What The Government Wants, In Exchange For Airline Payroll Grants

The aviation bailout portion of the CARES Act totals $78 billion.

  • $25 billion in loans to passenger airlines
  • $4 billion in loans to cargo airlines
  • $17 billion for businesses that are “critical to maintaining national security” (a euphemism for Boeing)
  • $29 billion payroll support grants to passenger and cargo airlines
  • $3 billion payroll support grants for airline contractors

When people talk about $58 billion for the airlines, that includes $29 billion in payroll grants and $29 billion in low interest loans to passenger and cargo airlines. It doesn’t include money for airline contractors or for Boeing.

The airlines want the payroll grants, which they viewed as free money. It could cover their full payrolls through the summer. Without these grants they would lay off a large portion of their staff. But it covers the staff they won’t lay off. And if covers amounts they won’t have to pay people still employed but on voluntary leaves or reduced hours.

The way the law was written the administration doesn’t have to just give away all the money. While the industry and Democratic senators (at the behest of airline unions) have argued that the money shouldn’t come with requirements, the Treasury Secretary reportedly placed a call to airline CEOs laying out the requirements for the $25 billion in payroll grants.

  • 70% of the money will be straight-up given to the airlines
  • 30% will be low interest loans
  • And in exchange the government takes 10% of the value of the loan in warrants, giving the government an option to buy shares later at current stock prices

Any airline taking $100 million or less will receive it free and clear without condition.

However an airline like Delta, American, or United might be looking at (order of magnitude) $5 billion.

  • $3.5 billion free and clear
  • $1.5 billion low interest loan
  • $150 million in warrants, creating an upside for the government if airlines recover

This makes some sense, though is still way too generous to the airlines. They wouldn’t have laid off more than 70% of staff based on public statements about future schedules. So they’re only getting ‘free and clear’ the absolute worst case for layoffs, and this doesn’t even account for payroll savings they accrue from reduced hours. Employees get made whole – even the most expensive employees earning several times as much as those in the country who are hurting and get little to nothing.

An airline could take payroll grants, use the free and clear portion to cover payroll they’d have laid off, and pocket the extra. They could straight-up return the low interest loan funds (there’s another $29 billion in loans they can apply for). And all they give up is 3% of the total in warrants.

Nonetheless they’ll still be negotiating through the weekend. Airline lobbyists will be out in full force, twisting arms among top lawmakers and administration officials, to these terms relaxed further.

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. “though is still way too generous to the airlines”
    So…honestly Gary what’s the answer? I certainly don’t know. I guess the devil is in the details. What do you suggest?
    Most average lay people like my self know the airlines can’t fail. We intuitively grasp that stock buy backs are bad and maybe even dividends are too (which both according to Jerome Powell are a fundamental part of a capitalist free market society) because they take away from a rainy day fund that could be used for times like this.
    Airlines are huge complex entities yet are strictly regulated by various government entities. You have a lot of knowledge….so what do you suggest?

  2. @Dublin intuition over average lay people is no substitute for knowledge. Buybacks and dividends are the main ways in which value is returned to shareholders. Without shareholders being compensated, there is no reason to own stock.

    The payroll grants are primarily a buyout for airline employees and their unions, not the airlines themselves. It really makes no sense to encourage companies to keep employees that they do not need in the short term, nor likely in the intermediate term. Airlines will take the grants for the employees they wouldn’t lay off anyway, and then lay off the rest at their first opportunity.

    The better idea (that dems blocked and continue to block) is to temporarily eliminate payroll taxes for ALL workers, not just those in industries with powerful lobbying arms. Make it easier for companies to keep more employees without all the unintended consequences of massive government intervention.

