White House Plan To Bail Out Spirit Airlines Is Illegal

The federal government is close to buying 90% of Spirit Airlines for $500 million. Until now they haven’t even come up with a story about how it’s legal. They’re now floating the Defense Production Act – that Spirit Airlines is necessary to the national defense.

Four days ago I wrote that the most plausible path for the administration to justify this would be the Defense Production Act and two days ago explored this further. Until yesterday morning, as best I can find (Google), this site was the only place mentioning the idea.

CBS has confirmed that this is the current legal plan. (HT: Enilria) This would be used to justify:

• Lending $500 million at some reasonable interest
  
• Becoming the top debtor in Spirit’s bankruptcy priority stack
  
• Securing the loan against Spirit assets (such as they are)
  
• Getting warrants that could covert to own 90% of the company after bankruptcy

The defense rationale is that the Pentagon would use Spirit’s excess capacity for troop transport, military cargo, and other missions. But that’s not even close to enough to match what the statute requires.

• The Defense Production Act allows loans to private businesses to reduce shortfalls of resources essential to national defense, and to create, maintain, expand, protect, or restore domestic industrial base capacity for those materials.

• It requires private financing to be unavailable on reasonable terms, the resource to be essential to national defense, U.S. industry cannot provide the needed capacity timely without the loan, the loan is the most cost-effective/practical/expedient way to meet the need, and there is reasonable assurance of repayment. Loans above $50 million require congressional notification and a 30-day wait unless a national emergency waiver is used.

This is very bad policy. It’s forcing taxpayers to fund an airline that passengers haven’t wanted to pay for. It creates bad incentives for the rest of the industry, who are already lining up for government help (asking for a suspension of the 7.5% excise tax on domestic tickets and the tax that funds air traffic control).

A Spirit bailout drags down Frontier and JetBlue as competitors that are themselves on the brink. Frontier, which isn’t making money, is the other major ultra-low cost carrier. JetBlue and Spirit are the two major carriers at leisure hub Fort Lauderdale, and JetBlue’s founder warns they may go bankrupt this year. And it creates terrible conflicts for the government to both own and regulate the airline.

Leaving that aside, though, there’s no real legal justification for this without an act of Congress. Every past airline bailout has been done with congressional authorization. Even the government’s stake in Intel and other companies in the past year has been done with funds appropriated for at least a related purpose by Congress.

The Defense Production Act requires showing that without Spirit, U.S. industry cannot provide the needed transportation capacity for the military, and that the loan is the most cost-effective and practical way to solve the shortfall. That is simply not reality.

• There is no shortfall in domestic airline capacity and there would not be with a Spirit liquidation. In fact, there is too much capacity currently given high jet fuel prices, and airlines are cutting back their flying plans.

• There’s been no difficulty in the military getting the capacity it needs. The plan to acquire Spirit out of bankrutpcy came first, rather than searching for a solution to a military problem and settling on Spirit as the solution. This is a rationalization, not a real problem.

  The federal government pays airlines for capacity now through the Civil Reserve Air Fleet program. Spirit is not part of that program, and that program is not maxed out.

• Spirit’s planes don’t match military need. They have a fleet of Airbus narrowbodies which are poorly suited for military cargo. Spirit does not have widebody aircraft or freighters.

• The actual policy goals do not meet the statute. Use of the Defense Production Act is pretextual. The President has emphasized avoiding liquidation, preserving jobs, and avoiding a U.S. airline failure and later selling Spirit at a profit. The stated goals have nothing to do with national defense. In fact, the plan to sell Spirit underscores that there’s not a need for the government to own the capacity for defense purposes.

• Likelihood of repayment is not high. That alone makes it illegal. Spirit’s planes and engines are encumbered. All they really have of value is gates and slots at LaGuardia, gates in Fort Lauderdale, and an operating certificate. They literally go out of business – get liquidated – without this injection because there’s no reasonable prospect of stemming the tide of losses.

• Creditors object. 90% warrants dilute creditors. Spirit really has no new assets to pledge for federal funding, so existing creditors would have to accept reduced collateral and lower priority. The government cannot just “jump the line” of priority. So the government either accepts lower priority than they’re talking about or everyone is too afraid of Trump, or the priority stack has to be adjusted (some of the $500 million could go to creditors rather than to fund Spirit, but then Spirit is in a more tenuous position).

• This takes too long even if conditions are met. Spirit needs financing by the end of next week, but the statute requirs a 30-day waiting period unless there’s a true national emergency, not just a standard defense need (and there’s not even a standard defense need).

The administration will tell a story that Spirit is part of the national transportation system. Its failure would degrade aviation labor capacity, emergency transportation resilience, and emergency mobility in a defense emergency.

Nobody believes this. Nobody even has to believe it. It will either (1) take too long to litigate to matter, or (2) a judge might simply give deference to the administration because national defense is invoked. They need to paper it with something, and something that uses the word ‘defense’ is their best option.

And standing is a major issue. Either house of Congress could sue, but both are controlled by the same party as the Executive. Creditors could sue. Frontier or JetBlue might be materially harmed by continuing to subsidize their competitor, but then they’re angering their regulator. So it’s not clear where the challenge comes from. It has to be someone specifically harmed – not a general harm to a taxpayer.

Unfortunately, if this justification passes muster, there’s no meaningful limiting principle. If a Spirit Airlines bailout can be justified on national defense grounds, nearly any government bailout can be – and congressional authorization is no longer necessary. The executive can act unilaterally, even though the constitution clearly rests power of the purse authority in the legislature.