Airlines Were Given Billions. Layoffs May Still Be Inevitable

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Key insights:

After a week of legislative acrimony, a deal consisting of $2 trillion in federal aid finally reached President Donald Trump’s desk, where it was signed into law last Friday.

While many small businesses and larger corporations are expected to jockey for more than $500 billion in loans, the airline industry was given what was originally thought of as a sweetheart deal, an earmarked $58 billion in grants and loans.

Airlines argued that the funds were vital, as they’ve seen an almost 90% drop in passenger traffic since the outbreak of the coronavirus, which is expected to cost the industry more than $252 billion, according to the International Air Transport Association.

Although it remains to be seen what exactly the terms of the agreements are and what airlines will receive (and which airlines, for that matter), it is widely reported that if airlines accept either the loans or the cash grants, the companies will have to abstain from any layoffs until at least Sept. 3o.

But the federal aid may not be enough to avoid cutting some workers.

“You’re guaranteeing a staff for a fleet that no longer exists,” said Michael Boyd, president of the aviation consulting firm Boyd Group International. “This doesn’t solve the major problem. We don’t need an airline industry right now because no one wants to fly.”

Relief for airlines or their employees?

The issues facing airlines and the broader travel industry are twofold. Right now, they can’t fly planes because nobody wants to travel. But after the crisis is over and travel restrictions lift, Americans may still not want to book a flight, plan a vacation or spend discretionary income as we head into a recession and even a possible depression.

As the American economy contracts, so will the airline industry, which inevitably means layoffs whether airlines accept the bailout or not.

“If we have a full-blown recession and consumers are hurting financially, they may hold back on spending some money,” said aviation expert Henry Harteveldt. “It’s inevitable that airlines are going to say, ‘We’re going to operate fewer planes and fewer flights and fewer destinations, [which] requires fewer employees.’”

Part of the irony here is that from a financial standpoint, the industry basically got what it asked for to avoid layoffs. A week before the bill was signed, the leaders of the top U.S. airlines including Ed Bastian of Delta and Oscar Munoz of United sent a letter to Capitol Hill that said if the airlines were given $58 billion, they’d hold off on cutting staff until Sept. 1. That’s what they were given, albeit with an extra 30 days tacked on.

Almost immediately after the deal was signed, praise streamed in from the companies.

“Delta and our 90,000 employees want to thank Congress and the administration for their bipartisan support as we navigate through the COVID-19 crisis,” said Bastian in a statement. JetBlue CEO Robin Hayes called the legislation “critical to the future of not just our aviation industry but our entire country.”

However, when the application for grants and loans was released by the Treasury Department this Monday, it included a section that requires airlines to propose how the U.S. government could take equity in their respective companies. It’s unclear what the terms of such a move would be, and how it would take shape.

With uncertainty surrounding the strings attached to loans and grants, which were originally intended for payroll, according to House Speaker Nancy Pelosi, airlines may still walk away from the bailout.

“What strings are worth accepting?” asked aviation analyst Seth Kaplan, adding that the underlying theme to this pandemic is that nobody knows exactly know how long it will last. “I don’t think any airline is really in a position to responsibly just keep paying everybody to, in many cases, do nothing, without taking the aid.”

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