“We have a great plan for the airlines”, Donald Trump said, during the Friday edition of his daily White House press briefings, which double as a venting sessions, both for the president and the media, who get to take turns berating each other.
“Got to keep the airlines going”, he added.
Yes, “got to”. We’ve “got to” bailout the airlines, despite the fact that the largest of them plowed around 95% of their free cash flow into buybacks over the last nine years.
As Bloomberg dryly noted last month in a brief piece on the subject, it’s hard to include American Airlines in the type of visual shown above because over the last decade, its cumulative free cash flow was negative. But that didn’t stop the company from repurchasing in excess of $12 billion of its shares. Those purchases are included in the combined total in the chart.
Trump said he’ll be meeting with executives this weekend to discuss the administration’s “great plan”. Boeing will be there. “We can’t let anything happen to Boeing”, Trump insisted.
The industry was hit with an across-the-board downgrade from Fitch on Friday. As part of that action, Delta was cut to junk. Fitch’s “junking” of the carrier follows a move by S&P late last month. Here’s the flavor of the industry review:
Fitch believes the pandemic will undo some of the credit improvement seen over the past decade at North American airlines. Most airlines will exit the worst of the crisis with higher debt levels and lower liquidity, leaving the sector more exposed to additional exogenous shocks.
The depth of the decline in traffic related to the pandemic is causing substantial cash outflows for airlines in the near-term. Looking past the worst of the crisis, it has become increasingly likely that the economic impact of the pandemic will cause a much slower than previously anticipated rebound in air traffic.
Delta has seen its capacity at LaGuardia and JFK slashed by 90% and 80%, respectively, this month. CEO Ed Bastian said Thursday that almost 35,000 workers have signed on for a voluntary unpaid leave program that includes enhanced benefits.
Heaven help anyone who came into the year long “JETS”, an ETF that holds virtually everything you wouldn’t have wanted over the past two months, but which will henceforth enjoy what amounts to a government backstop. Now if only the Fed were buying it, you’d have a great investment “thesis”.
Fitch noted that Delta is stronger than some peers, but the color that accompanies the downgrade gives you an idea about the extent to which the industry-wide panic has created a severe liquidity crisis. Here’s Fitch:
Delta has already taken significant actions to raise liquidity as demand has fallen, and Fitch believes that the company will have sufficient liquidity when paired with government grants to manage through the crisis. Actions taken to date include a $2.6 billion secured term loan, a $1 billion EETC transaction to refinance a $1 billion unsecured maturity, a $3 billion draw on existing revolvers. In all, Fitch expects Delta to borrow more than $8 billion during the year, which is essential for near-term liquidity, but will raise leverage by more than a turn over prior expectations when combined with our forecasts for a smaller top line over the next several years.
Note the mention of “government grants”. The industry is set to receive some $25 billion in payroll grants as part of the coronavirus relief bill. On top of that, carriers can access nearly $30 billion in loans.
One concern for smaller carriers (in addition to ensuring that the aid is distributed quickly) revolves around any equity they might be required to fork over should Steve Mnuchin decide he wants to extract something in exchange for the payroll grants. In the simplest possible terms, tiny carriers aren’t publicly traded and generally don’t have any assets. So, it wasn’t entirely clear how they would satisfy any requirement that they give Treasury an equity stake.
Democrats chafed at the notion of equity in exchange for payroll assistance. Financial stakes, some Democratic lawmakers said, should be attached to loans, not programs aimed at keeping Americans on payrolls.
In an acknowledgement of that reality, Mnuchin on Friday night said Treasury won’t ask carriers requesting $100 million or less in payroll grants for any kind of financial stake. Here’s the Treasury to explain:
Treasury has received over 230 applications for payroll support from a wide range of passenger air carriers. After consultation with the Secretary of Transportation and Treasury’s outside financial and legal advisors, Secretary Mnuchin has determined that as a result of benefits to the public–including but not limited to maintaining needed air service, refraining from involuntary furloughs, and limiting share buyback and executive compensation–Treasury will not require passenger air carriers that will receive $100 million of payroll assistance or less to provide financial instruments as appropriate compensation. As such, for passenger air carriers with payroll support payments up to $100 million, funds will be available promptly upon approval of their applications. The majority of these requests seek less than $10 million.
At the same time, Treasury is in consultation with a dozen passenger carriers seeking assistance in excess of $100 million. That won’t come free. Mnuchin said he’ll “secure appropriate financial instruments” from those carriers in order to protect taxpayers.
Apparently, details on what will be required for larger assistance packages will be released “very shortly”, presumably after Trump meets with executives.
In order to calculate the $25 billion in payroll assistance, Treasury and Congress used figures from a six-month time frame over which carriers paid employees some $30 billion.
According to data from the Transportation Security Administration, less than 95,000 people moved through security portals at US airports on Tuesday.
Although air travel ceased altogether in the aftermath of 9/11, the current decline is arguably more disconcerting for the industry, given the likelihood that the drop-off won’t quickly be reversed. Obviously, you can’t defend a flight from a virus the same way you can a hijacking. Sealing off the cockpit is irrelevant and you can’t subdue passengers who accidentally sneeze.
Citing “experts”, Bloomberg on Thursday called the current drop in passengers an event which “hasn’t been seen since the dawn of the jet age in the early 1960s”.
In response to a tweet from a high-profile supporter chiding airlines for requesting bailouts after spending billions on buybacks, Trump had a simple message on Friday:
Not good Gregg, but it is what it is. Have to save the airlines! https://t.co/AeaiLCO9pg
— Donald J. Trump (@realDonaldTrump) April 10, 2020
“It is what it is”, indeed.
And when it comes to the big carriers, there’s a strong argument to be made that “what it is” is just another example of privatizing profits and socializing losses.
So, turns out that many of America’s “finest corporations” are basically that neighbor of yours down at the end of the cul-de-sac. He’s got the bigger model house, several cars, an RV, upgraded landscaping, and takes 6 luxury vacations a year.
Then, 2 weeks after losing his job, goes straight to BK without a penny to his name.
“World Class Corporations” … gimme a break … maybe save a few shekels in the piggy bank every now and then. Rainy days do happen.
Spot on!
The airlines should pay back every cent of government bailout money, not just 30%. Then they should be required to build up a retained reserves to fund their own bailout the next time they need one (seems to be a need about once every 20 years). If this means higher airfares, then so be it.
This is political not economics. American or another should fold. Cattle car for cruise ships and destination weddings.
If one or more went bankrupt and it became explainable to public….very bad. Should also egg on the enviro crowd. Floridian cabbies already think AOC is trying to personally put them out of bussiness.
This should be about economics but it is an election year.
No real point in Pontificating about Morality in an immoral society…The system that created this mess did it because it knew it could and would resolve itself the way we are seeing it done……….