US government, firm on airline aid plan, could end up with 3% of American Airlines

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(Reuters) – The US Department of the Treasury is keeping its promise on an offer of $ 25 billion in government assistance to airlines to help them deal with the wage bill during the coronavirus downturn, officials said on Monday, and plan could give government more than 3% of American Airlines Group Inc (AAL.O).

FILE PHOTO: A member of a ground crew walks past American Airlines planes parked at the door during the coronavirus disease epidemic (COVID-19) at Ronald Reagan National Airport in Washington, United States , April 5, 2020. REUTERS / Joshua Roberts

Some airlines are increasingly resigned to the conditions, which would require the repayment of 30% of the funds – roughly over six months of the payroll of each carrier – and give the government mandates equivalent to 10% of the loan amount said the officials, noting that deals could be reached in the coming days. Under these conditions, the government could end up with the largest equity stake in American Airlines, which has the most employees of American carriers and has said it is looking for about $ 6 billion in payroll assistance.

It also has the lowest market capitalization of the top four carriers, at around $ 5.3 billion, less than the amount it would receive in aid.

An airline official said the warrant price had been frozen before Monday, when airline stocks fell sharply.

According to airlines’ market capitalization on Friday, the government could end up holding about 2.3% of United Airlines Holdings Inc (UAL.O), 1% of Delta Air Lines Inc (DAL.N), 1.3% of JetBlue Airways Corp (JBLU.O) and 0.6% of Southwest Airlines Co (LUV.N).

Raymond James Savanthi Syth analyst has reached similar calculations, which assume that each carrier gets the amount requested and that the government exercises the warrants, which allow the purchase of shares at a fixed price, to the fullest extent of the possible. It is likely, however, that the government will cash them out simply by getting share price appreciation at a later date.

Based on salaries and benefits for the second and third quarters of 2019, United was eligible for approximately $ 6 billion in grants, Delta for approximately $ 5.6 billion and Southwest for approximately $ 4 billion.

The potential dilution of stocks is less than many analysts feared. However, airline stocks fell on Monday disappointed that part of a $ 25 billion payroll support program should be repaid.

This poses a dilemma for some airlines keen to add more debt to their balance sheets before a recovery in travel demand is no longer certain, said Syth.

“In a rapid recovery, it makes sense to take this grant. But if you don’t expect a rapid recovery and expect operational levels to remain low next winter, you don’t want to be in so much debt that could hurt more people at the end of it. Said Syth.

“That’s the math they have to do: say OK, for the long-term health of the business, does it make sense to take that money and make additional decisions later where you might be in a worse debt situation, or maybe get away from that money and take some of the pain early, then be in a better position once we get out of the worse to try to recover. “

If things don’t get better, airlines may need to file notices of imminent mass layoffs this summer that could occur soon after September 30 – the date they are required to keep their employees if they accept the payroll support.

The prospect of layoffs could prompt Congress to reconsider the issue, either in a new round of airline support or by canceling the loans attached to the grants, some people said.

The layoffs could come weeks before the 2020 presidential election.

On Sunday, only 90,510 travelers passed through security checkpoints – another new low – compared to nearly 2.5 million a year earlier.

Report by Tracy Rucinski and David Shepardson; edited by Jonathan Oatis

Our standards:Principles of the Thomson Reuters Trust.

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