Analysis

Airlines Wary Of Giving Up Equity For Gov't COVID-19 Funds

By Linda Chiem
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Law360 (April 6, 2020, 11:08 PM EDT) -- U.S. airlines battered by coronavirus-related travel restrictions are banking on federal aid to help cover their employees' pay, but funding that allows the government to demand an ownership stake may put off some companies and prompt them to look elsewhere for vital cash, experts said.

Most major U.S. passenger airlines confirmed Monday that they've applied for grant funding under the federal government's third COVID-19 economic relief package, the Coronavirus Aid, Relief and Economic Security Act, as the pandemic continues to decimate passenger volumes and revenues. The U.S. Treasury had advised air carriers to apply by April 3 to score early approval for funds, but companies still have until April 27 to apply.

Passenger airlines are most eager to get a slice of $25 billion that must be used to pay employees through September under the CARES Act, which also provides $4 billion for cargo airlines and $3 billion for airline contractors to cover payroll. The payroll support comes with a number of conditions, including barring airlines from implementing involuntary layoffs, furloughs or pay reductions for employees before Sept. 30.

Airlines are less enthused about tapping a separate pot of CARES funds: $25 billion in loans and loan guarantees for passenger airlines, repair stations and ticket agents, which come with restrictions on executive pay hikes, stock buybacks and dividends. Airlines tapping into these loans also have to agree to largely maintain their employment levels.

Moreover, Treasury Secretary Steven Mnuchin has wide discretion to determine what's "appropriate" compensation for taxpayers in exchange for airlines receiving the payroll grants, and how much equity the government wants to take in exchange for loans. That means the government could demand stock warrants, preferred stock, debt securities, notes or other financial instruments as a condition of any financial assistance offered under the CARES Act.

"It's not really an outright gift," said Richard Squire, a Fordham University School of Law professor and expert on corporate restructuring. "They're going to have to give some money back, basically give the U.S. Treasury a stake in the business. Now what's interesting about that language is that it doesn't say it has to fully compensate, it says appropriate compensation."

As such, airlines and the Treasury are expected to intensely negotiate over the next several weeks as they weigh the ramifications that even partial government ownership would have on their operations, experts said.

"If [Mnuchin] wants, ultimately, it all back, then this is not a bailout in the sense of a handout," Squire said. "You're bringing the federal government in as an investor and it wants its money back, and that makes it less attractive. They're going to worry about all those details."

Alaska Airlines, Allegiant Air, American Airlines, Delta Air Lines, Hawaiian Airlines, JetBlue Airways, Republic Airways, Southwest Airlines and Spirit Airlines all confirmed to Law360 that they've applied for aid under the CARES Act. United Airlines, which told regulators on Friday that it's losing a staggering $100 million per day, has also applied for grants, according to the Wall Street Journal.

Most of the airlines said they've applied just for the payroll grants and declined to specify the terms and conditions they'd be willing to agree to, saying they're in confidential discussions with the Treasury. Meanwhile, some air cargo carriers, which are also feeling the pinch from a disrupted global supply chain, indicated they are considering their options. Atlas Air said it had no comment, while UPS said Monday that "this remains under evaluation by the company."

FedEx said in a securities filing Friday that it "expect[s] to benefit from certain of the relief provisions of recently enacted and future government programs intended to provide economic relief to U.S. and global businesses in response to the COVID-19 pandemic, including relief from certain excise taxes and payroll tax deferrals." But it did not say whether it intended to apply for aid.

The Treasury has said that airlines will be awarded payroll support in an amount equal to what they paid their employees from April to September last year. So airlines that have boosted their employment ranks since then will have to figure out how to cover the remainder.

If the applications are approved, the government will float payroll for U.S. passenger airlines at least for the next six months and give some pilots, flight attendants, baggage handlers, ramp agents and other workers some semblance of job security.

JetBlue CEO Robin Hayes said in a Friday memo to employees that government aid is not likely to be enough to cover pay and benefits at levels equal to when the airline was flying at full capacity, but that at least the law "keeps paychecks coming and it buys us time."

"Even if we get the payroll support, we still need to raise additional money to pay our other operating expenses," Hayes said. "We will be talking to the government and other lenders in the coming weeks."

Southwest Airlines CEO Gary Kelly said last week that the airline has successfully tapped the debt markets to secure additional cash — helped by the airline's investment-grade balance sheet and $10 billion in unencumbered aircraft as security — to weather the storm. The airline also applied for CARES Act grants on Monday.

"Fundamentally, our goal is to evaluate all possible sources of capital that will help protect our employees and our company's healthy footing," Southwest spokesman Chris Mainz said Monday. "This is an option open to us so it is under consideration. We are grateful for our federal leaders creating the program and for Southwest to be in a position to apply for payroll assistance."

Fordham's Squire said airlines that haven't done so already will seek to borrow from private markets, given all the strings attached to the CARES Act.

The federal loans "are really designed so that the government gets everything back with interest," Squire said. "I would imagine many airlines are looking at that part of the bill and just saying, 'This isn't worth it for us. We can issue bonds to private investors and we'll get better terms than this, and the private investor won't tell us how much we can pay our CEO.'"

Experts said the government's focus on reaping some returns for taxpayer-funded aid should not extend into some sort of partial nationalization of the U.S. airline industry, which they say has flourished over decades of deregulation. The last thing airlines need is the government meddling in or politicizing airline decisions covering prices, routes or services, experts said.

"The requirement that applicants provide the government with an equity stake is probably the most concerning item for most of the industry," said Evelyn D. Sahr, chair of the aviation group at Eckert Seamans Cherin & Mellott LLC. "The concern among many is that allowing the government an equity stake in each applicant along with the act's other restrictions is going to tie the industry's hands in terms of how to best manage itself at a time when it needs flexibility the most."

Pete Sepp, president of the National Taxpayers Union, wrote in a Friday blog post that state-run airlines — which typically receive massive subsidies from their governments to compete with airlines that rely more on consumers and investors to shape their business approaches — could spell further trouble for the nation's finances.

"Washington, D.C., could endanger taxpayers in another, equally destructive way: make the grants so unappealing to airlines that layoffs and bankruptcies are preferable options to staying alive through the current crisis," Sepp warned. "Under either scenario — large federal ownership stakes in private airlines or full federal ownership of airlines as if they were public utilities — taxpayers could be encumbered for years on end."

Compensation for the government will likely take the form of fees and equity, said Ronald Scheinberg, a Vedder Price PC shareholder and member of the firm's global transportation finance team.

"A number of the U.S. airlines are very strong enterprises and may very well have opportunities for funds from the private sector," Scheinberg said. "Giving up sizable equity to the government would, of course, dilute the holdings of existing shareholders."

It remains to be seen whether airlines might follow the lead of American aerospace titan Boeing, whose CEO David Calhoun has said the company would bow out of applying for aid if it meant Boeing giving up equity. A Boeing spokesman declined to comment.

Under the Treasury's most recent guidance, Boeing might be eligible to apply for $17 billion in loans set aside for "businesses critical to maintaining national security," but it's unlikely that the terms will be attractive enough to sway the company.

"They have the luxury of a rather strong balance sheet and are sitting on a lot of cash," Scheinberg said of Boeing. "It will be interesting to see whether the U.S. airlines take a similar view, but they do not have the luxury of the whoppingly big cash position."

--Editing by Aaron Pelc and Michael Watanabe.

For a reprint of this article, please contact reprints@law360.com.

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