Airlines Ask Over $65 Billion in Federal Relief; Airports Want $10 Billion

Airlines Ask Over $65 Billion in Federal Relief; Airports Want $10 Billion

March 17, 2020  | Jeff Davis

Yesterday, the airline industry – through its lobbying arm, Airlines for America – formally asked for a federal aid package that could wind up being between $65 and $70 billion by the end of the year, in order to maintain their solvency as coronavirus-related travel restrictions and fears have devastated demand for air travel. The request is for $29 billion in grants, $29 billion in loans, and somewhere between $7-10 billion in excise tax forgiveness.

The official statement from A4A is here and the one-page fact sheet outlining their request is here.

At the same time, the nation’s airports are seeking $10 billion in federal aid to cope with their end of the collapse of the demand for air travel.

And U.S. mass transit systems are in the process of organizing their own request for federal aid, as their operating revenues are plummeting as people stop taking transit.

Our analysis of the airline and airport requests:

Airlines – Grants

The airlines are asking for $29 billion in outright grants – $25 billion for passenger carriers, and $4 billion for cargo carriers – “to compensate for reduced liquidity (net of financing) attributable to COVID-19.” By contrast, the immediate post-9/11 airline aid package only provided $5 billion in grants ($4.5 billion for passenger carriers and $500 million for cargo carriers).

A4A ran two scenarios for passenger airline liquidity due to coronavirus restrictions: an optimistic scenario in which the net drop in liquidity for A4A passenger carriers (Alaska, American, Delta, Hawaiian, jetBlue, Southwest, and United) was $18 billion by June 30 and $23 billion by the end of the year, and a pessimistic scenario where the liquidity drop is $26 billion by June 30 and $53 billion by the end of the year. Under the latter scenario, A4A says, all seven airlines would run out of money completely sometime between June 30 and December 31.

Question 1: Is all that money needed at once? A4A’s backgrounder says that under the optimistic scenario, the low point of liquidity would hit in May. If Congress deems some grants necessary, could some be provided immediately, and the rest held back on a wait-and-see basis for a couple of months?

Question 2: What conditions should Congress demand for any outright grants? The 9/11 law didn’t demand any conditions for the grant money, but there are some demands in Congress for more – Sen. Ed Markey (D-MA) stated “any infusion of money to the airlines must have some major strings attached – including new rules to prohibit consumer abuses like unfair change and cancellation fees; protections for front-line workers like flight attendants, pilots, and airport workers; special consideration for our smaller, regional carriers not represented by the major trade associations; and the development of long-term strategies and targets to reduce the carbon footprint of the airline industry.” 

Question 3: Who would determine the amount of “reduced liquidity…attributable to COVID-19”? The 9/11 law said that airlines could not get aid exceeding “the amount of losses…that the air carrier demonstrates to the satisfaction of the President, using sworn financial statements or other appropriate data, that the air carrier incurred.” USDOT and GAO were charged with verifying and auditing the statements.

Airlines – Loans

The airlines want another $29 billion in unsecured loans or loan guarantees (again, $25 billion for passenger airlines and $4 billion for cargo airlines). They want it through the Federal Reserve, which would wither purchase financial instruments (commercial paper and term loans) from carriers or else provide zero-interest unsecured loans or loan guarantees.

The request says “Given the credit profile of the industry prior to the onset of COVID-19, participation should be open to all carriers, no carrier shall be required to collateralize any instrument, and the particular instruments purchased or guaranteed should be structured so as to expedite the participant’s ability to re-access the private capital markets as promptly as practical and to stabilize their existing credit ratings.”

This is a major departure from how the $10 billion in loans to air carriers in the post-9/11 law was administered, in several ways:

  • The 9/11 loan money was part of the federal budget, consistent with the Federal Credit Reform Act of 1990, but the airline’s proposed program would be even more off the federal balance sheet, through the Federal Reserve.
  • The 9/11 law established an Air Transportation Stabilization Board (ATSB), with three voting members (USDOT, Treasury, Federal Reserve) and with GAO as a non-voting member, to administer the loan program. The A4A proposal would lock USDOT out of the process, with only Treasury and the Fed involved.
  • The 9/11 law restricted loans and loan guarantees to cases where “the obligor is an air carrier for which credit is not reasonably available at the time of the transaction.” (That is one reason why only about $1.6 billion of the $10 billion in loan and loan guarantee authority was ever used.) The A4A proposal explicitly states that there is no creditworthiness requirement.
  • The 9/11 law only allowed loans and loan guarantees if, in the judgment of the ATSB, ” the intended obligation by the obligor is prudently incurred…” No such requirement appears in the A4A proposal.

Question 1: If Congress extends credit to air carriers, would it insist on a temporary equity stake or profit sharing? The 9/11 law required the ATSB to require that loans and loan guarantees be accompanied by “contracts under which the Government, contingent on the financial success of the participating corporation, would participate in the gains of the participating corporation or its security holders through the use of such instruments as warrants, stock options, common or preferred stock, or other appropriate equity instruments.”

