Airlines have somehow conned the President, the Speaker of the House and myriad members of the House of Representatives and the Senate to sign onto the idea of a $25 billion ‘clean extension’ of CARES Act payroll support. That’s a second $25 billion injection of cash in exchange for not furloughing workers or eliminating service to most cities through March 31, 2021.
Except that the math here is truly insane. No one seems to be doing the math.
$1 Million Or More Annual Run Rate Per Job Saved
Furloughs from the largest airlines when payroll support expires are expected to total less than 40,000 workers.
- American Airlines say they will furlough 19,000 workers at the beginning of October
- United says they’ll furlough about 17,000
- Delta is going to furlough about 1700 pilots
Southwest isn’t furloughing anyone this year. But let’s round up and say that 50,000 U.S. commercial airline jobs are at risk. That’s half a million dollars per job saved for six months, an annualized run rate of $1 million per airline job. (At fewer than 50,000 jobs ‘saved’ for six months, the per-employee price tag is even higher.)
If you disagree, tell me why I’m wrong. Do the math and show your work!
There are employees on voluntary leave, too, but a clean extension of payroll support wouldn’t require airlines to pay them their salaries. And if their jobs are in jeopardy later, it makes no sense to pay airlines now while they’re on leave, only requiring airlines to keep them until March 31.
Airlines Pocket Most Of The Money
The first round of payroll support covered three quarters of equivalent 2019 airline payroll. Airlines aren’t laying off three quarters of their staff without new payroll support. And airlines have reduced their payroll expenses substantially.
There are plenty of other workers that have taken early retirement. Airlines have axed non-union employees already (giving them modest severance to make their departures voluntary, having told them if they stay through the end of September they get next to nothing). American says their management job cuts save them $500 million a year.
Payroll support mostly covers payroll expenses that airlines are going to incur anyway. It’s effectively a straight cash subsidy into their coffers, benefiting airline stockholders and creditors. This comes after already authorizing $50 billion to the country’s airlines earlier in the year – which airlines abused.
Let’s consider Southwest Airlines, which isn’t furloughing anybody. A clean extension of CARES Act payroll support pays them $4.5 billion not to furlough anybody.
Furthermore, while the original CARES Act didn’t allow airlines to furlough workers or reduce their rates of pay, airlines figured out they could reduce hours to pay workers less and even requiring unpaid leaves. A ‘clean extension’ means signing onto those same shenanigans again, not even fixing some of the obvious flaws.
If You Really Want To Help Airline Workers
If airline workers facing furlough (and in many cases, receiving some furlough pay) are indeed special, and deserving of more support than workers being laid off in other industries, you don’t need to give $25 billion to the airlines in order to help them.
Airlines say they are going to be smaller for awhile, projecting until 2024 before travel demand fully recovers. They have fewer passengers, will run fewer flights, and so they need fewer workers. Covering payroll and limiting furloughs until March 31, 2021 does very little except gets the airlines to pay unemployment instead of the government directly, while using workers as cover for major subsidies to the airlines themselves.
If airlines really are going to be smaller for awhile, then it’s cruel to keep telling people they’ve got jobs when they won’t. Give them a decent transition benefit and help them find their next career.
- Instead of $25 billion to the airlines, take $2.5 billion and give each of 50,000 employees at risk of furlough $50,000 cash right now, up front.
- And like forgiven SBA Payroll Protection loans, call it “not income” so it isn’t taxed.
If you need to offer another transition benefit later, you’ve still got $22.5 billion you didn’t spend having taxpayers subsidize airline shareholders and creditors.
Of course you’d still need to justify helping 50,000 airline workers versus everyone else. $25 billion the airlines want covers $600 a week in pandemic unemployment for 10 weeks for over 4 million workers. $2.5 billion covers it for over 400,000 workers.
But Isn’t This Important For The Economy?
The short answer is “no.” While airlines move people and goods, and that matters, it only matters when there’s demand. Airlines are saying that they won’t be ‘ready’ to respond when the economy is ready to recover if they don’t get a second round of subsidies, but that just isn’t the case.
- Airlines are keeping more pilots on the payroll than they need to fly current routes, because it takes time to train pilots and to keep them current. Airlines are telling you they aren’t behaving in their own best interest, to capitalize on business once it’s there, but their actions say otherwise.
- Flight attendants take mere weeks to train, and even in a strong economy plenty of candidates were available. Before the pandemic American Airlines said it was statistically harder to become one of their flight attendants than get into Harvard. Meanwhile furloughed workers can be recalled.
- Management talent has already been let go. Payroll support doesn’t reverse that.
What’s good for the economy is the opposite of payroll support, keeping people connected to jobs by paying them not to work for the next six months.
The economy doesn’t benefit from workers sitting on the sidelines. Economic recovery comes when everyone is being productive, and that means people moving into their next roles as quickly as possible. For that, a smaller program that assists workers is what would make sense.
