Did the $50 Billion Coronavirus Bailouts Effectively Nationalize America’s Commercial Airlines?

Near-empty commercial flights over America’s skies are guaranteed to continue following the federal government’s new minimum service requirements for airlines receiving coronavirus bailout funds.

The new rules, which the U.S. Department of Transportation (USDOT) issued yesterday, provide the industry with some additional flexibility for how many flights they’ll have to perform in order to access federal funding.

But USDOT’s minimum service standards will still require air carriers to operate money-losing flights in order to access government loans and grants, wasting both industry and taxpayer dollars, and potentially setting the stage for prolonged government intervention in the passenger airline industry.

“This whole issue is a great demonstration that the government is not very good at micro-managing industry,” says Marc Scribner, a transportation researcher at the Competitive Enterprise Institute. The airlines, and particularly large carriers, he says, “made a deal with the devil in accepting bailout funds.”

No one disputes that airlines are struggling right now.

Stories of “ghost flights” with mostly empty seats and occasionally more flight attendants than passengers have been widely reported. The Transportation Security Administration reports that the number of people passing through airport security checkpoints has fallen by 95 percent compared to this time last year.

“It’s been traumatic,” says George Novak, president of the National Air Carrier Association (NACA), which represents low-cost carriers. He says that some airlines are operating at as little as 5 percent capacity.

That these flights have continued despite the disappearance of passengers is a product of the conditions baked into the $2.3 trillion Coronavirus Aid, Recovery, and Economic Security (CARES) Act.

That legislation provides passenger airlines with $25 billion in grants, which they can only use to retain current employees on their payroll. The law also provides airlines with an additional $25 billion in loans they can spend on their operations.

Both pots of money come with a requirement that airlines continue to fly to locations they had been servicing prior to March 1, with the exact number of flights left up to the Secretary of Transportation to decide.

The CARES Act passed on March 27. But with final minimum service requirements only being issued by USDOT yesterday, airlines were left in the dark for almost two weeks regarding how many planes they’d have to keep in the air, contributing to the number of almost-empty passenger flights taking off.

Adding to the confusion, the USDOT proposed minimum service requirements last Thursday. These rules required all airlines, regardless of size, to keep flying a minimum of five flights a week to locations where they were flying at least five times a week at the end of February. These carriers would also have to fly at least one flight a week into locations they had serviced with less than five flights a week. This meant big airlines could drastically reduce their flights to large airports, but NACA and many of the smaller carriers they represent argued it would force some airlines to maintain 100 percent of their prior service at some locations.

These carriers also took issue with USDOT basing its minimum service requirements on airlines’ late February schedules, which they say did not account for the seasonal service reductions many of them experience in spring and summer.

In response to these objections, USDOT’s finalized minimum service requirements give smaller carriers— defined as an airline with less than 10 percent of industry’s total domestic capacity—more wiggle room. These small carriers will only need to fly three flights into locations that were receiving five flights a week pre-pandemic.

Larger carriers also got a break in the finalized rules too. They will need to offer only a minimum of three flights to locations where they were already offering at least five, but less than 25, flights pre-pandemic.

All carriers, regardless of size, will also be allowed to choose whether to base their minimum levels of service on the number of flights they performed in February 2020 or early August 2019, to account for seasonal variations in demand.

This gives NACA most of want it wanted, says Novak, saying the new rules did a good job of balancing the needs of the industry while still providing value for taxpayers.

As for the case for government assistance to airlines in the first place, he says, preserving some air travel is essential given the limited alternative interstate transportation options Americans have. “Essentially, the airlines are our national infrastructure for interstate transportation. We don’t have a strong rail network. Other forms of mass service transportation aren’t viable,” Novak says.

Scribner says the finalized USDOT rules are an improvement in some ways.

“I’m glad the DOT eased some of the burdens on the charter and low-cost carriers, in large part because that segment of the industry is providing the most robust price competition in recent years,” he says.

But Scribner argues these are minor improvements on a bailout that shouldn’t have been passed in the first place. “These service requirements, in effect, would force carriers who opt to accept government financial support to burn through cash even quicker,” he notes.

In addition to being wasteful, these minimum service requirements incentivize carriers to avail themselves of both the grants and the loans included in the CARES Act.

The CARES Act’s $25 billion in grants for passenger airlines can be spent only on employee payroll. That means grant money can’t be spent on covering the costs of the money-losing flights USDOT’s minimum service requirements require airlines to fly.

“They’re going to be burning through fuel and incurring other operating expenses that they’ll have to pay out of another pot of money, either their own or they’ll have to access these [loans]” says Scribner.

The New York Times, citing a Moody’s Investor Service Report, reports that the three largest airlines—Delta, American, and United—only have enough cash on hand for four or five months before they’d need to start making deep cuts or take out new loans.

These loans come with their own set of requirements. Most significantly, the CARES Act gives the Treasury Department the power to demand equity in these airlines in return for loans, which it can hold for up to five years. (The government would not get any voting power with these shares.)

“What is the government going to pay per share on this? Right now, the share price is very low, at the level of support they are holding out, you could potentially have the government be significant, major equity holders in these carriers,” says Scribner.

That puts both airlines and the Treasury Department, not to mention taxpayers, in a tough position.

If the government requires airlines to hand over a large equity stake in their companies, it will end up holding a significant stake in these airlines. Given that USDOT is already dictating airline operations, this all starts to look a lot like the nationalization of the industry, which could then take years to unwind.

On the other hand, if the Treasury Department demanded little in the way of equity from airlines, it would end up risking a lot of taxpayer dollars on these loans with little collateral to show for it.

Interestingly, Congressional Democrats and airline employee unions are urging Treasury Secretary Steve Mnuchin to offer very generous loan terms to the airlines, reports the Times. They fear that if the government drives too hard a bargain, the airlines will walk away from both the CARES Act’s loans and grants, and instead start laying off workers.

Congress was so eager to pass the CARES Act that it couldn’t even wait to record votes. That haste meant a lot of these issues would have to ironed out at a later date, assuming they get ironed out at all. In the meantime, airlines will continue to fly mostly empty planes across the U.S., to the benefit of no one.