Question 2: Will Congress insist on salary restrictions for participation in either grant or loan programs? The 9/11 law required that any air carrier employee at a carrier receiving a loan or loan guarantee, making over $300 thousand a year, had to have their salary frozen at the 2000 level for two years, or for departing executives, their “golden parachute” package could not exceed twice their 2000 compensation. (This is another reason why so few airlines got loans after 9/11.)

Airlines – Taxes

The airlines are asking for tax relief, in two parts.

Rebate. First, they want all regularly scheduled air carriers (including cargo airlines) to receive immediate rebates of the Airport and Airway Trust Fund excise taxes they have paid or will pay from January 1 through March 31, 2020. Simple subtraction from the monthly Treasury reports shows that Trust Fund taxes totaled almost $4.3 billion in the January-February period. Assume that the increasing terribleness of March travel demand brings those total tax payments up to around $5 billion by March 31.

Question: Does the Trust Fund bear the cost of the rebate, or will that cost be borne by general revenues? The Trust Fund currently has an uncommitted balance of around $6.5 billion, but having to give up a $5 billion rebate would eat most of that up.

Temporary repeal. In addition, the airlines want the temporary repeal of all of the AATF taxes paid by passenger and cargo airlines through December 31, 2021, “subject to a trigger for a further extension beyond 2021 dependent upon economic circumstances.”

Per the new CBO baseline (see Table 2 in this document), pre COVID-19, the Trust Fund taxes were expected to bring in $17.7 billion in FY 2020, $18.3 billion in FY 2021, and an average of $21.8 billion per year in the nine years from 2022-2030. Obviously, those projections for 2020 and 2021 are now grossly optimistic (7.5 percent of the price of a ticket, plus $4.30 per head domestic and $18.90 per head international, don’t add up to much if no one is flying). But the cost of suspending the taxes through the December 31 could be at least another $5 billion.

Question 1: Would the Trust Fund be made whole for this tax suspension? In combination with the rebate, this would eliminate the uncommitted balance in the Trust Fund and start eating away at money that is already pledged to meet ongoing obligations, making the AATF more like the Highway Trust Fund. However the (optimistic) baseline had uncommitted balances rising sharply over the last half of the next decade, so if the taxes were allowed to be reinstated at some point late 2020 or early 2021, and demand for travel snapped back to anywhere near the pre-COVID levels, the damage would be fixable.

Question 2: Will Congress allow another budget baseline reset gimmick?

Let us remember the 1996-1997 experience in all its ridiculousness.

In FY 1995, the AATF taxes brought in $5.5 billion to the Trust Fund, that amount was projected to increase steadily over the next decade. Congress allowed the AATF taxes, and some other excise taxes, to expire on January 1, 1996. The Congressional Budget Office issued its annual Budget and Economic Outlook (and baseline) in May 1996, while the taxes were expired. CBO wrote “Expiration of the excise taxes for the Airport and Airway and Leaking Underground Storage Tank Trust Funds and the Hazardous Substance Superfund will reduce revenues by $5 billion in 1996 and $11 billion by 2005. As required by the Balanced Budget Act, CBO assumes that excise taxes dedicated to trust funds and scheduled to expire during the budget projection period are extended. Those excise taxes have now expired, however, and have therefore been excluded from the baseline” (p. 36).

Per the Clinton Administration’s proposal, the taxes were reinstated on August 27, 1996 through the end of the year, then lapsed again. The Jan. 1 – Aug. 27 lapse lowered Trust Fund balances by about $4 billion.

Then, the taxes lapsed again from January 1, 1997, just long enough for CBO and OMB to issue their annual budget baselines that, once again, assumed zero aviation taxes, forever. Congress then reinstated the taxes temporarily on February 29, 1997, with that extension (to September 30, 1997) officially scored as raising $2.7 billion in “new revenues.” (with that lapse lowering Trust Fund balances by $1 billion).

Then, as part of the summer 1997 tax reconciliation bill, Congress reinstated the taxes for ten years (with some modifications). Because they were starting from a zero baseline that assumed that the Trust Fund would soon be allowed to go broke and that no new taxes would ever be imposed on aviation, the extension and modification of the aviation taxes in the 1997 reconciliation bill was credited as bringing in $73 billion in “new revenue” over a decade, and was used to offset the costs of some of the other tax breaks in the bill. (See the Joint Tax score of the reconciliation bill here – aviation tax extension starts on page 7.)

Temporarily suspending an existing tax should not allow Congress to claim reinstatement of the tax as “new revenue,” particularly when the taxes were and will be deposited in a trust fund account that is supposed to keep making payments on past obligations for many years.

