U.S. Seeks To Strike Balance as Industry Pleads for Bailouts

Varying priorities among U.S lawmakers in Washington, D.C. threatened to delay a stimulus package promised last month by the federal government for airlines and aerospace companies, most notably Boeing and its suppliers. At press time, Congress still hadn’t passed legislation to address the need for financial help due to the effects of the Covid-19 pandemic, as one after another airlines either announced the complete withdrawal of service or severe cuts. Boeing, meanwhile, continued to burn through cash reserves as it watched its stock price decline by some 70 percent.

Much of the debate surrounded a $50 billion stimulus package requested by the country’s airlines, whose liquidity crisis many blamed on the fact that the industry spent most of its cash on stock buybacks last year. Nevertheless, in recognition of the vital role the industry plays in the economy, President Donald Trump pledged to place airlines “number one” in line for government support. He also expressed a desire to support Boeing, which asked for a $60 billion package, part of which would help support its supply chain.

A bill that failed to pass in the Senate contained a $50 billion loan guarantee for U.S. airlines and $8 billion for cargo carriers. However, Senate Democrats complained that after negotiating a bipartisan bill that would have addressed worker job security, wages, and provisions limiting stock buybacks, Republicans ultimately advanced their original bill, which contained virtually none of the provisions Democrats had sought during the sides’ negotiations. Republicans complained that the Democrats wanted provisions calling for new airline carbon caps and grants meant to promote solar energy, arguing those conditions did not relate to the coronavirus crisis.

Prior to the vote, the package of financial relief measures requested by Airlines for America included a $25 billion grant and $25 billion in loan guarantees for Part 121 passenger air carriers and $8 billion for Part 121 cargo carriers—also split between a grant and a loan—to cover the same time period.

“In the short space of two weeks, U.S. airlines have seen their positions of strong financial health deteriorate remarkably rapidly,” said A4A in a statement. “The downturn in demand for commercial air transportation-related to Covid-19 is causing unprecedented harm to the U.S. airline industry. Net bookings for the next few months have been exceeding negative 100 percent as cancellations are rapidly outpacing new bookings (2 to 1 for some carriers), and trending worse each day.”

Finally, A4A called for tax relief in the form of a rebate of all federal excise taxes paid to the Airport and Airway Trust Fund from January 1 through March 31. It has also asked for a temporary repeal of all federal aviation excise taxes for Part 121 carriers imposed on tickets, cargo, and fuel through at least December 31, 2021. The failed Senate bill did include an excise tax “holiday period” to run from March 31 to the end of the year, during which the Internal Revenue Service would not impose transportation or kerosene taxes. 

Calling the situation “much worse than 9/11,” A4A has received liquidity projections from all its passenger-carrying members for mid-year 2020 and year-end 2020, relative to year-end 2019. The group assumed two possible scenarios, one in which access to outside cash remains open throughout 2020 and one in which revenues decline more severely and outside sources of cash become completely unavailable. Under its optimistic scenario, the industry would see a 45 percent drop in liquidity, or $18 billion, for A4A passenger carriers alone in the first six months of the year. By the end of 2020, they will have dropped by 59 percent, or $23 billion, leaving total liquidity of $16 billion.

Under its pessimistic scenario, A4A sees a 67 percent drop in liquidity in the first six months, from $26 billion to $12.8 billion, and a 135 percent drop by the end of the year, leaving a deficit of $14 billion. “In this scenario, all seven A4A passenger carriers run out of money completely sometime between June 30 and the end of the year,” said the group. “Making matters even more urgent, credit card companies would likely begin withholding cash from sales before the carriers actually run out of money, effectively causing carriers to run out of money earlier than June 30…As of the morning of March 16, the pessimistic scenario is looking most likely.”

As of press time Delta Air Lines had announced a systemwide 80-percent reduction in flying, including a 90-percent cut in international available seat miles, while United announced an 85-percent cut in international service and a 42-percent cut in North America; finally, American Airlines said it would slash 75-percent of its international flying and as much as 30 percent of its U.S. service by May. Even JetBlue, which flies mainly domestic service, announced a 40-percent systemwide reduction.

Addressing the possibility of a 30-day domestic travel ban, A4A said such a move would worsen its optimistic scenario by $7 billion and its pessimistic scenario by $10 billion.

“A near-term 30-day domestic ban would result in a massive cash draw because, per DOT rules, even nonrefundable tickets are refundable to the customer, in cash, within seven business days if the service cannot be provided,” said the group. “This would be compounded by a further reduction in cash inflows from sales during April for travel after the ban is lifted since people would be less likely to book during the ban period. Credit markets would also be far less likely to lend.”