The editors of the Wall Street Journal are worried that U. S. airlines will be nationalized as a result of the policy response to COVID-19:
America’s beleaguered passenger airlines are allocated roughly $50 billion in the coronavirus relief bill that passed last week. Loans represent half of the amount. The rest is grants to backfill wages and benefits, offered on the condition that the airlines won’t cut compensation or furlough anyone before Sept. 30.
The idea is simply to freeze the staff list for six months, at which point the pandemic might have receded and air travel recovered. In exchange, Congress has authorized the Treasury Secretary, at his sole discretion, to “receive warrants, options, preferred stock, debt securities, notes, or other financial instruments†that constitute “appropriate compensation to the Federal Government.†The law also empowers him to take “a warrant or equity interest†in airlines receiving loans.
The desire to get something for the taxpayer’s buck is understandable, but there’s a real risk here of a long-term nationalization. Look at the latest valuations of the biggest airlines: roughly $15.3 billion for Delta, $6.4 billion for United, and $4.6 billion for American. Leave out Southwest, which has fewer debts than its peers. Add about $8 billion combined for Alaska, JetBlue, Allegiant, Spirit and Hawaiian. Compare that with the federal government’s offer of $50 billion in loans and grants.
The point is that if the government takes equity, its stake might not be a sliver, especially if the employee subsidy isn’t discounted. At the end of 2019, American Airlines was paying about $1 billion a month in salaries, wages and benefits, according to its latest financial statement. With the number of flying passengers now down 90%, how long would the Treasury have to float an airline’s payroll before taxpayers became its majority owner?
Several observations. First, although I think that the payroll subsidies are probably good policy at least in the near term, the loans, which appear to be the editors’ main concern, shouldn’t exist at all. The airlines able to weather this storm, the leading candidate being Southwest, should survive and the others should be allowed to fail. Managing risk is one of a manager’s primary jobs. If managers are incapable of doing that, we shouldn’t subsidize their feckless behavior.
Second, I strongly suspect that there will be a lot less flying for the foreseeable future and the decrease in passenger miles may not be temporary. IMO the best policy WRT the airlines is gradually decreasing subsidies including wage subsidies after the immediate crisis which I would define as the next several months, say, starting in June. Airline employees will be increasingly motivated to look for other jobs as the subsidies decrease.
Third, I hope there’s some consideration of executive compensation in the legislation. $1 million of that billion a month American shells out in payrolls goes to the CEO. When I wasn’t an AA stockholder, that was none of my business but if I have been dragooned into becoming one to keep the airline afloat it is. $12 million a year plus options sounds like a lot for the CEO of a $6 billion company. Microsoft is a $1 trillion company and Nadella earns less than four times that. Something does not compute.
Finally, IMO we’re still doing far too much flying. Even before COVID-19 flying was a pretty miserable experience, especially compared with what it was like, say, 40 years ago. I don’t understand why we have been subsidizing it so heavily.
