Airline stocks are down massively this year as passenger travel has fallen by 96%. They need government intervention to survive. People are understandably upset to see companies that spent 96% of their free cash flow over the last 10 years on stock buybacks, totaling about $50 billion, encounter a crisis and subsequently ask for $50 billion to avoid bankruptcy.
The government is stepping in and will keep the airlines afloat, but does this provide any reassurance that they’re investable?
The airlines will get their requested $50 billion, which includes $25 billion in grants and $25 billion in federal loan programs. The government’s motivation for providing this support is to prevent layoffs and pay disruption to hundreds of thousands of airline employees, a mandate that is actually baked into the requirements for receiving funds.
Part of the terms explicitly forbid laying off employees or altering collective bargaining agreements prior to Sept. 30, 2020. Additionally, there are much-deserved limitations placed on executive compensation, dividends and stock buybacks. In my estimation, these conditions don’t go far enough in terms of executive and board ramifications for stock buyback irresponsibility, but it’s nice to see their inclusion.
According to investment bank Cowen, airlines are being provided approximately 76% of their payroll expenses, with total aid at this time breaking down as follows: American Airlines (AAL) - Get Report, $10.5 billion; Delta (DAL) - Get Report, $5.4 billion; United (UAL) - Get Report, $4.95 billion; Southwest Airlines (LUV) - Get Report $3.3 billion; Alaska (ALK) - Get Report and its carrier Horizon, $992 million; JetBlue (JBLU) - Get Report, $936 million; Spirit (SAVE) - Get Report, $335 million; Hawaiian (HA) - Get Report, $289 million; Allegiant (ALGT) - Get Report, $172 million; SkyWest (SKYW) - Get Report, $438 million; and Mesa (MESA) - Get Report, $76 million.
Much to their chagrin, only 70% of the money received will be in the form of grants, with the other 30% in low-interest loans that must be repaid, adding more debt to companies that already operate with significantly high leverage. These 10-year loans stipulate warrants be provided that are convertible to equity equal to 10% of the loan value; assuming the airlines survive and return to their former profitability, these warrants could eventually prove very lucrative for taxpayers.
Airlines have a long history of bankruptcies, and many have called for the government to simply do nothing and let capitalism run its natural course. If only a handful of carriers were at risk, I believe the Treasury would have allowed this to happen. However the systemic nature of this crisis has effectively crippled the entire U.S. travel industry at once, forcing the government's hand. This is not so much to save the companies, but to save the huge amount of jobs the airlines sustain at a time when nationwide unemployment may temporarily exceed Great Depression-level figures.
This federal aid only limps them along until the end of September, however, at which point they’ll have to stand on their own or come back for more government support. If they're unable to be self-sufficient by October, I find it far less likely that the government will save airlines, and by extension their shareholders, a second time.
States like Georgia and South Carolina have already begun reopening, and even the most conservative states will end their shelter-in-place orders within the next month or so. The historic loss of jobs will begin reversing, and politicians will be under much less pressure to intervene to keep companies afloat to maintain payrolls.
Additionally, people’s willingness to fly for non-critical reasons post-lockdown remains to be seen. It may take much longer than people think for normal airline activity to resume.
It’s quite likely airlines may need more help come October, or even sooner. The aid packages they’ve been provided are not that substantial, and I find it doubtful the Treasury will save everyone twice.
Some will tap into the capital markets, as Delta recently did with its $3 billion debt issuance or United with its $1 billion equity raise, which will dilute shareholders or increase leverage even further. With consolidation and some bankruptcies as distinct possibilities, I’d avoid the airlines for now.