I believe a second round of airline bailouts is a bad idea. However most of the arguments I’ve seen making the case for one have been disingenuous, airline executives claiming the money is ‘really just for the workers’ when the airlines and their shareholders were a large beneficiary of the first round and will be an even greater beneficiary of the second.
There’s one piece from former Spirit Airlines CEO Ben Baldanza that came close to making the honest case that airlines are the ones benefiting from continued subsidies, and that this is a good thing for the economy overall. Although when challenged even he retreated to ‘we’re just helping the workers’.
So let me at least lay out what seems to be the strongest argument against my position, and make the case for a second airline bailout through extension of the CARES Act Payroll Support Program. It comes down to a bet that we’ll be past the virus in April 2021, that airlines won’t invest enough in their businesses to be ready to grow in the meantime, and that the country benefits most from having airline capacity.
- When the CARES Act Payroll Support Program was passed, the government provided a majority of payroll to U.S. airlines for six months. The belief at the time, which seems naive now, was that consumer demand would return within six months and airlines would be ready to meet that demand.
- But there’s a real chance that the world could be returning to normal six months from now. Nevermind that IATA says it’ll be 2024 before airline demand recovers, and aircraft retirements mean U.S. airlines will be smaller next summer no matter what happens with the virus. If a round of subsidies made sense on the basis of being ready for the world to return to normal at the end of March, we have an even more well-informed reason to believe a six month time horizon makes sense this time.
- Patient outcomes are vastly improved since March, with modest advances from drugs like remdesivir and dexamethasone, placing patients on their stomachs, and simply understanding the course of the virus. Soon we’ll have monoclonal antibodies, additional antivirals, and even vaccines on an emergency use basis. Together with the number of people who have already had the virus, and that most people don’t get reinfected quickly, along with continued mask wearing we could certainly back to a semblance of normal life in spring 2021.
- The travel and tourism industry has been among the hardest hit by the virus and economic contraction. In order for businesses to recover, tourists have to be able to travel. Businesses need to be able to visit clients and their employees have to be able to travel to their own factories. Target needs to be able to send managers to everywhere in the country they have a store. The airline industry is crucial for that.
- While airlines are keeping more pilots on payroll now than they need, because it takes so long to re-train and keep pilots current, they can’t afford to keep everyone on payroll for a snap back. Many of the people they’re furloughing are going to move on to other jobs. And the furlough recall processs is a lengthy one that requires time for employees to choose whether or not to come back and potentially even to move from one city to another where the jobs are offered to them. If we can get the economy back at full capacity even one week sooner then airline subsidies are cheap.
- It’s true that airlines have been able to access private capital markets and will survive on their own, and it’s true that payroll grants cover more than just the employees who are being laid off. But that extra money to the airlines is the price of keeping them viable. They have too much debt as it is, and that debt service is crushing. They can’t buy more planes, supporting jobs in the aircraft industry, without stronger balance sheets. And we need well-capitalized airlines to expand to meet the needs of a growing-again economy, given how capital-intensive airlines are.
You may not like subsidizing airlines, their shareholders, or creditors but we do it all the time. The entire financial services industry runs on government money with losses backstopped by Treasury and the Fed. It makes no sense to pretend that the airline industry is more of a free market business. Indeed, the industry has been propped up by the government since their biggest customer in the 1920s became the Postal Service.
Does this take pass the Ideological Turning Test? Do you find it persuasive?
“It comes down to a bet that we’ll be past the virus in April 2021”
This is something that I can’t move past. What I don’t believe is addressed here is that the way we ‘work’ is being reimagined. Speaking specifically for my industry, which is a component of tech, companies are coming to realization that they will never be able to get back to a point where they mandate employees to work on-location, let alone engage in business travel, due to the fact that many of these companies went remote and still met expectations or outperformed 2019. The airline industry will not ‘return’ in April 2021 because it fundamentally will be different at that time regardless of what happens with the virus.
The argument against another bailout is that airlines need to be planning for that now. They can’t be held up in their current form because the current form will not be sustainable long-term. The virus has caused a permanent shift in my opinion. You can choose to re-org today, or dump a bunch of money into the industry and re-org tomorrow. In any event, it is coming.
Zoom and other video conferencing platforms such as Webex will no more change business travel than the telephone, email, or the internet did.
Look back in history – when has any remote work trend decreased the need for travel on an overall basis? If anything, you would think high speed internet becoming commonplace would’ve made the biggest dent – yet all the combined above did (phone, email, internet, video chat) was actually increase the need for travel as businesses started to connect not on a local or regional level but national and international.
