Matthew Klint asks if American’s plan to drop ‘up to 30 cities’ without CARES Act money is ‘just a ruse’. It’s not, though the timing of leaking the story to Leslie Josephs was clearly designed as a tactic to push for a second government bailout.
- When CARES Act money expires American will no longer be required to serve cities they served prior to the pandemic (that they didn’t get an exemption from the Department of Transportation to drop)
- And they’ll no longer be paying employees whether those employees work or not, the major reason that American had a 25% break even load factor. They already had the planes, and were paying the crew and maintenance teams, so they mostly just had to cover the cost of fuel. Without federal subsidies the marginal cost of operating a flight goes up.
When the CARES Act expires American needs more passengers to justify a flight, and they’re legally permitted to drop cities. So of course they’ll drop some routes.
Pointing out that the airline will reduce service without a bailout though is designed as a scare tactic to get the bailout. Of course the cost of that bailout is absurd.
- This is the most expensive unemployment program in history. For the most part it’s paying people not to work – American says they do not need the employees they plan to furlough because demand for flights is down. But they want the government to pay for people to stay on payroll, and mostly not work.
- They might furlough 30% of staff, but a ‘clean extension’ of CARES Act payroll support covers around 3/4ths of 2019 payroll.
- American’s payroll is much reduced compared to 2019 already, having shed around 30% of management jobs ($500 million a year in payroll) and because the people they’ll lay off effective October 1 have the lowest seniority, costing the airline less than the employees they’ll retain.
- This means the airline is pocketing somewhere between 50% to two-thirds of any clean extension of CARES Act, using it to pay people they’d be paying anyway without a bail out.
Doug Parker testifying on the need for subsidies to the US airline industry in 2001
The CEO of Southwest Airlines was reluctant to ask for the money because they aren’t laying anyone off anyway but was pressured to do it by his pilots. American’s CEO Doug Parker originally said his airline wouldn’t ask for the money because they’ll survive without it.
However there’s huge bipartisan support to avoid the loss of tens of thousands of jobs a month before the election, though that hardly moves the needle in the unemployment rate during the current recession.
Of course American Airlines has been meeting with legislators and working the phones. A ‘clean extension’ of the CARES Act means another $5.8 billion for American, a lot more money than they’d save with furloughs, and then we’ll be back to laying off employees again April 1 when it’s no longer election season.