Are Government Loans Taken By American, United Illegal?

American Airlines pledged the AAdvantage program as collateral against a $5.5 billion government subsidized CARES Act loan, and has the option to grow that to $7.5 billion. Several other airlines, including United, obtained CARES Act loans as well. (Delta and Southwest declined the funds which come with significant strings including a prohibition on dividends and buybacks until a year after the loans are paid back.)

When airlines took payroll support funds they were restricted from reducing the rate of pay for employees, and from furloughing employees. They found loopholes that allowed them to reduce hours in order to reduce pay, and to require workers to take unpaid vacations. That way payroll support covered even more spending that the airlines would have incurred anyway, rather than employees they might have let go, turning it into a subsidy for shareholders and creditors.

The subsidized loans, though, contain employment rules as well. However, like payroll support, those rules expired September 30, 2020. Airlines took the money right as those rules were ending, meaning that taking billions in subsidized loans didn’t incur new or extended restrictions.

However furlough limitations weren’t the same between payroll support funds and subsidized loans. According to Treasury guidance, airlines accepting these loans can “not reduce its employment levels by more than 10 percent from the levels on” March 24, 2020.

The specific language of CARES Act Section 4003 (c)(2)(g):

[The loan] agreement provides that, until September 30, 2020, the eligible business shall maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce its employment levels by more than 10 percent from the levels on such date.

This isn’t a ‘no furloughs’ rule, it’s an ’employment levels’ rule. And both American and United (and some other carriers) did reduce their employment levels by more than double the allowed levels prior to September 30, while still obtaining subsidized loans. They should not have been eligible for these loans and it would seem that the Department of Treasury may have acted improperly to the extend they waived this requirement.

Of course, airlines and the government have lawyers who will no doubt explain why they did not have to abide by the language of the statute in their handling of loans provided for by the statute. That’s hardly out of character for assertions of executive authority in 2020.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

More articles by Gary Leff »

Comments

  1. @Gary, since the AAdvantage program was used as collateral would that prevent AA from changing the program while it serves as collateral? Changes while it serves as collateral could decrease the value of the program.

  2. It does not matter if they get concessions from employees, this time next year every US airline will be in Chapter 11.

Leave a Reply

Your email address will not be published.