The Trump administration and U.S. airlines reached an agreement in principle on Tuesday on a bailout plan to avoid layoffs in a sector that directly employs more than 750,000 people in the U.S.
This agreement comes after days of tough negotiations: American Airlines, Delta Air Lines, United Airlines and Southwest, the country’s four major airlines, had come to the table suspicious, fearing draconian demands from the federal government, including possible nationalization.
The historic $ 2.2 trillion economic recovery plan, promulgated in late March by President Donald Trump, provides $ 25 billion in subsidies to airlines to keep jobs. “Our airlines are now in a better situation and they will get out of this very difficult period in which they have nothing to do,” welcomed President Donald Trump, during his daily press briefing at the White House on the health crisis.
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Aid in exchange for “warrants”
The terms of the deal were not released by the Treasury, which said, “We are anxious to finalize the necessary arrangements and get the funds out as quickly as possible.” According to sources familiar with the matter, the ministry informed the airlines last Friday that they must repay 30% of the money they should receive in the future.
The federal government should also receive “warrants”, which are financial products that can be converted into shares, in exchange for its assistance. These “warrants”, the price of which is generally fixed in advance, should represent 10% of the value of the aid that each company will receive. The state should therefore become a minority shareholder in the dozen signatory airlines.
Financial aid to support employment
The Treasury believes that the agreement “will support American workers and preserve the strategic importance of the airline industry while providing appropriate compensation to taxpayers.”
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“This financial support was necessary to keep the jobs of the 60,000 employees at least until September 30,” said Gary Kelly, CEO of Southwest. His company obtained financial assistance of $ 3.2 billion, of which $ 2.3 billion will be paid directly to him, while the balance is a very low-interest loan to be repaid over ten years. In exchange, Southwest gives 26 million “warrants” to the state without saying what it represents in terms of equity participation. The company also undertook not to lay off and reduce the remuneration of its employees until September 30.
Commitments also made by others, including American Airlines, which will receive $ 5.8 billion. The companies also promise to limit executive compensation until March 2022 and not to pay a dividend or buy back their own shares until September 2021.
55% drop in revenue compared to 2019
The pandemic is the most serious crisis in air transport since the September 11 attacks. It has resulted in the suppression of at least 80% of flights by American companies, massive cancellations of air tickets, postponements and cancellations of aircraft orders. Atlantic connections have been suspended.
The International Air Transport Association (Iata) on Tuesday estimated the airline’s revenue decline in 2020 at $ 314 billion, down 55% from revenue in 2019.
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The agreement reached with the Treasury offers airlines a breath of fresh air, but more will be needed to revive activity. They can also qualify for loans guaranteed up to $ 25 billion made available to them by the federal government. American Airlines announced Tuesday that it will apply for these credits.
Some companies are also considering original solutions, such as selling off “miles” to banks in advance as part of the partnerships that bind them. To attract consumers, financial institutions and credit card issuers offer cards that earn their owner “miles” with each purchase.
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