U.S. Airlines About To Become Part Government-Owned

As part of the airline bailout expected to pass Congress and signed by the President, the government will take stakes in the airlines.

  • Republicans pushed back against straight-up grants, preferring to offer loans
  • As a compromise, the government will take a position in the airlines that get bailed out.

One option available to the Treasury secretary is a “warrant that converts into equity.” I imagine this would be non-voting preferred shares. As bad an idea as a bailout is, and as unnecessary, a position where the government is poised to get its money back (and a potential return) is superior to just printing money and handing it over to airline bosses – provided that the stakes are non-voting, and government oversight of airline businesses are kept to a minimum.

In an earlier Democratic aid proposal, airlines would be required to operate certain (money-losing) routes that Members of Congress wished to see. Airlines would have also been asked to divest themsevles more quickly of older aircraft as an environmental measure. An airline like Delta, then, might be in a position to need to order more planes.

Put another way (1) creating a mechanism for the money provided to airlines to be paid back is better than not, however (2) it’s important for politicians not to meddle in the industry, forcing airlines to make decisions to please legislative constituencies rather than customers. Even where the government is a non-voting owner, there will be substantial oversight of the government’s investment and politicizing the industry becomes unavoidable.

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 »

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  1. The federal investment in banks didn’t have the government meddle in overdraft and other “unpopular” fees charged by the banks.

    A chance for the government to earn back its investment is warranted, as you say; it’s much better than a grant.

  2. @ Gary — Wait, I though that this was Socialism? I guess that, and deficit spending, is OK when the hypocritical, lying Republicans are in power? If this was Obama, God help us all…

  3. Do the airlines have customer’s interest at the fore right now? I think it goes shareholders, then customers for the US 3 (Southwest and Alaska still have some great customer-centric policies). If I had to pick between shareholder interest (market value and profit) vs. politicians, I might lean towards the politicians. Maybe.

  4. It’s not perfect but it’s fine. Really what we need to do after this is all over is just be honest that every time there is an exogenous shock like this it seems to be airlines and banks are always hardest hit. In the end, these government bailouts are essentially business interruption insurance, without all of the cute ways of wiggling out of paying that an insurance company could come up with. So if government just has to be the one providing this insurance, it should charge for it. $60 billion is what they needed this time around so charge the industry $6 billion a year in taxes as essentially an insurance premium. Like if you were to buy cancel for any reason trip insurance, an insurance company would charge about 10% of your trip as the premium.

  5. Yes, running a budget deficit and bigger government and expansive (socialist) stimulus is bad and evil and the purview of the Dems – except when the Republicans do it, and then it it is of course brilliant and they throw all their beliefs out the window

  6. @Gary, agree with your main point about loans being preferred to grants. However, I don’t think the following statement “provided that the stakes are non-voting, and government oversight of airline businesses are kept to a minimum” is backed up. If you claim the companies are currently mis-managed, shouldn’t any new investor (USA government being one) demand changes?

  7. So the US carriers will end up being like the Middle East carriers they so complaint about?

  8. They are not government owned by any case. Stop this non-sense about government owned, we are not a socialist culture or about to become one (notice how well it worked for Bernie). If that was the case ALL small business would be government owned too. This is not the same as GM shares being given to the US government during the Great Recession. These are forgivable loans, no payback and no stock if you decide to take them and if you abide by the loan governance.

    Let’s be real here, government run airlines are always a mess and the US knows this as well. We will not fall into the same mistake that the EU is about to make.

  9. They’re only gov owned if they accept the cash, right?

    Republicans decrying the welfare state:

    Real principled take.

  10. “It’s important for politicians not to meddle in the industry, forcing airlines to make decisions to please legislative constituencies rather than customers.”

    Gary, when has the above NOT happened? It’s called lobbying, and the airline industry reeks of it. The constituencies are usually just the lobbyists and the donors, rather than the voters and (most of) the shareholders.

    If we’re going to provide them with liquidity – again – we have the right to equity. Just like VC’s, private equity, and banks. And it makes perfect sense within your free market ethos, Gary. It’s called capitalism.

  11. Did the government make money when the did the same with the auto industry during the financial crisis?

  12. Gary quoted someone: “warrant that converts into equity”. To me, that means that the warrants would have zero value, unless the airline stocks rises above the strike price. Then the Federal Government could exercise those warrants, receive stock from the airline, and then sell them into the marketplace; thereby earning a profit. Hopefully, the Federal Government would trickle the shares into the marketplace, to keep from driving the share price into the ground.

    Now preferred shares are different instruments altogether. For example, 10% preferred shares would be valued based on its yield (10%) and the fact that it was at the bottom of the priority of lien. So, suppose hypothetically the airline had a Baa3 unsecured (lowest investment grade rating) from Moody’s. A secured loan might be considered to have a Baa2 rating one notch higher due to its priority of lien. A subordinated debt instrument might be seen to be a Ba1 or Ba2, below investment grade, due to priority of lien. Since the preferred shares are behind subordinated debt in the priority of lien, it might have an implied rating of Ba3, well into junk.

    Personally, I prefer that the Federal Government issue loans rather than warrants to convert into another financial instrument.

  13. Senior debt is far preferable to preferred shares or warrants.
    In re: US govt loses $2 bill on CIT preferred shares in TARP, but the bondholders made a profit,

    BTW if you think Carnival will be solvent for 7 mos, you can get 20% on your money in senior debt

  14. Incredible. I intend to remind the airline employees I interact with that they now work for ME because I OWN them!

  15. Let them fail. The planes will still be here and for once someone could pick up the pieces and learn how to run a proper aviation business.
    By the way, wouldn’t it be great if political parties were banned! No Dems, Repubs, Blue, Red, blah, blah, blah. Politicians – and those that vote for them – would be forced to think for themselves for a change. Although thinking for oneself seems to be a lost art. Requires too much mental effort for most people.

  16. Another sad day for a nation careening towards the abyss and their only solution is “step on the gas”. “Never let a good crisis go to waste.” (Especially when it’s a hoax)

  17. Will uppity (but incompetent) Boeing also be forced to give up equity – which they say they will not accept in favor of other options “of which they have many”?

  18. @James N – CV cases passed 500K globally…75K in the US now, probably 100K by the end of the weekend. Rate of death daily is also increasing. That all just a “hoax” to you? Seen any coverage out of the NYC hospitals this week BTW?

  19. This is the way Buffet does business though he gets better terms. Loan money that can be converted to equity to provide upside.
    It would be nice if the DOT used it’s influence to implement minimum customer service requirements (e.g seat width & pitch, prompt refunds for cancelled flights, etc.) but I don’t see that happening with this administration.

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