Reports that Congress has reached a deal on a $2 trillion stimulus bill that would include $25 billion in grants to help airlines pay their workers should mitigate the unprecedented prospect of canceling nearly all passenger flights, a last-ditch measure floated by industry representatives as recently as this week.
The apparent compromise between lawmakers came after a report in The Wall Street Journal, citing unnamed airline and government officials, which said a suspension of virtually all domestic passenger flights for an unspecified period of time was under consideration, as the U.S. economy reels under the strain of trying to stem the spread of the coronavirus pandemic.
The airline industry had been seeking $29 billion in “payroll protection” grants and $29 billion in loans and loan guarantees, according to a letter submitted to Congressional leaders over the weekend by Airlines for America in which the trade group warned, “Time is running out.”
“On one hand, demand is way down,” said airline industry consultant Robert W. Mann, pointing to TSA data that showed an 80 percent drop in passenger traffic from a year ago.
But Mann was skeptical that the prospect of shutting down the nation’s aviation industry was little more than a bluff. “I don't think they were in a position that would allow them to hold the economy hostage, and I think they overplayed their hand there,” he said. Even if flights were grounded, pilot training and aircraft maintenance schedules, along with collective bargaining agreements, would cut into the amount of money carriers could save, Mann said.
“I think they need to watch the dire nature of the rhetoric. They’re not the only industry that’s having trouble in this,” said George Hamlin, president of Hamlin Transportation Consulting. “Much of it is optics, and unfortunately, the optics are not in the airlines’ favor at the moment,” he said.
Airlines also are facing plenty of competition for federal dollars, Hamlin added. “Everybody’s got their hand out.”
In the face of sharply reduced demand, domestic carriers already slashed flights by around 40 percent, by some estimates, although reports of fliers traveling on nearly-empty planes abound. Within the last two weeks, the major domestic carriers made announcements and filed notifications with regulators that they are securing new loans and tapping lines of credit in response to the sharp falloff in air travel, but Peter McNally, global energy sector lead at investment and research firm Third Bridge, said these measures might not be enough to compensate for a cash flow that has slowed to a trickle.
“If you do the numbers, Delta quoted that they've cut $4 billion in second quarter expenses, but revenues are down $2 billion in March. You’re going to run out of liquidity at some point,” he said.
“We now face legitimate liquidity concerns and questions about our ability to meet ongoing debt obligations,” a March 19 Airlines for America letter to lawmakers warned. “This crisis hit a previously robust, healthy industry at lightning speed, and the government response needs to be just as swift, in order to save it.”
In hindsight, allowing this kind of debt to accrue in the first place probably wasn’t a great idea, Hamlin said. “Three of the big four have considerable debt. During the era of share buybacks, why wasn't some of that paid down?” he said.
Depending on how particular debts are structured, Hamlin added, carriers could find themselves facing a cash crunch. “If debt payments are due, that’s going to be a huge hurdle. When executive bonuses were being enhanced by share buybacks, maybe some of that could have gone to pay down that debt,” he said.
In its March 21 letter, Airlines for America said that if it was granted the $29 billion it sought in loans, it would limit executive compensation and stop both stock buybacks and dividend issuance for the life of the loans.
“There's been some pretty egregious behavior in those areas,” Mann said. “Those buybacks don't look like such a great capital allocation strategy at the moment.”
Many people — including Congressional Democrats — have voiced similar thoughts, pointing out that 96 percent of airlines’ free cash flow has been funneled into share buybacks over the past decade.
Progressive lawmakers such as Senators Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., had urged adopting restrictions around airline bailouts to ensure that executives who get federal support don’t use those taxpayer dollars to enrich themselves or shareholders through buybacks, increasing compensation or cutting costs by laying off workers.
Airlines get a little bit of fiscal breathing room from the slump in fuel prices and the Boeing 737 Max grounding that has prevented many from taking delivery of (and paying for) the new planes they had on order, but the industry’s fixed overhead costs are so high that even these circumstances won’t offer a reprieve for very long.
“The cash burn rate at these fuel prices and with the amount of flying they’re actually doing is probably on the order of $8 billion a month for passenger flights,” Mann said. This gives most airlines an eight- to 10-week window before they run out of money.
Since tickets are often booked months in advance, those service obligations weigh on airline balance sheets, Mann said. “It’s all well and good as long as people continue to buy tickets. If the advance purchase revenue stream is interrupted, if that stops all of a sudden, all that negative working capital rears its ugly head and you have a cash crisis.”