Airline cash subsidies offered by the federal government could force carriers into more debt

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Jets are parked on Runway 28 at Pittsburgh International Airport on March 27, 2020 in Pittsburgh, Pennsylvania.

Jeff Swensen | Getty Images

Two weeks later Congress approved $ 50 billion airline bailout As reserved carriers receive $ 25 billion in direct cash subsidies, it turns out that those subsidies could force airlines into more debt. Executives from several U.S. airlines told CNBC that preliminary grant offers made by the federal government on Friday called for 30% of the money offered in low-interest loans from the Treasury Department.

The structure of the offers surprised American airlines. “This is not what Congress approved,” said an industry official who asked not to be identified given ongoing discussions between the airlines and the Treasury Department. “The aid was supposed to be $ 25 billion in cash grants and $ 25 billion in loans.”

The cash subsidy offers extended to the largest airlines on Friday also came with several important provisions, including the absence of massive layoffs of airline employees until September 30, a stipulation expected by airlines as the Congress was finalizing $ 50 billion in aid. As a result, all carriers have pledged not to lay off employees for the next six months.

Another stipulation of subsidy offers calls for the federal government to receive share purchase warrants equal to 10% of the loan component of each offer. The exercise price of these warrants is the price of the respective airline shares at the close of trading on Thursday.

The addition of a debt component to the grant offers comes at a time when airlines have taken out loans and opened lines of credit for billions of dollars. As a result, the credit ratings of many airlines have been lowered. On Friday, Fitch downgraded Delta’s credit rating to junk status, saying: “In total, Fitch expects Delta to borrow more than $ 8 billion during the year, which is critical for liquidity in the short term, but will increase the leverage of more than one revenue over previous expectations, when combined with our forecast for smaller revenue over the next several years. “

Will the stipulation of low interest loans in cash grants cause some airlines to pass on the multibillion dollar aid offer? Probably not. With airlines spending millions of dollars in cash every day due to falling global demand, carriers have limited options.

“I’m not sure what the others will do,” said an airline executive, “we’ll continue talking with the Treasury.” It is not known how much leeway there is in the initial offers.

Treasury Secretary Steven Mnuchin told CNBC on Thursday: “Our goal is to make sure, like I said, that it’s not a bailout, but to make sure the airlines have the cash. necessary to keep their workers in place. “

Once U.S. airlines finalize and agree to the terms of the cash subsidy offers, they will decide whether to borrow additional billions from the federal government and the $ 25 billion in loans it will oversee.

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