Airlines Don't Need to Be Saved by Taxpayers Again
(Bloomberg Opinion) -- Last March, the government provided U.S. airlines a $50 billion lifeline in one of the largest industry-wide interventions in American history. The industry received a further $29 billion through the bipartisan year-end relief package and President Joe Biden’s stimulus plan. The enormous volume of support raises a question: Was this in taxpayers’ interest, or was it a classic case of corporate welfare that primarily benefited shareholders?
A careful examination of the record shows that the initial intervention during the height of the panic was certainly the best available alternative. But more recent support to an industry the government had already stabilized raises questions about the marginal return on taxpayer dollars.
With airlines now adding routes as part of the broader economic recovery, it's easy to forget how precarious the future of the industry was a year ago. The general economic shock from the virus was unprecedented, but the speed and scope of the impact on the aviation industry was particularly breathtaking. More than 95 percent of demand evaporated almost overnight.
Some industry experts feared many airlines could face bankruptcy within weeks. The best-case scenario was Draconian layoffs and service cuts, affecting hundreds of thousands of workers and their families while disrupting businesses across the economy. Even the strongest carriers were burning cash at an unsustainable rate, while access to credit markets was drying up. Permitting the collapse of a strategic industry that requires long lead times to add capacity would have had profound implications for pandemic response and long-term economic competitiveness.
The fundamental goal of the government's economic response to the pandemic was to preserve productive capacity in the economy to drive the recovery that would follow from an end to the underlying public-health crisis. The $2.2 trillion Cares Act, which Congress passed last March on a near-unanimous basis, successfully followed this approach. It included $25 billion in payroll support and $25 billion in loans for airlines.
Payroll support stabilized the industry during the most acute phase of the economic shock. Airlines could use the funds only to pay workers and agreed to prohibitions on furloughs and share buybacks, limits on executive compensation, and requirements to maintain flights, particularly to hard-to-reach rural communities. The government benefited in the form of taxes and avoided unemployment insurance. The companies had to repay a portion of the funds, in part by providing warrants.
The loan program addressed airlines’ medium-term financial strength. Taxpayers incurred little direct expense. The government loans eased access to credit markets, helping airlines borrow more than $50 billion in 2020. The Treasury Department’s willingness to accept loyalty programs as collateral also helped unlock a rich source of secured financing for the industry.
Opponents of the rescue argued for letting airlines seek bankruptcy protection while continuing to fly, as many airlines have done through the years. But to keep flying, airlines need customers to buy tickets. At the time, there was no such demand and no certainty as to when passengers would return. Uncontrolled bankruptcies would have caused permanent scarring across the industry and its workforce, impeding the recovery for years to come.
Similarly, a government-financed restructuring like the 2009 auto rescue would have led to a much worse outcome for taxpayers. A slow-moving reorganization would have likely incurred even larger social costs given the industry’s inability to operate and attract financing in the total absence of demand. Most importantly, putting the government in charge of airlines at the height of the most severe crisis in the industry’s history would have been a profound mistake. The government is good at many things, but running airlines is not one of them.
Yet the success of the Cares Act rescue has made subsequent rounds of payroll support harder to justify. At the time airlines received an additional $15 billion as part of the bipartisan $900 billion relief bill at the end of 2020, the largest four carriers reported nearly $65 billion of combined liquidity.
Nonetheless, there were important reasons to extend relief in December. The overall $900 billion package was critically important at a time when vaccines were still nascent and the country was in the midst of the devastating third wave of infections and associated lockdowns. Airline support was extremely popular in Congress and may have aided the overall bill’s passage.
This justification does not apply to the most recent $14 billion in payroll assistance provided in Biden’s stimulus plan. Vaccines were already allowing the resumption of normal business activity and airlines continued to have ample liquidity.
Proponents of additional support argue that despite the absence of the threat of an industry-wide collapse, one of the rationales for the original rescue still holds: that because airline workers must stay current on training, we can’t allow employees to be furloughed without reducing productive capacity in the economy. However, airlines now have the liquidity available to maintain payroll if they believe it is justified by future demand. Some carriers are doing just that. We all have sympathy for airline workers who are at risk of furlough. But there are more efficient ways for the government to support these displaced workers than by handing airlines billions of dollars over and above the payroll costs associated with these potential furloughs.
Debating the appropriateness of the government's economic response to the pandemic is critical to informing policymakers’ responses to future crises. In the case of airlines, without last year’s swift intervention, there might not be a viable industry at the center of the debate. Yet what was once necessary doesn't justify endless repetition. There will probably be calls for more payroll support when the latest employment protections expire at the end of September. Taxpayers should be rightly skeptical.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Dan Katz served as a senior adviser at the U.S. Treasury Department from 2019 to 2021.
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