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John Engle
John Engle
Articles (610) 

Airline Bailout 2.0: Still Generous, but More Strings Attached

A second bailout will help keep the lights on, but the airline industry still faces a tough path to recovery

December 29, 2020 | About:

In a previous article, I speculated on whether a second airline industry bailout would be as overwhelmingly generous as the first was earlier this year. With political appetite among leaders across the federal government apparently souring on the idea of corporate bailouts with virtually no strings attached, I surmised that any future rescue package would come with harsher terms, which would not bode well for financially irresponsible airlines.

With the latest Coronavirus economic relief bill now in effect, we can at last assess what affects the latest bailout will have on airline operators.

Fresh bailout, fresh strings attached

When the first airline industry bailout expired on Sept. 30, air-carriers were faced with much the same financial pressures as had prevailed six months prior. Consequently, the players with the heaviest debt burdens began cutting staff almost immediately in an effort to reduce their cost overheads and preserve cash.

American Airlines Group Inc. (AAL) jettisoned the most of any domestic air-carrier, furloughing 19,000 employees as soon as October hit. United Airlines Holdings Inc. (UAL) was right behind it, furloughing more than 13,000 in the same period.

Seeing the airlines cut staff so rapidly, Congress was swift to consider another round of bailouts. Thanks to relentless lobbying, both from airline employee unions and from industry leaders, the $900 billion relief package signed into law on Dec. 27 set aside $45 billion in funding for the transportation sector, including $15 billion in payroll grants earmarked for the airlines.

As had been expected, this bailout has more strings attached than the first, including a mandate to rehire the more than 30,000 employees furloughed since the start of October, as well as to maintain certain minimum flight requirements. In other words, it is strictly focused on keeping the airlines operational.

Overall, however, the provisions of the second bailout are no harsher than those of the first, As with the first bailout, larger airlines will only be expected to repay 30% of the payroll grants over time and to hand over a few more warrants.

Rocky road to recovery

The airline industry has shown some signs of increased traffic in recent weeks. The Transportation Safety Administration screened 1.28 million passengers at airports nationwide on Dec. 27, marking the sixth time in ten days that daily travel volume exceeded 1 million. While the latest travel numbers have proven heartening to investors, they cannot mask the significant underlying demand weaknesses that continues to afflict the airline industry.

According to Airlines for America, an industry lobbying group, U.S. airlines are collectively burning $180 million in cash per day, while travel volumes are still down 70% compared to this time last year. Based on the latest projections from market research firm Cirium, published on Nov. 18, it will take years for airlines to fully recover:

"2021 traffic will only see a modest year-on-year growth against 2020. However, this masks the fact that Q1 2021 will continue to show 60-70% declines versus Q1 2020, but by December 2021, traffic will be 65% higher than 2020, even in the slower recovery case...The 'rebound' year is now pushed back to 2022."

Most industry analysts have continued to assume that air travel volumes will remain severely depressed in 2021 despite rising hopes for a rapid vaccine rollout.

My verdict

The news of a fresh capital injection of $15 billion has successfully buoyed market confidence in the airline industry. Indeed, news of the second bailout sparked a modest rally in the shares of the major air-carriers on Dec. 28. Being the most debt-ridden airline that will benefit the most from the bailout, American Airlines had the strongest showing, closing the day up 2.55%. United Airlines and Delta Airlines Inc. experienced more modest gains, rising 1.54% and 1.06%, respectively.

Southwest Airlines Co. (LUV) was the odd man out among domestic air-carriers, with its stock falling a modest 0.35%. Since Southwest's balance sheet is far stronger than its major competitors, it didn't really need a bailout at all, and investors were hoping for weakness in competitors to increase its market share - hopes which have now been somewhat dashed.

Even with the latest generous bailout in hand, airlines face a long and difficult path back to pre-crisis normalcy. The mildness of the rally on Dec. 28 may speak to a broader sense of anxiety among investors.

Given the substantial challenges that the airline industry must overcome in the coming months and years, I see ample reason for caution, generous bailouts notwithstanding.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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