The Strange Incentive The Treasury Secretary Has To Push Another Airline Bailout

The Secretary of the Treasury has joined calls for another $25 billion to U.S. commercial airlines in exchange for a continued ban on furloughing workers through March 31. He knows that,

  • With just 35,000 employees facing furlough in October this amounts to over $700,000 per job. This is mostly an airline bailout, rather than furlough protection.
  • Airlines have plenty of liquidity, he’s just signed off on subsidized loans to 7 U.S. airlines (Delta and Southwest turned down the money, American could borrow as much as $7.5 billion).
  • Small towns don’t have to lose air service when payroll grants expire, because airlines taking subsidized loans sign onto the Transportation Secretary requiring continued air service (at the Secretary’s discretion).
  • The carriers themselves say demand won’t recover by April 2021, so workers face furlough again.

A ‘clean extension’ of the CARES Act doesn’t even preclude the shenanigans airlines engaged in, requiring workers to take unpaid leaves and reducing hours, in order to keep more of the payroll money for themselves. The Treasury Secretary knows all of this and has endorsed another $25 billion.

Secretary Mnuchin, then, has publicly supported another $25 billion because of this, because it’s mostly money that supports airline shareholders and creditors, and not even money the airlines need to survive.

And that brings up the strange incentive that Mnuchin now faces. He insisted on stock warrants when airlines took their first round of bailouts in the spring. He’s gotten additional warrants for subsidized loans. Now he succeeds when the taxpayers ‘make money’ off the deal he constructed.

Here are the warrants from April:

Airline # of Warrants Exercise Price
AMERICAN AIRLINES 13,703,876 $12.51
DELTA AIR LINES 6,563,753 $24.39
UNITED AIRLINES 4,627,141 $31.50
JETBLUE 2,639,226 $9.50
SOUTHWEST AIRLINES 2,598,724 $36.47
ALASKA AIRLINES 881,480 $31.61
SPIRIT AIRLINES 500,150 $14.08
HAWAIIAN AIRLINES 488,477 $11.82
SKYWEST AIRLINES 357,317 $28.38
ALLEGIANT AIR 25,890 $83.33
FRONTIER AIRLINES 13,016 $241.72
REPUBLIC AIRWAYS 7,662 $415.00

Taxpayers will gain when the share price of these airlines rise, because the government will sell its warrants at a profit (or convert to shares that will sell at a profit).  It will appear that bailouts were a ‘better deal’.

Pumping an additional $25 billion into airlines, most of which covers expenses they’d incur anyway even without a bailout, pumps up the value of airlines, their share prices, and makes Mnuchin look like a hero for the ‘investments he made on behalf of the taxpayer’ (which of course won’t net out the additional $25 billion injection).

When airlines gave the government a stake in their businesses, effectively partial nationalization, they created an incentive for the government to continue bailing them out to protect and grow that very stake.

In 1998 the four major tobacco companies entered into a settlement with 46 states that would pay out $206 billion over 25 years. This transformed states from tobacco company opponents into protectors to ensure their revenue stream. Even new tobacco companies that hadn’t engaged in deceptive behavior the settlement covered were required to pay in, protecting incumbents from competition. Once the government’s fortunes are tied to that of a business, expect both protectionism and cronyism.

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, 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 »

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  1. I dunno about all that. We’re talking about small equity stakes, compared to the perpetuity value of a million people paying taxes every year instead of drawing an unemployment check.

  2. @ Gary — The incentive for everything Munchie does is singular — to get Orange Hitler re-elected. Nancy Pelosi and Chuck Schumer have the upper hand, which is why nothing will get passed. Yeah, the Dems can play dirty, too, and they should because Orange Hitler has left them no choice.

  3. You never gave a damn about the workers Leff…just your frequent flier miles.
    Airlines still getting less than the auto industry did and keeping those salaries going keeps money pumping back in to the economy.
    But then again…no impact to your miles/perks so who cares right?

  4. @Angelo C – that’s simply false.

    The auto bailouts cost ~ $80 billion, the government covered ~ $70 billion. The net cost was ‘only’ $10 billion. The net cost of payroll grants already distributed will be double that. We don’t know what recovery will occur from the subsidized loans.

    In any case why does an auto bailout create an entitlement for the next bailout? If it does that’s an even bigger problem for the economy.

    As for my own feelings in the matter, I have many friends in the industry, including several who have already lost their jobs. It hurts and it’s personal.

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