  3. Okay, I get it airlines are hurting, but why are their employees more worthy than upteen other industries facing massive layoffs. The average employee makes way more than the average worker be laid off. Their pilots earn more than 99% of all employees facing layoffs, The unions negotiated contracts that make it very difficult to lay them off with no ongoing payroll, especially the pilots. But before the taxpayer rides in to bail them out, shouldn’t they face the same kind of constraints as the payroll protection act i.e. no reimbursement for compensation for salary above $100k/year? Shouldn’t shareholders be wiped out or at least massively diluted before taxpayers kick in money? How do you feel about bailing out shale drillers? Longshoreman? Restaurant and Hotel chains? Cruise Lines? and on and on. Why do airlines deserve massive special treatment. Captains in particular are privileged, with high pay relatively low work requirements and generous pensions. Why do they deserve to be insulated? As Gary has pointed out repeatedly, the airline industry won’t disappear even if they all go bankrupt.

  4. Payroll tax cut is a clown show idea. It is incredibly regressive. Sure, go help those with six figure incomes and basically do nothing for low income workers.

    WR2 doesn’t seem to have a clue.

  5. I would not be so concerned about any union angles as I would re the hedge fund whores, who seek to dive into these opportunities like the vultures they are.

    We need to be cognizant to the situation to prevent hedge funds from interposing themselves to scoop up federal funds meant for the employees. We do not want to allow the rape of the taxpayer for the privileged few who are nicely wired in.

  6. The payroll grants and loans are pretty worthless to the airlines. The airlines don’t need people aside from those who handle reservations and those who store and maintain their aircraft. They need to make their loan and lease payments (which they could negotiate to defer) and maintain their terminal presence (which can be negotiated with airports as well). They still have enough cash to do that until they are allowed to fly based on adequate demand when things open up. When they do they should hire people back for fair market wages. There are a big supply of flight attendants and pilots with much less demand going forward for the foreseeable future so paying these people at pre COVID-19 salaries is ridiculous. Firing all these people invalidates all union contracts which have extorted these airlines for years. Flight attendants of the big 3 are the lowest rated in the world and are known to provide poor service. Not much sympathy for them including some 60-70 year old flight attendants.

    Airlines want assistance because the government interfered in the marketplace and ordered shutdown of an economy and curbs on foreign travel and even domestic travel. If individuals were bailout via stimulus checks and extended and upgraded unemployment checks without having to pay it back, so should airlines and their shareholders. Are individuals going to pay back their stimulus bailout checks?

  7. Gary,

    Can you please explain why cargo airlines need to be bailed out? Judging from numerous reports of various airlines running cargo only flights to move time critical items around the world, one would think that demand for air cargo is sky high right now. Why would the US taxpayers need to bail them out when business is good?

  8. @Jackson Aimson – payroll grants (not loans) will still total more than the payroll costs of those who would have been laid off

  9. @WR2 – random Fox factoids is no substitute for knowledge. The main way that companies return value to shareholders is by investing into their business, to grow revenues and profits. As revenue income rises, so does the share price, based on P/E ratios. Both Microsoft and Apple, for example, never paid a dividend or did a stock buyback until their market cap reached hundreds of billions of dollars. Their early shareholders were still *very* happy with their return.

    Traditionally, companies returned excess cash above their IRR via stock dividends to the shareholders. However, due to very low interest rates, and short term investor pressure, many/most companies juiced their P/E ratios by borrowing a lot of money, then using the cash for stock buybacks. American Airlines is a prime example of this (though by no means the only offender). They generated EBITDA in excess of $20B over the last 5 boom years, yet their debt, at $21B is as high as ever. Instead of using funds to pay down their leverage, they used over 100% of free cash flows to buy back shares.

    I agree with Ron- a bailout of cargo freight companies makes absolutely no sense right now. Rates are through the roof, and while their costs for shipping on commercial airlines went up, other costs like fuel and even employee costs should drop.

    It is really unclear what Jackson Aimson is saying- I’d agree with the first point that the airlines neither need nor should their current staff. This is an ideal time to restructure the existing cost structure of US aviation- who cares about an employee strike at this time? Yes, a bunch of highly paid senior pilots, flight attendants and executives would lose their jobs, and I feel sorry for the individuals affected. However, the new people could do a better job at a lower cost- let them go bankrupt and let the chips fall as they may!

