American Airlines will receive $5.8 billion in government aid to pay its employees as the airline announced on April 14th. Amid a sharp decline in profits and revenue, the airline joined a coalition of others to seek government aid. Now, after the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, American Airlines will receive funds to pay its employees.
$5.8 billion heading American’s way
The money will be split into two pools. $4.1 billion will come in the form of a direct grant from the federal government. Meanwhile, the other $1.7 billion will come in the form of a low-interest loan. American will outline additional terms of the funding when it files an update with the Securities and Exchange Commission.
American Airlines will use the money to support the salaries and benefits the airline provides to its employees. With this Payroll Support Program (PSP) grant, American’s employees will not face involuntary furloughs or pay reductions through at least September 30, 2020.
American Airlines Chairman and CEO, Doug Parker, offered the following statement:
“The Payroll Support Program recognizes the extraordinary dedication of our entire team, and importantly, sustains the critical air service being provided by our frontline team members”
He went further to commend legislators, federal officials and American’s employees and their unions. At the end of the statement, Doug Parker also added the following:
“The support our government has entrusted to us carries immense responsibility and an obligation that American Airlines is privileged to undertake. We recognize the importance of our service as evidenced by the customers who continue to fly today for important reasons, including medical professionals getting to where they are most needed and family members getting to where they feel most safe. It is our privilege to continue flying through the downturn and to be in a ready position as our country and the world return to the skies”
Limiting controversial practices
One of the major controversies with providing assistance to airlines were stock buybacks, dividends, and large paychecks for airline executives. These issues are not unique to American Airlines. In receiving this aid, American has agreed to limit all of the aforementioned practices. Further details will be available in the filing.
Another loan for $4.75 billion
The Dallas-based carrier also announced that it will apply for a loan of $4.75 billion from the United States Treasury. This loan has not yet been finalized. American will need to apply and, likely, negotiate the terms of this loan.
The airline does continue to fly to a number of destinations. However, with low fares and empty aircraft, the carrier is not turning the profits that it did at the same time last year. As a result, the carrier will need additional funding.
Maintaining minimum service
Airlines that receive government assistance under the CARES Act must maintain a minimum amount of domestic service. For destinations that are served by the airline for at least 25 times per week, the airline must continue to fly five times per week. For destinations served between five and 25 times per week, the airline only needs to fly at least three weekly flights to that destination. If a carrier flies to a destination fewer than five days a week, airlines must serve the destination with at least one flight on one day per week.
For a carrier like American with a major hub-and-spoke model, the Department of Transportation offered a little more reprieve for the airline. Cities served from multiple hubs only need to be serviced from at least one of those hubs so long as the carrier can continue to maintain minimum frequencies.
Airlines cannot cooperate on flights, however. Each carrier must serve its destinations in accordance with minimum service requirements. Regional carriers operating on behalf of the airline can help meet these requirements.
In terms of flight schedules, airlines can choose to either follow minimum service requirements based on their winter 2020 schedule or summer schedule from 2019. For places where service had ceased after March 1st, airlines will need to reinstate service within seven business days of receiving government assistance from the CARES Act.
When American expects air travel demand to recover
American Airlines has provided a few different hints as to when it expects air travel demand to recover. First, in this announcement, American provided a forward-looking statement indicating that it “hopes” that air travel demand recovers by September 30th.
Second, American Airlines has altered its elite status thresholds for 2020 by significantly reducing requirements. This makes status previously attainable in a year to be attainable in around six months. Thus, it appears that American expects demand to start to recover from early-summer. However, the coronavirus and governments will have a major hand in terms of how that schedule plays out.
In addition, American has cut 60% of its international summer capacity. This is indicative of the airline anticipating a gradual return in travel demand. However, the carrier will not be launching a number of new services this year. Instead, those will fly in 2021.
American Airlines has announced that it will receive $5.8 billion in assistance from the federal government amid this industry-altering and unprecedented coronavirus pandemic. In addition, the carrier will seek a loan for a further $4.75 billion from the US Treasury. Further details of the financing will be available in the coming days. For now, American stated that employees will not face involuntary furloughs or pay cuts through at least September 30th. Suffice it to say, if demand does not recover by the fall, then airlines will be in big trouble.
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