American Airlines To Get $3.1bn In Additional Government Support

American Airlines and its subsidiaries entered into an extension of the Payroll Support Program (PSP). The airlines in total expect to receive up to $3.1 billion, of which about half was already disbursed to the airlines. American Airlines received over $5 billion under the initial PSP enacted right at the start of the crisis.

American Airlines getty
American Airlines will get up to $3.1 billion in government support. Photo: Getty Images

The extension of the PSP agreement

After the US government passed a new relief bill at the end of December, airlines began working with the US Department of Treasury to get their share of support. On January 15th, American Airlines and its subsidiaries (Envoy Air, Piedmont Airlines, and PSA Airlines) reached an agreement with the Treasury to receive at least $3.086 billion in support. On January 15th, the first installment was disbursed by the treasury, totaling $1.543 billion.

Like every other airline, American Airlines has to comply with terms such as maintaining a minimum level of service as prescribed by the US Department of Transportation (DOT). In addition, the airline cannot make any involuntary furloughs and reductions in pay rates or benefits through March 31st, 2021.

All employees who were involuntarily terminated or furloughed after September 30th, 2020, have to be recalled and get some back-pay. Lastly, the airline cannot buy back its own shares or pay dividends through March 31, 2022, and must abide by limits on executive compensation until October 1st, 2022.

American Getty Hangar
The airline will be recalling the workers that it has furloughed since September 30th. Photo: Getty Images

American issued a promissory note to the Treasury, which provides for the airline’s unconditional promise to pay the Treasury the initial principal sum of approximately $433 million, subject to an increase equal to 30% of the amount each additional installment disbursed under the program. So, assuming the airline receives a total of nearly $3.1 billion, the promissory note will have a total principal sum of around $896 million.

American must also issue to the Treasury warrants to purchase the airline’s stock. Assuming the entire amount is disbursed to American, this will be equivalent to over 5.7 million shares.

The PSP agreement is on top of the government loan the airline closed on in September. In October, the airline and the Treasury agreed to expand that loan to up to $7.5 billion, and American now has until May 28th, 2021, to draw upon the full amount. It has already borrowed $550 million under it.

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What have other airlines received?

One of the first airlines that announced an agreement with the Treasury was Delta Air Lines. Delta, which did not furlough any employees, will receive $3 billion, just below what American has been allocated.

American and Delta Planes at LAX
American’s competitor, Delta, will receive up to $3 billion. Photo: Getty Images

Southwest Airlines, which warned of furloughs amid a worsening demand environment, will receive a total of over $1.7 billion in support. And, regional carrier SkyWest will receive just over $230 million.

Keeping critical infrastructure in place

American and some of its peers have been lobbying the government for additional support before the first round ran out. In the airline’s third-quarter earnings call, CEO Doug Parker indicated that the PSP extension only needed to last through next March.

Mr. Parker framed the conversation around a clean extension of the PSP as a necessary tool to keep the critical infrastructure in place to support the market and US economy.

American 737
American made the conversation around government support about keeping critical infrastructure in place. Photo: Getty Images

Payroll support does help give some people a paycheck, but it is only for a few months. Come March, there is no guarantee that American will not need to furlough any workers again once the spring comes around. The demand outlook is uncertain, but carriers are hopeful that the vaccination drive will reopen some borders and stimulate some travel demand, though the current CEO hopes that will be the case.

However, Australia has already stated that its borders are likely to stay closed through the end of the year. Other countries have not yet indicated how they will use vaccinations to reopen.

Nevertheless, American feels confident that its domestic market is strong enough, though it now needs to hope it can make the revenue it needs to turn a profit. Hopefully, this government support will help, but the airline has its work cut out for it.

Are you glad to see American Airlines receive up to a total of $3.1 billion? Let us know in the comments!