  10. I just don’t get why these airlines “can’t fail”. Why not?! These airlines will still lay-off their lowest earning employees, but their most senior And highest paid will stay on both in operations, due to union seniority rules in contracts and in corporate, because they just won the game of bailout grab ass. In fact they’ll get a raise and it’ll be way more than $1200. Open your eyes, Wash away the dead corporate tissue already. If they were to do anything, make new rules to speed up bankruptcy proceedings and allow them to operate while in court.

  11. @George. As a financial analyst, your series of vague generalities about stock valuation are difficult to stomach. I listed a few.
    — “The main way that companies return value to shareholders is by investing into their business.” Investing in the business means nothing unless the stockholders get something back eventually. Therefore, according to basic stock valuation theory, a stock is worth the net present value of all future dividends.
    –“to grow revenues and profits. As revenue income”. Equating revenue with profits shows a basic misunderstanding how companies work. Revenues-Costs=Profits. Companies go bankrupt all the time when costs grow faster than revenues, no matter how fast revenues grow. In addition, companies also go bankrupt when they have high profits, but also high cash burns. Without cash, businesses cannot operate.
    –“share price, based on P/E ratios”. Analysts use P/E ratios as one factor to analyze companies, but P/E ratios do not determine share prices. WTH: Amazon has a P/E ratio of 88.75x and is not exactly valued “based on P/E ratios”.
    –“Traditionally, companies returned excess cash above their IRR via stock dividends to the shareholders.” Unbelievably broad and unsupported statement. Was that written in the “Ferengi Rules Of Acquisition”? [Reference: Star Trek Deep Space Nine.] Note the sarcasm.
    –“using the cash for stock buybacks”. It is a silly tautology that buybacks impact cash: Every income statement and balance sheet item impacts cash, duh.

    While you are trying to rip WR2, maybe it would be wiser not to display your absolute ignorance of company structure, strategy, and stock valuation. Just saying.

  12. @Other Just Saying- I’ve been a CFO for numerous companies, both public and private, over the last 20 years, similar to Gary. You clearly got your “financial analyst” certificate off the back of the comic book you read in your parent’s basement.

    Most operating finance people work using common sense ratios and analyses. Glad any investors who listened to your advice missed out on the tech boom and just about every other major change in economic activity in the last century.

  13. @George. Typical: I guess you never heard of the Efficient Market Hypothesis (EMT) which has been taught in business schools for over 30 years and is accepted standard wisdom.

    If you actually were the CFO for anything, I should say I have met a lot of empty suits in my life.

    Another explanation would be the Peter Principle on Steroids (whereby an employee is promoted based on their success in previous jobs until they reach several levels above which they are no longer competent).

    Finally, remember Klink in Hogan’s Heroes was actually a Colonel, which is a pretty high military rank (similar to CFO). According to the show, Klink helped the Allies win the Second World War. Maybe making George a CFO multiple times is an example of the same phenomena.

  14. …why not add what the Democrats want to sneak into aid. Aid that should go to poor needy people . Instead Pelosi is putting money toward the Kennedy Center (look it up!) and now abortion funding. Yeah..real needy isn’t it? I’ve worked my tush off for 40 years and don’t have a paycheck coming in. The Senate wants to give money to the Kennedy’s and Planned Parenthood!!!

  15. Politics aside. When I consider the amount of money the airlines have raked in with baggage fees and still catching a break on the 9/11 fuel surcharge even though fuel prices have normalized for quite some time it brings into question “What have they been doing with their record profits”? Where are their rainy day operational funds? Obviously they learned nothing from the 9/11 tragedy and ensuing recessions. The Government should require them to forfeit to them all Baggage Fees, Early Boarding Fees, Seat Selection Fees for the next 10 years to repay the loan to at least 75% of it and no more “Fuel Surcharge Fees credits” passed onto the consumer. We, Consumers, did not catch a break when gas prices were exorbitantly high.

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