000 tests a day and China has ramped up huge.

        Those test kids could allow a degree or normalcy to start to return as well as have the needed ones to do all contact tracing (which should come first)

        But wide spread screening is a major help as well.

        • Korea test people based on hard data linked to established proximity to known positivs using tracking apps on mobiles to identify who to test. It’s not based on “Please test me”.

          • Even in my little country about the population of Oregon state can do 1500 tests ‘per day’
            They arent being wasted by being used, mostly via a Doctors office in a ‘single payer health system’ with a $10-40 co pay, nothing for kids.
            Last thing you want to do is go to a testing place if there is no symptoms or other indicators as that could increase your risk being around people that could be.

  5. More than likely, the $1,500,000,000,000 the Fed, according to Washington sources, to be pumped in the market will probably go to BAIL out the large US Corporations, rather than those needy Coronavirus victims or the small business affected by this drama.
    We better keep a close surveillance on Who receives What in this process of Bails.

    • Dodd- Frank Act banned the Fed giving financial help to specific large companies like they did back in 2008, but they still can create financial
      facilities that eligible companies can apply for. The Fed should stick to aiding the banks and easing credit down the chain.

  6. Don’t know about the US, but here in the UK things are seemingly moving fast.

    For example, it’s been reported that the railways might be (effectively) nationalised pretty soon. This is remarkable because just a few weeks ago such a move would have been politically out of the question. Necessity is the mother U-turns…

    So I wouldn’t be surprised if the UK gov casts an eye at the airlines too, with a view of preserving them (or at least the important bits) as going concerns: this is pure speculation on my part. Quite what that mean afterwards, or what happens to non-UK airlines with a heavy presence in the UK market, I’ve no idea.

    At the same time it’s clear that a lot of companies that previously had extensive business airline travel are now having to make do without. And, according to those that I know, they’re actually doing pretty well with Skype calls, etc. And to be honest, a lot of them will probably not revert after COVID-19. This could easily do permanent damage to the number of people flying shorthaul within Europe.

    • Privatizing UK railways was IMO one of the worst ideas ever. It’s vital public infra structure that runs without oil from undemoncratic countries. Agree this crisis could have onger term imact, after Corona is survived.

      • The tracks, slots, power supply and signal system is one thing. Trains and maintenance depots is another. There is some locig for the goverment to own the infrastructure like pipe-networks, harbours, powerlines, roads and tracks but discrete tradeable goods like trains, ships, powerplants, aircrafts be private and traded.

      • The trains in Japan are all privately owned, and that seems to work pretty well.

        The difference is that the companies mostly own their own track, so they’ve a vested interest in looking after it. In the UK we gave the tracks and signals to one company, and train routes to other companies, etc. etc.

        And, er, there’s plenty of democratic fossil fuel producing countries. A lot of the UK’s gas actually comes from Norway, and last time I looked no one had them down as being run by a totalitarian dictatorship…

        Re: the long term impact; what’s quite interesting is what happens to UK rail franchises when they collapse and get taken over by the government. Often, then end up making money for the government. Ok, the difference is that government might not be quite so willing to put a lot of money into investment – that’s what went wrong after World War 2 – but the pressure to reprivatise isn’t necessarily so great.

        In Japan the railway company’s strategy is quite interesting. They’re busily building a new maglev line between Nagoya and Shinigawa in Tokyo. Very impressive it will be too. The thing is it’s widely predicted that the railway companies won’t be able to afford it, and deliberately so. The strategy is go bust part way through, get nationalised, leave it to the Government to finish of “this project of high national prestige” using tax payers money, and reap the rewards after the government eventually privatises it again. Everyone seems to know that this is what’ll happen, but no one can stop it.

