Airline bailouts, explained

Labor unions and some lawmakers are calling for strict bailout conditions to hold airlines accountable for federal money.

The airline industry is struggling to stay afloat in the midst of the Covid-19 pandemic. Strict international travel restrictions have been put in place, people are worried about flying, and thousands of airline workers are at risk of losing their jobs. In this moment of crisis, US airlines say they’re in desperate need of financial relief or the industry might be at risk of collapsing.

On March 16, Airlines for America, an industry trade organization that advocates for major US airlines, asked for $50 billion in assistance from the federal government (by taxpayer money) through $25 billion in grants, $25 billion in low-interest loans, and significant tax relief (which includes a $4 billion return for taxes they’ve previously paid). Airlines for America has not responded to an emailed request for comment from Vox.

President Donald Trump suggested that bailouts are on their way during a press briefing on March 17, saying, “We don’t want airlines going out of business.” Meanwhile, labor unions and other lawmakers have called for the aid to come with specific conditions, such as maintaining pay and benefits for workers and preventing money to be directed to CEO bonuses or stock buybacks. The airline aid proposal released by the Treasury Department on March 18, however, doesn’t appear to have strict bailout limits championed by Senate Democrats and union representatives. The White House is discussing various bailout packages with Senate Republican leaders before bringing in the Democrats, so conditions of the aid might change.

Before the release of the White House’s proposal, Sara Nelson, president of the Association of Flight Attendants, said that bailouts “should come with significant conditions to help workers and keep planes flying, not enrich shareholders or pad executive bonuses.” She called on the airlines to commit to maintaining payroll and paying workers a $15 minimum wage, in addition to guaranteeing them representation on board seats.

Mary Kay Henry, president of the Service Employees International Union, also said in a press release, “We can’t let airlines get away with pocketing a bailout while contracted workers suffer. They need to share the responsibility to address the crisis by supporting those on the front lines.”

”As the operational leaders of the airline industry and those most impacted by work stoppages, pilot and other airline employee work protections must be included in any government investment package,” Dennis Tajer of the Allied Pilots Association wrote to Vox in an email. “Equally important, to help instill confidence and proper use of the government investment, it must not be a blank check to spend on share buybacks and executive bonuses.”

The proposal doesn’t fully address that, some lawmakers have pointed out. Sen. Jack Reed (D-RI) told Politico that the package should include provisions that would allow taxpayers to take on stock in airlines and limit executive pay. “We have restrictions on share buybacks, on dividends, on executive pay, we make sure their workforce is treated fairly, that they’re not the victims of this after use of our resources — similar to some of the things we did with the banks” in the 2008 financial crisis, Reed said.

This isn’t the first time airlines have relied on the US government as demand for travel grinds to a halt. In the wake of the 9/11 terror attacks that severely hurt US airlines, Congress passed a $15 billion financial aid package that gave carriers $5 billion in immediate cash assistance and $10 billion in loan guarantees. However, a major thing was different in the airlines’ 2001 crisis than today: The transportation industry was experiencing a slowdown even before 9/11. CNN reported in 2001 that airlines were most heavily hit by the pre-attack economic decline due to a drop in business travel and were projected to lose $3 billion. The 9/11 attacks only highlighted how vulnerable airlines are to sudden unexpected events, and throughout the 2000s, carriers were caught up in a series of bankruptcies and mergers.

Compared to a decade ago, major US airlines were raking in record profits. The net profit for all US airlines, as recently as 2010, ranged from $3 billion to $4 billion. From 2015 to 2018, United alone reported net profits of $4.5 billion, $2.3 billion, $2.1 billion, and $2.5 billion. The consolidation of smaller carriers into what is now known as the Big Four — American, United, Delta, and Southwest — also helped increase profits. Together, these airlines control more than 80 percent of the American passenger market and had bright financial outlooks — until the pandemic hit.

A Delta spokesperson told Vox in an email that the company has “long operated under a philosophy of balanced use of its cash,” which benefits all of its stakeholders. “Additionally, we’ve rewarded the industry’s best people with the most generous profit-sharing plan in corporate America, with a cumulative payout of $9.1 billion while also giving wage increases for the last 10 years.” Southwest said it was directing all inquires about government assistance to Airlines for America, the industry group advocating for the bailout.

