The COVID-19 pandemic has drastically reduced both domestic and international air travel. As of March 23, 2020, the Transportation Security Agency (“TSA”) screened just 13% of the number of passengers it screened on March 23, 2019. This sharp decline in air travel has devastated the U.S. airline industry, which employs approximately 750,000 workers.
On Friday, March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that provides an estimated $2 trillion in economic aid, including financial relief for the airline industry. President Trump signed the bill into law the same day. The CARES Act will not only help air carriers avoid near term involuntary furloughs and bankruptcies, but it will also reshape the airline industry through the various restrictions imposed in exchange for economic aid.
In total, the CARES Act provides $50 billion in economic aid to passenger air carriers that is split into two buckets – grants and loans. Any loans or grants made to air carriers under the Act will be publicly disclosed on the Treasury Department’s website and reported to Congress.
Grants to passenger air carriers
Half of the $50 billion in economic aid is in the form of grants that are dedicated to funding compensation and benefits for passenger air carriers’ non-executive staff. The grant money will be divided among passenger air carriers based on the amount the air carrier paid its employees between April 1, 2019 and September 30, 2019.
Receipt of the grant money comes with several conditions:
- Carriers cannot furlough staff and must maintain current pay rates through September 30, 2020;
- Carriers cannot pay dividends or engage in stock buybacks until September 30, 2021;
- The federal government may not condition issuance of a grant cannot upon an air carrier’s agreement to renegotiate existing collective bargaining agreements or enter into new collective bargaining agreements from the date financial aid is received until September 30, 2020;
- Until March 24, 2022, compensation for employees who earn in excess of $425,000 (unless covered by a collective bargaining agreement) is capped at the 2019 level and any severance cannot exceed twice the maximum compensation received in 2019;
- Until March 24, 2022, compensation for employees whose salary exceeded $3,000,000 in 2019 is limited to $3,000,000 plus 50% of the excess of $3,000,000 paid in 2019; and
- Carriers must maintain service to domestic cities deemed “necessary” by the Secretary of Transportation – taking into consideration the needs of small and remote communities –until March 1, 2022. Necessary cities are limited to cities that the air carrier serviced on March 1, 2020.
Cargo air carriers are eligible for $4 billion in grants and airline contractors are eligible for $3 billion in grants, subject to the same restrictions as passenger air carriers.
In exchange for such grants, the Secretary of Treasury “may receive warrants, options, preferred stock, debt securities, notes, or other financial instruments as issued by recipients of financial assistance.” This language has led to speculation that the government may take a non-voting warrant or equity stake in carriers that receive grants under the Act.
Within five (5) days of enactment, the Secretary of Treasury will publish procedures for submitting requests for grants. Initial payments will be made within ten (10) days of a request for assistance. If the carrier fails to comply with any of the conditions of the grant, the financial assistance may be clawed back by the government.
Loans to passenger air carriers
The other $25 billion of financial aid is in the form of loans or loan guarantees that can be used for expenses other than compensation and benefits for non-executive staff. The duration of the loans is to be “as short as practicable,” but no longer than five years, and interest will be at a rate determined by the Secretary of the Treasury. While the loans can be modified or restructured, they cannot be forgiven.
Like the grants to passenger air carriers, the loans and loan guarantees come with restrictions:
- Carriers that take loans cannot pay dividends or engage in buybacks until one year after they repay the loan;
- Carriers must maintain 90% of their workforce as of March 24, 2020 until September 30, 2020;
- The federal government may not condition issuance of the loan or loan guarantee upon an air carrier’s agreement to renegotiate any existing collective bargaining agreements or enter into new collective bargaining agreements for the duration of the loan and one year after its repayment; and
- The compensation restrictions and continuation of air service provision applicable to grants also apply to loans.
Cargo air carriers are eligible for $4 billion in loans and loan guarantees, subject to the same restrictions as passenger air carriers.
Within ten (10) days of enactment of the Act, the Secretary of the Treasury will publish procedures to apply for loans and the minimum requirements for loans.
The Act also suspends aviation excise taxes (i.e., 7.5% ticket tax, aviation fuel tax, and 6.25% air cargo tax) until January 1, 2021.
Airline industry labor groups have already taken strong positions encouraging air carriers to accept all available aid under the Act. At the same time, it is unclear whether the Act provides sufficient support to adequately mitigate the current financial crisis facing air carriers due to the sudden stoppage of travel activities.
Critically, while the Act prohibits the federal government from forcing air carriers to renegotiate labor contracts, it does not appear to put any limitations on air carriers’ ability to voluntarily renegotiate labor contracts before accepting aid under the Act or after the expiration of the September 30, 2020 moratorium on pay cuts and furloughs. As air carriers evaluate the Act, they should consider opportunities to negotiate additional cost-savings and operational efficiencies.
While the full effect of the COVID-19 pandemic on the airline industry remains to be seen, the CARES Act will undoubtedly play a large part in shaping the future of the airline industry.