The airlines fleeced the business traveler however, and the 10% of business fares representing 40% of revenue is gone. And it should be, as change fees and same day standby travel fees were ridiculous in this sort of industry. There will be large service and labor cuts due to the industry aligning more towards the SWA model – maybe the network carriers close down or downsize their lounges for instance. Service to small airports on RJs subsidized by business fares will be severely curtailed. Hopefully a more simplified model comes about. But, airports are going to lose service and frequency.
As for the industry as a whole – a major airlines worth of seats has already been taken out of the system permanently with the retiring of a large number of aircraft from the network carriers. The labor portion will get purged as well. Now, what will AA do with their $1b corporate HQ build?
Lets just look at it more simply. There will be no vaccine that is 90%+ effective out before next year. Then everyone needs to be given a dose, AND people need to know that they have been vaccinated and it worked. That isn’t happening by April. I think if we are LUCKY, we start to see a normal Thanksgiving of 2021. People will start to wander back into travel earlier, but to think things will be 100% normal by April is just not rational. Without getting too political, there isn’t a chance that I would take a vaccine that is ‘magically’ pushed out right before election day in the US right now. We also need to see all the restrictions lifted, which is just paperwork, but will probably take a good month or so to get done.
Historically, the U.S.P.ost Office operated Railroad Post Offices on passenger trains to pick- up, drop-off, and sort mail en route.
In 1967, the federal government closed the RPOs and mail storage cars, shifting that work to the airlines and trucks. As a result of losing that critical subsidy, railroads sought to discontinue their passenger trains to the extent of requiring the federal government to create and fund Amtrak.
Federal subsidies indeed have picked winners and losers by unleveling the playing field.
@Ricky
@Mark E,
It’s amazing what a knowledge of history will provide.
Remember when flying was actually enjoyable and easy? When you were served a meal in economy? When no one wore flip-flops or tank-tops or put bare feet on the bulkhead when flying? When fares and routes were predictable and pricing didn’t change by the hour?
You don’t? Well I do: because that’s the way it was before the Airline Deregulation Act.
The fact is that no transportation infrastructure pays for itself. Be it the roads and highways, the railroads and the airline industry. Even though all that infrastructure is critical to a thriving capitalistic democracy. They are all (and need to be) subsidized the the Feds. That said, the air carriers need a whole lot more regulation to keep them from picking all our pockets.
“Zoom and other video conferencing platforms such as Webex will no more change business travel than the telephone, email, or the internet did.”
@Ricky, I’m not sure if this was directed to my post, but I’m not suggesting that technology will change business travel. Zoom and Webex have been in existence for years. I am saying mentatlity will change business travel. The mentality was that a remote meeting could never replace that of being in-person, and that prevailing thought never pushed companies to adopt the technology you mentioned. Now that it was a forced adoption, I think we see that thought process degrade. What we see bearing out in tech is that it simply isn’t true that in-person meetings are always necessary.
I’m not a fan or proponent of any additional “free government money” for the airline industry. But I do understand that politics play a large portion of the decision here, and due to a presidential election just 2 months away, politics will play an even larger role in Subsidy Part II.
That said, I may be convinced to support additional “government money” to the airlines, as long as it is not free money. Instead of simply giving a few million/billion dollars of the taxpayer’s money to airlines to keep them viable for another 6-9 months, let’s just categorize that money as pre-paid ticket fares. Kind of a cash loan that is not repaid in cash, but in services.
This means that in the future, when Federal employees need to fly somewhere on official business, the cost of the ticket is deducted from what the Federal Government advanced an airline. And to ensure that airlines don’t gimmick this program (they would not do that, would they?), the redemption price of a ticket will be capped at not more than 110% of an airlines current, most prevalent fare actually sold/purchased for the route that is to be ticketed. So, no jacking up fares just to pay back the Feds a whole lot sooner.
Seems like a fair trade-off to me. But I’m not a politician that gets to write the Law.
No bailout unless shareholders are wiped out or at least converted to junior debt holders
@Andre. Agreed. I work for a company of 120,000+ people. We’ve virtualised all our conferences this year, and I believe that’s going to be the plan going forward. Some of these conferences are attended by 20,000+ people. That’s a lot of flights that we’ve avoided. Apple successfully virtualised WWDC this year too. That’s another 6,000 potential flights not taken
What it’s also done is allowed many, many more people to attend these conferences, and that’s been noticed
There’s already a change in mentality. Anyone remember MySpace?