(American and United have not responded to a request for comment from Vox.)

Delta, American, and United Airlines have significantly cut back on both domestic and international flight routes, and instituted hiring freezes and voluntary unpaid leave to try to offset revenue loss. Hundreds of thousands of workers are at risk of losing their jobs, and layoffs of airline contractors and airport employees have already begun. The airlines, of course, aren’t the only aspect of the travel industry hurt by the pandemic. The World Travel and Tourism Council predicts that 50 million jobs within the sector will be negatively affected by the coronavirus. Nearly 60 global airlines signed on to a plea asking governments and industry stakeholders around the world to offer aid.

To the average person who doesn’t follow the aviation industry closely, it’s probably baffling to hear that a large, multibillion-dollar company like United is in financial distress. Many people appear infuriated that airlines — which they say have treated customers poorly even during profitable times — are now demanding more money at taxpayers’ expense.

”If we’re gonna bailout the airlines that have been gouging us for decades while they cut costs and space — I better never pay for a fucking bag again,” one person tweeted. Some are calling for the industry to be nationalized, and others were unsympathetic to the airlines’ call for help, saying that other industries and workers, like local businesses and restaurants, need aid too.

So where did all those cash profits go? The short answer is stock buybacks. Bloomberg News reported that the biggest carriers altogether spent 96 percent of free cash flow to buy back their own shares, which primarily benefit airline executives, investors, and other shareholders. Stock buybacks are meant to increase a stock’s value since fewer shares exist in the open market, and investors end up owning a greater share of the company. Airlines have also been criticized for generously paying their top executives (who earn millions in compensation packages), while their workers rallied for a pay raise as profits soared.

Running an airline is a high-cost operation, and carriers like Delta have become savvier in figuring out ways to get passengers to pay more through travel fees, like additional luggage, seat selection, and priority boarding. Fees are also another stream of revenue for airlines that are exempt from the 7 percent excise tax on domestic airfare. Passengers are catching on to how airlines are nickel-and-diming them for their comfort and convenience; yet so far, no airlines have waived these additional fees.

Slate’s Henry Grabar described the industry as “low-margin, capital-intensive businesses,” which means a company’s cash savings won’t be very helpful during an extensive crisis. ”Capital-intensive means it’s hard to tighten your belt,” Grabar wrote. “You can save some money on fuel and food, but not on labor or rent. You still have to pay banks or leasing companies for your planes. You can’t save those seats for later, or fly twice as many flights when business picks up again. There is no factory to shut down. Even if you ground flights, many costs are fixed.”

Experts predict that the US — and the world, for that matter — is on track to enter a recession, which means businesses and their employees across sectors, from hospitality to manufacturing, are facing uncertain times. The government hypothetically doesn’t have to (and can’t) bail out every ailing industry, but lawmakers, for the most part, think of airlines as a public utility and a crucial part of the US economy. Vice’s Aaron Gordon argued that Congress overvalues the airlines relative to the average American, writing that public transportation agencies are also experiencing a similar financial shock and employ the same number of people, yet are only asking for about $13 billion in assistance.

Airline executives are well aware that it’s in the government’s interest to help out the industry. As Tim Wu, author of The Curse of Bigness: Antitrust in the New Gilded Age, wrote in the New York Times: “The major airlines know that unlike a local restaurant, they will never be allowed, collectively, to fail completely. In practice, the public has subsidized the industry by providing de facto insurance against hard times in the form of bailouts or merger approvals. And now here we go again.”

At this point, a bailout appears to be necessary — not just for flights to keep operating but to ensure stability for the 750,000 airline workers who are the backbone of the industry. Yet many appear wary of how much leeway the industry should be given. It remains to be seen what a bailout will accomplish in the long term, particularly as this pandemic shows no signs of letting up anytime soon, but it’s clear that the US government won’t let the airlines fail. Not this time, at least.

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