The US Treasury department has reached an agreement with the US airlines that will enable the sector to receive billions of dollars of aid to cover payroll costs during the coronavirus pandemic.
The agreement come after push back from the airline sector over the inclusion of equity stakes within the aid package. Despite the sector’s unhappiness over the US government taken ownership positions in the final agreement
Despite these mutterings, according to analysts Cowen the aid was taken up broadly across the sector.
“The approved grant amount was lower than we anticipated on an airline by airline basis, indicating a high participation rate, [in other words] US carriers requested more than $25 billion in total, so each disbursement was scaled down. Each airline was granted ~76% of their payroll based on 2Q19 and 3Q19 actual payroll,” said Cowen.
Participation in the stimulus' payroll support program ultimately gives the government ownership interest in the airlines via warrants. Each airline is set to create warrants representing 10% of the program's loan amount.
“The loan piece (30% of aid) looks to be low interest, 10-year maturity, with prepayment option,” said Cowen.
According to Cowen the total aid taken by US airlines breaks downs as follows; American ($10.5 billion), Delta ($5.4 billion) United ($4.95 billion), Southwest ($3.3 billion, Alaska ($881 million, Jet Blue, ($936 million), Spirit ($335 million)Hawaiian ($289 million), Allegiant ($172 million), SkyWest ($438 million), and Mesa ($76 million)
JPM Morgan’s analysts said they were, “impressed, and concerned”, with the government’s hardline approach, which they expected to continue.
“What was once thought to be free, formulaic, and easy turned out to be drawn out, somewhat expensive, and intense. Frankly, the grant applications themselves implied a far more sophisticated grasp of airline finances, profit streams, and capital structures than we would have expected from a government agency, said JPMorgan.
“For example, asking airlines for granular disclosures on frequent flyer accounting, the type of which analysts and investors have long yearned for, suggests a potentially worrisome level of industry cognizance.
Considering what turned out to be an arduous grant process, this level of sophistication and hardline approach suggests (at least to us) that a difficult path for loan applicants may lay ahead.”
However, American Airlines chief executive Doug Parker warmly welcomed the support from the US government.
“This program would not have come about without the collaborative, bipartisan approach that was undertaken, and we applaud the administration, Secretary Mnuchin, Secretary Chao and congressional leadership for their efforts and vision.
This was echoed by Brad Tilden, Alaska Air Group's chief executive who said, "This aid will bring immediate and sorely needed liquidity to the airline industry and will enable all airlines – including Alaska – to continue serving our customers and to keep our people at work, while we adjust to an extraordinary reduction in demand."