The bailout of U.S. airlines under Presidents Donald Trump and Biden was meant to stave off economic calamity and keep the nation’s aviation system alive through the coronavirus pandemic.
Buoyed by federal aid, planes kept flying as air travel plummeted by more than 90 percent. But after handing airlines tens of billions of dollars in grants, the value of stock deals struck on taxpayers’ behalf is not in Buffett’s league.
Those stock agreements, similar to options, this week are worth about $260 million, or less than 1 percent of the $37 billion the U.S. government gave 10 major passenger airlines last year to help pay their workers, according to a Washington Post analysis of Treasury Department data. Subsequent agreements taxpayers received as airlines got another $13 billion this year are, as of now, useless, although their value would rise if stock prices climb.
There are several ways to calculate what the federal government bought with its billions in pandemic-era aid to airlines. The nation’s aviation system remains intact, supporting jobs in the sector and outside it, while enabling economic growth and freedom of movement across the country.
But nearly two years after the pandemic was declared, questions have emerged about what worked well, and what did not, after one of Washington’s most powerful industries was propped up by a vast U.S. bailout.
“It wasn’t the most carefully crafted deal out there, but in a time-is-of-the-essence sense, it was the deal that could get done,” said aviation analyst Robert Mann. Without the federal money, “there surely would have been bankruptcies, because there simply would have been no revenue coming in. … As with anything, perfection is the enemy of progress.”
Consumer groups have cited major flight disruptions and delays this year in asking whether airlines have held up their end of the bargain with taxpayers. On Wednesday, the chief executives of major airlines will be summoned to Capitol Hill to testify on their performance.
Some carriers have acknowledged planning missteps as passenger counts have grown to near pre-pandemic levels, but argue their companies were resilient against a relentless and unprecedented foe not of their making.
‘Time is running out’
In March 2020, when there were no coronavirus vaccines and air travel was down 80 percent and falling, U.S. airlines warned of an employment apocalypse.
“Time is running out,” wrote the chiefs of the nation’s top carriers to congressional leaders, warning that draconian furloughs were imminent without federal action. Tens of billions of dollars in grants would “ensure that we can save the jobs of our 750,000 airline professionals.”
It was a cry for help at a moment of national vulnerability. Fears of the coronavirus and economic collapse drove bipartisan support for a massive bailout.
But unlike with the multibillion-dollar bailout of General Motors under Presidents George W. Bush and Barack Obama, the federal government did not take a major ownership stake in the airlines.
In early 2020, some called on Congress to demand broad concessions from airlines in exchange for taxpayer money, such as addressing emissions and limiting bag fees. Three days before the appeal from airline CEOs, scholars at the Brookings Institution, a Washington think tank, argued that the bailout should be limited to loans, noting that “a decade of multibillion-dollar profits proves the airlines and shippers can pay back loans.”
Those ideas fell flat. On March 27, 2020, Congress agreed to provide $25 billion in financial assistance to airlines “to preserve aviation jobs and compensate air carrier industry workers” as part of the Coronavirus Aid, Relief, and Economic Security Act, known as the Cares Act. The law gave the Treasury Department discretion to require “appropriate compensation” for the aid. As details were being hashed out, airlines and unions that had pushed for the rescue sought to minimize that compensation.
In the end, 10 major passenger airlines — defined by the Transportation Department as those with more than $1 billion in annual operating revenue — received more than $50 billion in grants as part of the Payroll Support Program (PSP). Airlines, in turn, gave the Treasury Department promissory notes agreeing to pay the government $14 billion years down the road. In addition to that guaranteed money, taxpayers also received millions of stock warrants, which give the government the option to purchase shares of airline stock at a set price.
The money was handed over with no expectation that the government would recoup its investment directly, as lawmakers were content with other benefits it provided.
Airlines sought financial assistance three times, including extensions of the Payroll Support Program in December 2020 and again in March as part of a far-reaching coronavirus aid package backed by Biden.
Under conditions of receiving the money, airlines could not buy back shares of their stock or pay shareholder dividends. They had to limit executive compensation and could not furlough workers involuntarily or reduce pay or benefits. They also generally had to maintain a minimum level of air service along existing routes.
Airlines had also appealed for loans or loan guarantees worth at least $29 billion in the early days of the pandemic. But they took out just a fraction of the loans made available, according to Treasury Department disclosures. The loans also required stock warrants.
The core of the industry’s argument that it needed federal grants came down to saving jobs, but the picture is more complex than it portrayed.
The terms of the bailout stated that airlines could not force out workers. But although taxpayers were providing more than $50 billion — meant to keep employees on the job — their workforce shrank by about 42,000 full-time workers and 14,000 part-time workers as of the end of September, when the Payroll Support Program concluded, according to an analysis of data that airlines provided the Transportation Department.
The voluntary reductions were allowed under the bailout, but they would come back to hit customers as coronavirus vaccines became available and travel began to ramp up.
The first sign of trouble emerged this past summer. American Airlines canceled more than 900 flights in early July to better match its schedule with staffing levels. In August, Spirit Airlines canceled thousands of flights in an episode that cost the company $50 million. In October, thousands of Southwest Airlines passengers were left stranded for days as the carrier scrambled to recover, later admitting that it was short-staffed.
