Were the airline bailouts really needed?
By Andrew Ross Sorkin
A year ago this week, Doug Parker, the chief executive of American Airlines, flew to Washington to begin what became a yearlong lobbying campaign for a series of taxpayer-funded bailouts during the pandemic.
He wasn’t alone. The campaign also included leaders from Alaska Airlines, Allegiant Air, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways, United Airlines, SkyWest Airlines and Southwest Airlines — all with their hands extended. The flight attendant and pilot unions were also part of the lobbying.
A year later, as the stock market cruises to new heights, questions should be asked about the $50 billion in grants that were used to prop up the airline industry. Was it worth it? And was it necessary?
The good news is that the rescue money likely saved as many as 75,000 jobs, most remaining at full pay. And that money also kept the airlines from filing for bankruptcy, and in a position to ferry passengers all over the country to jump start economic growth as the health crisis subsides.
The bad news is that it is also likely that taxpayers massively overpaid: The original grant of $25 billion in April meant that each of the 75,000 jobs saved cost the equivalent of more than $300,000. And with each additional round of bailout money, that price has grown.
The truth is that shareholders of the airlines have been the biggest beneficiaries. That includes airline executives, many of whom have been paid in stock for years and stood to lose millions of dollars if their holdings were wiped out. Airline chiefs collected tens of millions per year in compensation before the pandemic, in part by boosting their companies’ share prices by regularly buying back tens of billions in shares. That meant setting aside less money for a rainy day — or, in this case, a pandemic.
But here we are: Shares of United traded below $20 in May; today they are above $60. The patterns are similar for the other major carriers.
Airline stocks — lifted by taxpayers — are up nearly 200% from their pandemic trough and have almost recovered their losses.
It is fair to say that we socialized the airline industry’s losses and largely privatized the gains.
No other industry affected by the pandemic received more from the government. There was no special program for hotels or restaurants or travel agencies. Companies in those industries had to line up for the small business-focused Paycheck Protection Program and pray. The largest loan the program could make was $10 million.
The question isn’t whether airline employees should have been helped, it’s whether airline shareholders should have been. The airline bailouts weren’t simply a job-protection program, as advertised. In case you’re not convinced, there’s this: United invested $20 million into an electric helicopter company last month that went public through a special purpose acquisition company, or SPAC. Does that sound like a company that is in such dire straits that it requires a taxpayer-funded bailout? It received a third rescue payment after it made the investment.
With the stock market now soaring, it is worth considering whether the airlines needed taxpayer money at all. Private investors seem to be willing to throw money at everything these days, from celebrity-backed blank-check companies with no profits to troubled video game retailers, Bitcoin and digital art. Why not airlines?
Even during the depths of the pandemic, in April last year, Carnival Cruise Line managed to raise $4 billion in debt from private investors, just as the airlines were still negotiating their first rescue deal with the government. That said, Carnival had to pay dearly for the money, with an interest rate of around 12%.
Airline chiefs and labor union bosses convinced Congress that the industry was different — and more indispensable. They made the case that if airlines were to fall into bankruptcy, there would be no planes ready to help revive the economy when the time came. They argued that pilots couldn’t be laid off and quickly rehired, since they need to be in flight regularly or training on simulators to be certified to fly.
Would airlines have stopped flying in bankruptcy? Nope. In previous airline bankruptcies — and there have been dozens — the companies kept operating. The government could have provided financing under that scenario, similar to the way it did when it rescued General Motors in 2009, taking a major equity stake in the company so that taxpayers could share in the upside when it recovered.
After the banking crisis of 2008 led to bailouts, the recriminations began when firms like Goldman Sachs had a banner year in the aftermath — and paid bankers record bonuses.
Will the same thing happen to the airlines? Under the terms of their bailouts, the chief executives’ compensation this year and last was capped at about half what they received before the pandemic.
Delta has already begun to issue special payments to some other managers. It says this is to compensate them in part for extra hours worked during the pandemic. “The payment of special bonuses to management while the airline is still burning cash is premature and inappropriate,” said Chris Riggins, a spokesperson for the Air Line Pilots Association, in a statement this month.
The worst for the airline industry may be over, but the debate about the appropriateness of the pandemic bailouts is just getting started.