Any temporary suspension or repeal of the AATF taxes must include some legislative language to the effect that “For purposes of enforcing the Statutory PAYGO Act of 2010, the Congressional Budget Act, other applicable provisions of law, and the Rules of the House and Representatives and the Senate, subsequent projections made pursuant to section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985 shall ignore the provision of section [insert section number] of this Act that temporarily suspends the [AATF excise taxes].” Or something like that. Otherwise, Congress will inevitably use the reinstatement of the taxes as an excuse to enact $150+ billion in new spending or tax cuts over the next decade without having to pay for them.

2:15 p.m. update: At 1:44 p.m. today, the press secretary for House Speaker Nancy Pelosi sent out the following via Twitter:

Airports – Grants

The airports want $10 billion in additional, one-time federal Airport Improvement Program grants – but with a twist. Under current law, AIP grants can only be used for capital projects – not operational expenses, and (generally) not debt service payments. The airports want a one-time waiver of those rules so they can use this tranche of emergency AIP grants to pay forthcoming bond notes and make payroll.

As luck would have it, earlier this year the RAND Corporation published a huge study of airport finances. In 2017, U.S. commercial service airports received $37.8 billion in funding, as follows (with airports classified by size):

Airport Funding Sources in 2017
Millions of dollars. Source, RAND report, Table D.1
Large Hub Med. Hub Small Hub Non-Hub Non-primary Total
Operating Revenue
Terminal rentals (aero) 4,144 688 311 107 6 5,256
Parking 2,706 882 509 149 3 4,249
Landing fees (aero) 2,980 591 290 92 23 3,977
Rental car facilities 1,106 368 272 104 5 1,855
Terminal concessions 1,256 215 94 19 1 1,585
Other aero. fees 1,663 305 262 213 121 2,566
Other non-aero. 1,317 233 220 169 27 1,968
Total, Operating 15,172 3,282 1,958 853 186 21,451
Non-Operating Revenue
PFC proceeds 2,429 525 228 88 2 3,271
Fed./state/local grants 601 245 428 650 220 2,144
Capital contributions 285 139 102 112 18 656
Interest revenue 238 44 20 9 1 312
Other non-operating 175 134 58 84 30 480
Total, Non-operating 3,728 1,087 836 943 271 6,863
Bond proceeds 7,734 1,447 306 46 0 9,534
TOTAL FUNDING 26,634 5,816 3,100 1,842 457 37,848

$13.4 billion of that funding stream is from sources that dry up immediately as people and planes stop flying – parking, rental cars, receipts from the $4.50 per passenger PFC charge, and the fees charged to each airliner that lands. Terminal concession revenue is also drying up (though that hit may not pass through to the airport authorities immediately), and it may only be a matter of time before some airlines cancel their rental of some terminal gates.

Meanwhile, in 2017, U.S. airports spent $33.7 billion, as follows:

Airport Expenses in 2017
Millions of dollars. Source, RAND report, Table D.1
Large Hub Med. Hub Small Hub Non-Hub Non-primary Total
Operating Expenses
Salaries & benefits 3,729 854 649 386 92 5,710
Contractual services 3,369 757 337 198 45 4,706
Comm. & utilities 683 168 115 69 15 1,050
Supplies &  materials 362 103 96 66 24 651
Other operating 1,234 237 173 121 24 1,789
Total, Operating 9,377 2,119 1,370 840 200 13,906
Capital Expenses
Airfield 1,303 435 434 548 167 2,887
Terminal 4,680 390 250 175 12 5,508
Parking 774 227 88 15 4 1,108
Road/rail/transit 921 136 54 43 13 1,168
Other 1,070 537 214 213 51 2,086
Total, Capital 8,748 1,725 1,040 994 247 12,757
Debt Service
Interest payments 2,725 466 172 44 26 3,433
Principal repayments 2,807 553 227 60 4 3,651
Total, Debt Service 5,532 1,019 399 104 30 7,084
TOTAL EXPENSES 23,657 4,863 2,809 1,938 477 33,744

A lot of these expenses are inflexible, particularly in the short term. Airports can lay off workers, and cancel and suspend contracts, but it’s hard to suspend ongoing construction projects in mid-construction, and the bond market does not wait for its quarterly payments.

The RAND report makes clear that, of that completely inflexible $7+ billion per year in debt service payments, the largest share is for bonds that are repaid with general airport revenues. Following that, the next biggest category is for bonds that are securitized first with PFC receipts, with general airport revenues as a backstop. To this point, airports have been deemed very creditworthy (the RAND study says “Of the 8,054 municipal bonds that include the word “airport” in the bond description (as of June 2019) in the Electronic Municipal Market Access (EMMA) database of the Municipal Securities Rulemaking Board (MSRB), only 25 bonds were rated below investment grade by one of the three major credit agencies: Moody’s, Standard and Poor’s, and Fitch (MSRB, undated). Also, in Fitch’s database of more than 70 U.S. airports rated by the agency, only one airport rated below investment grade.” Questions about the ability to make quarterly payments coming up later this year could upend all that.

Question: Would any aid provided by Congress to airports specify how much could be used for debt service and how much would have to be used to maintain the pay of airport employees and contractors?

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