The major US airlines have reached agreement with the US Federal government to receive some $50 billion money initially allocated under the March 2020 CARES Act.
The money comes both in the form of loans and grants. The loans are low interest and to be paid back over a period of ten years starting in October, while the grants give the US Government warrants – options to buy airline stock – if there is a rebound in the stock price at a later date.
In the case of Delta, the $5.4 billion support includes an unsecured ten-year low-interest loan of $1.6 billion, while Delta provides the government with warrants to acquire about 1 per cent of Delta stock at $24.39 per share over five years.
“This is an essential step, but just one of many that will get us through the next several months,” Delta Chief Executive Officer Ed Bastian said in a message to employees. “The funding, along with self-help measures we have taken, will prevent furloughs and pay rate reductions through the end of September, despite the 95 per cent drop we’ve seen in passenger traffic.”
Southwest Airlines said that it would receive more than $3.2 billion, consisting of more than $2.3 billion in direct payroll support and a nearly $1 billion unsecured ten-year term loan (“loan”) with low interest rates and which may be repaid at any time prior to maturity at par.
The airline said that “the loan is expected to include approximately 2.6 million warrants issued to the US Department of Treasury. The programme includes certain conditions, such as: prohibitions against involuntary furloughs and reductions in employee pay rates and benefits through September 30, 2020; the elimination of share repurchases and dividends until September 30, 2021; and limits on executive compensation until March 24, 2022.”
For its part, American Airlines Group Inc. said it would get $5.8 billion in support.
United Airlines said it would receive $5.0 billion with approximately $3.5 billion as a direct grant and approximately $1.5 billion low interest rate loan. In connection with the Payroll Support Program, the airline’s parent company also expects to issue warrants to purchase approximately 4.6 million shares of UAL common stock to the federal government.
According to the lobbying group, Airlines for America, the US airlines are burning through $10 billion to $12 billion a month.
The deal was necessary according to Treasury Secretary Steven Mnuchin, “to support American workers and help preserve the strategic importance of the airline industry while allowing for appropriate compensation to the taxpayers.”
In addition, according to both Delta and American Airlines, tens of thousands of airline staff have voluntarily taken absence of leave, during which they continue to receive benefits.
delta.com, southwest.com, aa.com
To learn more, listen to aviation consultant John Strickland discuss the U.S airline bailouts.