Airlines Business & Finance

Will the Bailout of US Airlines Learn from the Past?

While the airline industry awaits the terms of a government bailout needed to survive the COVID-19 pandemic, 21st-century history offers some clues to the strings that might be attached.

Carriers previously requested help from Washington when business plummeted after the Sept. 11, 2001, terrorist attacks in which hijacked airliners were flown into buildings, killing everyone aboard.

Traffic took nearly three years to recover after sliding 43 percent, and the George W. Bush administration offered a package of assistance including loan guarantees in the interim.

How long a rebound might take for U.S. carriers today is impossible to tell. The value of the NYSE Arca Airline Index has plunged 57 percent to $48.6 billion since COVID-19 was first reported in the U.S. on Jan. 21, with the pandemic forcing more than 316 million Americans to observe “stay-at-home” orders and bringing air traffic to a standstill.

The number of passenger screenings conducted by the Transportation Security Administration on April 8 — a gauge of demand — plunged 96 percent year-over-year to 94,931, according to Airlines for America, the industry’s major trade group. Last year, more than 2.2 million passengers were screened on the same day.

“The airline business has been hit very hard as everybody knows,” President Trump said at a news conference on Thursday evening. “We are going to be in a position to do a lot to help them so that they keep their employees and they save their businesses.”

The $2.3 trillion CARES Act sets aside $25 billion in cash grants for U.S. airlines, and about 90 percent of that money is expected to go to the nation’s six largest airlines – American Airlines, United Airlines, Delta Air Lines, JetBlue Airways, and Southwest, according to a Reuters report that cited people familiar with the matter. About 275 companies have applied for the aid.

Airlines are also eligible for $25 billion in loans.

The Trump administration has floated the idea of taking equity stakes in the airlines in exchange for bailout cash, and is considering limiting share buybacks and dividends.

Such steps would be in line with conditions the Bush administration imposed on airlines in the Sept. 11 rescue package.

The Air Transportation Safety and System Stabilization Act, which extended loan guarantees of up to $10 billion, placed limitations on employee compensation and severance, among other things.

The measure also created the Air Transportation Stabilization Board, which oversaw loan guarantees and made sure the government received an ownership stake in companies that received aid and that taxpayers participated in equity gains.

In the six months after former President Bush signed the bill into law, the airlines climbed 44 percent, vastly outperforming a 19 percent gain on the S&P 500, wrote Arjun Menon, vice president of U.S. equity strategy at Goldman Sachs.

But the winning streak didn’t last. The industry “reversed all of its outperformance by the end of 12 months,” Menon said. Over the full-year period, the airlines tumbled 20 percent while the broader index fell only 12 percent, according to Menon.

The measure’s net cost for Washington was $2.5 billion.

“The government guaranteed loans totaling $1.6 billion (of the $10 billion authorized) and disbursed $4.8 billion in cash, primarily for direct losses,” Menon wrote. “Fees and stock gains amounted to $2.3 billion, resulting in a net loss of $2.5 billion.”