The only reason payroll support has a chance of passage is the political calculus not the economic calculus. The President doesn’t want to see jobs lost a month before the election, and Democrats in Congress want to protect union jobs. This isn’t about the economy, it’s about craven electoral calculation.
Remember that pre-COVID, employee costs were maybe 20 to 30% of their total costs. The airlines have significant other costs (not including all the COVID related costs) including landing fees, fuel, aircraft, airport costs, maintenance parts, contract work (smaller airports), among other costs.
Last year, airlines had about $247B in revenue of which $29B was profit. (Source statista). Thus $218B is break even. While some costs may be variable (i.e. based on how many customers or flights), most are fixed costs. With revenues hovering around 20 to 30%, you can estimate that $218B/half year X 70% (what they are missing out on) = $76B in lost revenue vs last year for 6 months. Yes, some costs are variable but most aren’t. $25B covers about a third of normal costs for half of a year. The other $50B the airlines are either finding ways to postpone costs, cut costs, in-sourcing, reducing employee pay, stopping projects, raising cash (to pay later), or anything to make up those bills.
If you only look at the employee pay costs, you are missing out that airlines can’t fly if their aircraft are repossessed, they can’t pay for fuel, they can’t pay a loan due, can’t pay the airports, can’t pay vendors, etc.
Payroll protection bills helps many businesses that are payroll heavy. But didn’t do much to help businesses that heavy on inventory, fixed costs, real estate heavy etc.
One might argue that there are other industries in a similar boat…and that may be absolutely true. But it doesn’t mean that the entire industry might collapse without help. In time, new startups might pickup where there’s demand, but that would slow the economy for many more years. Airlines are essential to cargo, business, tourism and many other parts of the economy.
“ Democrats in Congress“. … what about Republicans, you really think they will put up a fight?
@ Gary — I doubt anything gets passed before election day, especially now with the open SCOTUS seat. The government will probably shut down Sept 30.
I feel that some kind of payroll support for the furloughed workers, as you have stated, is necessary. But as @Ryan stated, airlines have other costs. Make the airlines justify the amount they need. Have them come up with $numbers, that will give sustaining support until the economy comes back. This blank check approach, may have worked in March. But now, since there has been no national plan to deal with Covid, just throwing out taxpayer monies, all willy nilly is just plain wrong.
@Gene – RBG’s passing does, potentially, change a lot of the politics in ways that the actors themselves aren’t even sure yet.
Like I said in another thread, paying to keep workers in jobs where they aren’t needed is horrible economic policy. They may as well be getting paid to dig holes.
This is all about the optics of big layoffs in swing states right before an election. I’ll betcha if this does not get passed before the election, it will then die a quick death.
BTW, Gary, reread your first sentence. –> “Airlines have somehow connect the President,” Proofread, Gary.
This is all insane. If you want to boost the economy, then give the cash directly to the people in the form of cashback or tax cut. Why involve a middle man?
Give average Joe $500 and he will spend it in quickly. Give $5 billion to the airline and they will figure out a way to route it to the 1% who have no interest in spending it.
By the way, see the latest job ad from FR over on travelupdate blog. Hilarious
I’m sorry many airline employees will get furloughed on October 1. These employees can collect unemployment like other folks who got furloughed. The good news is most employees (union members) have recall rights and should be recalled by June 2021.
I’ll take a shot at your math- United, Delta and American only made up ~70% of the original CARES Act distribution, and presumably would be an equivalent amount of the CARES Act 2. So it’s really 70% x $25B = $17.5B / 50,000 jobs, or $350K per job. Presumably the smaller airlines that also receive subsidies would also be able to avoid layoffs, though like you say, Southwest already declared it will have no layoffs.
Annualizing the cost per job saved really doesn’t make much sense- that almost assumes a CARE 3 would follow.
But otherwise, yeah, spending $350K per potential furlowed employee makes no sense. As others have pointed out, airlines have a lot of other costs, so would divert some of this subsidy to cover their other losses, like they did with the original CARE Act. But that’s clearly not the intent of these grants- they are to be used for payroll expenses only, and even exclude executive compensation. Using CARES funding to cover fuel, landing fees or maintenance is wrong.
There are a lot of different ways the airlines can be assisted without handing over any money. Protect landing rights for the airlines so they are not flying almost empty planes. Allow the airlines to shift passengers and cargo to other airlines so that planes are being flown in a cost effective manner. Fuel is the 2nd largest expense (after labor) for an airline so reducing the amount of fuel used would reduce cost significantly. Americans are not allowed into the EU without quarantine, put the same restrictions on EU residents. That will force the EU to open up and possibly get more travelers in the air. If it’s truly going to be 2024 before travel resumes to 2019 levels then putting off the inevitable is just a stupid way of pandering for votes. Unless they plan on putting $50 billion a year into keeping a bunch of lazy people employed. Again, what makes the airline personnel any more important than all of the other workers who have lost their job?