Less than two weeks after executives at American boasted during an earnings call that it had posted the best operational performance in the carrier’s history the previous month, it suffered a meltdown at the end of October.
“I think it’s right for taxpayers and Congress to ask, ‘What did you do with this money?’” said John Breyault, vice president for public policy, telecommunications and fraud at the National Consumers League. “The bailout money was specifically designed so that airlines would not have work shortages. While they didn’t lay off people, they did furlough many employees. There were many early-retirement packages. And now we’re seeing the results of that.”
Added William McGee, the aviation adviser for Consumer Reports, who worked in airline ground and flight operations before becoming a consumer advocate: “That bailout money was specifically designed for airlines not to have worker shortages.”
Southwest’s bumpy ramp-up underscored the consequences of those early staffing decisions that allowed workers to leave voluntarily. The airline has been rushing to hire 5,000 employees by the end of this year, with plans for another 8,000 workers next year.
After its meltdown this fall led to thousands of flight cancellations and cost the airline an estimated $75 million, Southwest chief executive Gary Kelly offered a frank assessment of the carrier’s performance, saying it misjudged what it would take to rebuild the airline.
“Our primary challenge is we just don’t have enough people resources to match up with the effort required to operate flights and serve our customers. The root cause is we just need more people resources, period,” Kelly told analysts. “An assumption that I made was that we were going to call them and say, ‘Okay, it’s time to come back,’ and they were going to show up, and everything’s going to be just like it was. … I personally underestimated that coming into this year.”
Southwest wasn’t alone. In its third-quarter earnings call, Doug Parker, chief executive of American Airlines, said the carrier underestimated the amount of time it would take to retrain pilots, which left it shorthanded, prompting the airline to trim its schedule over the summer.
Drawing scrutiny on Capitol Hill
The pain felt by travelers has drawn attention on Capitol Hill, leading the Senate Commerce Committee — which has oversight of the aviation industry — to schedule a hearing Wednesday with airline officials over their use of bailout money.
In a letter this month to Nicholas E. Calio, chief executive of Airlines for America, which represents the nation’s largest airlines, members of the House Transportation Committee sought details about the airlines’ management of federal bailout money and urged carriers to “take whatever measures are available” to manage staffing issues.
Reps. Peter A. DeFazio (D-Ore.) and Sam Graves (R-Mo.) said in the letter that while many factors might be at play, “travelers don’t care why their flight is delayed. They care just that it’s delayed.”
Calio responded that job losses would have been even greater had it not been for the government support. Airlines had to entice employees to retire early, leave voluntarily or take unpaid leave to remain solvent, Calio said. The government grants allowed airlines to cover only 77 percent of their labor costs, he said, emphasizing that none of the operational issues airlines experienced this year were due to “noncompliance with PSP requirements.”
Consumer advocates have their doubts. While airlines say they followed rules laid out under the Cares Act, Breyault said the industry managed to find ways around some elements, including limits on executive compensation.
United Airlines, for example, disclosed in regulatory filings that it would give cash awards to its top executives if they stayed with the company for three years or until Cares Act restrictions on executive compensation expired. United maintained that the bonuses were necessary to ensure stability. Delta Air Lines also gave bonuses to managers whose pay had been reduced early in the pandemic.
“Following the letter, but not the spirit, of the Cares Act is exactly the problem we’re worried about,” Breyault said.
Even so, union leaders say the Payroll Support Program was a win for workers.
“This is the first time in U.S. history that any kind of relief program was built around keeping people in their jobs,” said Sara Nelson, international president of the Association of Flight Attendants-CWA, which represents nearly 50,000 flight attendants at 17 airlines. “In every other situation, it was, ‘We’ve got to save the company, and if we save the company we save the jobs,’ which from our perspective doesn’t work.”
A ‘healthy return’ hasn’t materialized
As the first airline rescue package was being assembled in Congress in early 2020, Sen. Jack Reed (D-R.I.), a longtime member of the Senate Banking Committee, recalled an effort he spearheaded requiring stock warrants as part of bank bailout legislation in 2008. He said that law returned almost $10 billion in profits to taxpayers as banks bounced back from the depths of the financial crisis.
Airlines didn’t cause the coronavirus crisis, Reed argued, but he said they could have better prepared for a severe drop in business. Taxpayers who aided airlines are entitled to receive a “healthy return,” Reed said early in the pandemic.
“When Warren Buffett makes investments in struggling companies that eventually turnaround, he is lauded as an astute investor and reaps billions in profits,” Reed said in a statement in April 2020. “Similarly, if taxpayer funds are needed, the terms must be fair, and taxpayers should be rewarded for helping struggling companies turnaround.”
Airline stocks are volatile, and some airlines have provided higher estimates for the value of the warrants. Over the past year, the potential value of the government’s warrants from individual airlines has fluctuated by $100 million or more. Uncle Sam has several years to decide when to buy and sell shares under the arrangements, so the current value could rise or fall.
A spokesman for Reed declined to say whether he was satisfied with how his provision has played out.