The airlines appeared cleared for takeoff, but the U.S. Treasury threw a last-minute curveball to the industry, causing the stocks fall in early trading on Monday. The employee-payroll protection grants are suddenly up in the air, and airlines like American Airlines Group (NASDAQ:AAL) could be forced to dump thousands of employees. The market appears to misconstrue the industry implications of the government aid making any dip a buying opportunity here as the market continues to see a dire situation that doesn't exist.

Image Source: American Airlines website

Treasury Switch

As part of the CARES Act, the government agreed to provide up to $25 billion in grants to cover payroll costs from April 1 to September 30, with restrictions on stock buybacks, dividends, and executive compensation. The stimulus bill does provide the Treasury Secretary with the ability to request appropriate compensation from the airlines, but the act was approved on March 27 with the intent of providing aid to cover airlines employee costs at limited financial impact to the airlines.

In a major switch to the industry, the Treasury has apparently made the following requirements for airlines paying over $100 million in payroll expenses:

  • 70% of aid via a grant.
  • 30% of aid via a low-cost loan, payable in 5 years.
  • 3% of aid in warrants at current stock prices.

The major holdup here is that American Airlines has over $6 billion in payroll costs during this time period covered by the grant. The company apparently qualifies for $6 billion in aid, and the plan now would require the airline to take out $1.8 billion in loans to cover the costs of employees not needed. Employees that would've been furloughed weeks ago already.

The airlines probably have limited issues with the warrants. American Airlines does have a market cap of only $5 billion, so the equivalent of $180 million in warrants would dilute shareholder by nearly 4%. The other legacy airlines of Delta Air Lines (DAL) and United Airlines (UAL) would see far limited equity hits, so the only hiccups for those airlines are likely the loan portions of the grants.

The President of the Association of Flight Attendants union told CNBC that this move would cause airline bankruptcies and tweeted this to the Treasury Secretary on Friday. The market should take note that the unions are upset with Steve Mnuchin, not the airlines or Congress.

While the Treasury move has potential dire impacts on airline employees, the move won't cause airline bankruptcies. With American Airlines cutting capacity by 80%, the airline clearly doesn't need up to 80% of their current workforce.

All anybody needs to look at is Disney World (NYSE:DIS) furloughing most of its 77,000 employees, including 43,000 unionized workers, due to the closing of the theme park. The airlines are likely to follow suite here without changes to the deal from the Treasury.

As passenger traffic demand rises, the airline will recall employees to match rebounding revenues.

Stem Cash Burn

The key to the airline survival is a big reduction in the daily cash burn by cutting the top cost: employee payroll and benefit costs. Delta Air Lines already pegged the daily cash burn at $60 million before any significant cuts to employee costs.

American Airlines has to make a decision in days, not weeks, on whether to accept the government grant or furlough staff. In the case of Delta, the payroll grant would cut cash flow losses basically in half and leave the airline burning ~$30 million in cash per day.

American Airlines would be in a similar situation. With or without the furloughed employees, the airline could easily cut cash burn into the $1 billion per month range. Daily passenger traffic is currently below 4% of normal levels, according to TSA with Easter passengers at only 90,000.

As my last article highlighted, the airline had $3.6 billion in employee casts last Q2. If the airline can obtain 20% employee reductions via temporary unpaid leaves, American Airlines can cut costs to below $3.0 billion. Unfortunately, the airline has to substantially slash these costs to survive, and the grants were the government's solution to maintain payrolls.

Investors need to prepare for American Airlines to start announcing employee reduction plans as part of a negotiating ploy. My prediction is that the Treasury Secretary reduces the loan portion of these grants to below 15% or a deal isn't done. The airlines will find other alternative paths.

Any move might shock the markets, but American Airlines entered Q1 with $3.8 billion in cash and recently pulled down $2.73 billion on their credit lines and another $1.0 billion in additional liquidity actions. The airline had nearly $8 billion in cash.

American Airlines clearly needs more funding whether government grants, loan guarantees, or plans being hatched by Delta and United Airlines to sell miles to credit card partners for cash. The dire issue here is the union workers losing jobs, not the airline going out of business.


The key investor takeaway is that the U.S. Treasury threw the airlines a curveball this weekend. Investors need to understand that the situation is not ideal, but the biggest issue is for the unions, not the airlines.

American Airlines has the cash to survive the downturn and only needs a solution to slash employee costs in order to remain solvent. So far, the solutions have limited equity impacts leaving shareholders intact when the pandemic is over and air travel recovers. The stock remains a buy on weakness and any fears related to not accepting the U.S. government grants.

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Disclosure: I am/we are long AAL, UAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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