        • The UK passenger rail franchises already get government subsidies and the government also get franchise payments.
          “Net government support to the rail industry in Great Britain
          totalled £7.1 billion in 2018-19. This excludes loans to Network
          Rail.”
          https://dataportal.orr.gov.uk/media/1547/rail-finance-statistical-release-2018-19.pdf

          The Franchise company’s are largely foreign owned by overseas State rail businesses
          “At Romford station, in the Essex centre of “taking back control”, there’s a choice of trains into London: those run by the Dutch , or those run by the Chinese. Anyone heading for nearby Basildon has to change at Upminster and pay a fare to the Italian firm that has been operating C2C since January…
          Welsh trains are run by German Deutsche Bahn owned Arriva, Scot Rail is Dutch State Rail owned Abelio. The French owned Govia-SNCF have the lions share of English passenger franchises. Another service is First MTR party owned by Hong Kong Government
          https://www.theguardian.com/business/2017/apr/01/british-rail-franchises-foreign-owners-subsidy

          unless the franchisees walk away they took on a business with some risk so should carry on with their State Rail owners just waiting for the upturn

  7. Maybe companies should be obliged to first get at least 75% of share buybacks/dividend payments made in the last 5 years from the capital market, before receiving Gov help. But a short term unemployment support could help workers get through mass lay-offs.

    • Totally agree with your assessment of discarding any Airline and/or Corporations who have speculated in Share Buyback and Dividend distributions with their Healthy Cash positions, like there was no tomorrow. Now that their complacent actions did not foresee the unexpected, and Corporate Controls totally absent, it is now the moment of facing reality of their screwups. All workers laid off should receive direct unemployment benefits from the government, but definitely, the Corporation, not one CENT of American Taxpayers Funds.

  8. Hi Scott,

    This article is exactly what I was looking for. Thank you very much.

    Unless this so-called administration wakes up and realizes the real dangers lurking to our economy, general welfare, we will be facing a severe crisis. As you outlined, no passengers, no revenue. No revenue for considerable time for the virus to subside, expect bankruptcies (without direct government help in keeping them alive) and capacity shrinkage, cancellation or deferment of orders affecting both Airbus and Boeing, the latter hard. Said another way, air travel and airline industry are looking at an abyss, in my opinion, unless something is done and done fast.

  9. And now Boeing seeking US government loans and grants. Boy does this make me angry. The sheer gall of a company that despite its self inflicted troubles continued with its dividend as if there was nothing to see and appears to have made no proper effort to rein in the good times at the top (eg with the Muilenberg departure costs). There doesn’t even appear to be any humility about it.

    OK, the pragmatic thing may well be for the US government to assist but I sure hope that if they do they get their pound of flesh in return and this Boeing management are swept out of the company quickly, without benefit.

      • Woody:

        Your approach has my vote. Sometimes you have to swallow it and do what is good for the country no matter how vile a taste you have for the ones at the top.

        But you kick out the clowns that setup things to be this bad as well.

        Present the terms and they are stuck with it.

        I felt the same way about bailing out banks, but Leeman showed just how bad the ripple was going to be.

        the only negative was not changing the governance (and changing the laws so you can throw the scum that caused that in jail) .

        We can throw in for Boeing no more Program Accounting!!!!!

        • Unfortunately with financial institutions for the past few decades it was so easy for “talent” (some genuine, much simply lucky to be able to persuade that their involvement was beneficial when this was unverifiable, tenuous or simply untrue) to move location that no government I know of had the nerve to enforce moral hazard.

          But for Boeing, operating in a very physical world, no such problem for government. For me, they can and should enforce moral hazard.

      • Except modern day ‘capitalism’, generally outside family businesses, is often not really capitalism and profits are to a significant extent not privatized in the way often mentioned and derided.

        We are now several decades into the explosive increase in remuneration levels for the higher levels of businesses, with many shareholders (the actual providers of capital that gives capitalism its name) enjoying less financial gain than these employees and with little or no ability to rein the employees’ troughing in. Is genuine capitalism, where the reward go exclusively to the capital providers, fair? I doubt many would argue this now. But nor is the troughing fair.

        Re profits, depends on the country, sector, company etc., but many large listed companies are significantly or largely owned by pension funds etc., so the profits flow from large business to private individuals of all backgrounds and means via this route rather than via government taxation and state pensions. And again, a key issue is that the profits come only after the troughing by senior employees has reduced the profit distributable to the likes of pension funds.

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