The US government is already providing hundreds of billions in emergency aid to the airline industry. And it’s not too hard to see why. If you have ever traveled by air, you know that it’s a miserable experience. Between the long security lines, cramped seats, and sometimes-shoddy service, air travel is basically a nightmare. And yet, we’ve been conditioned to understand that these problems are entirely in the airline industry’s control. There’s no such thing as an “airline bailout” in this narrative, because no one is bailing out the airlines. We’re not paying them to make air travel more unpleasant.
Airline bankruptcies are now at a 20-year high, and a number of carriers are teetering on the brink of closure. The problem is that airlines have been using their cash from government bailouts to fund investments in company stock, like buying up more planes and routes and paying executive salaries. The airlines are also buying up hotels and other real estate, which further increases their debt burden.
We now see (sad) claims that the airline rescue was a good thing. Expect new loans in the future.
Gary Leff 8. July 2023
The argument for bailing out airlines during a pandemic is that the money is needed to make the airlines travel-ready when consumers need to travel. But airlines were not prepared and cancelled an almost unprecedented number of flights while flight schedules had not yet fully returned to pre-pandemic levels.
Brian Schumer’s on Skift offers a defense of the bailout that ignores these concerns.
Summers cites $54 billion in subsidies for airlines, but this is a significant underestimate of the amount of support for U.S. airlines. The $54 billion is the total amount of direct subsidies. The airlines also received $25 billion in subsidized loans. The federal ticket tax has been suspended for 2023. Airports and contractors have also been helped, and airlines have benefited.
The summary of his case is as follows,
Airlines cannot retrain tens of thousands of pilots and flight attendants in a few months and make sure they meet all the requirements of the Federal Aviation Administration. The airline training centers are not large enough to handle everyone at once. Maybe they would be ready for the summer requirement of 2023.
But that’s exactly what happened, even after the rescue. The workers were paid a salary, but for the most part did not work and received no training or education. And that’s why we’re in trouble now. The airlines spent as little of the bailout money as possible and did not do what was expected of them.
Schumers makes these claims as a defense of salvation,
- The counterfactual option of not saving is really bad. At the beginning of the pandemic, there would have been many layoffs and airlines would have significantly reduced their operations. Maybe they should have, and it could have limited the spread of Covid-19. But that’s not an argument for the second and third saves. We know what would have happened without the program, or at least the worst-case scenario, since the first rescue program expired in the fall (allowing airlines to lay off employees at will). United and American are laying off about 30,000 employees. Delta and Southwest haven’t fired anyone. And the workers were recalled months later when travel resumed. And Summers said: In the meantime, there would have been a bloodbath at the headquarters, thousands of people would have lost their jobs. In fact, this also happened after the save. American and United each laid off approximately 30% of their non-union employees, treating the layoffs as voluntary (e.g., voluntary departure with retention of travel benefits or termination without pay at the end of the initial bailout). American Airlines estimates that it can save $500 million a year by laying off executives, and they claim that the airline has lost virtually nothing as a result.
According to Sumers, the airlines would have taken even more aircraft out of service or, worse, defaulted on their lease and equity obligations. American Airlines removed its Boeing 757, Boeing 767, Airbus A330 and Embraer E-190 aircraft from service during the pandemic. This even applies to your own plane. And Summers reveals his game here – the subsidies were a bailout for the airline owners and bondholders.
- It would be worse without the subsidies. The unspoken assumption here is that the airlines spent all the aid money to prepare and there just wasn’t enough to stay prepared. That’s not true. American Airlines, for example, has $20 billion in cash. They didn’t spend the money to keep the drivers up to date. They didn’t run their flight simulators at full capacity during the pandemic. There was no aircraft on the ground to show the pilots takeoffs and landings to prepare them for the flight. Instead, they filled out the paperwork to provide bailout money to keep the employees, so the employees were placed under house arrest.
- If we hadn’t pumped tens of billions into the airlines, they would be like rental cars now. That’s not true. Car rental companies have been selling their fleets and cannot easily add cars due to the shortage. This is not the case with airlines. There are many planes on the market, and if the airlines sold more planes, the glut would be even greater. The difference with rental cars is that for cars, these companies compete with consumers, and the market for cars is limited because production is difficult due to the lack of chips.
While I don’t think it’s fair to claim, as Schumers does, that consumers who want to fly somewhere for a reasonable price this summer should understand that this is only possible because the government stepped in and paid workers during the worst of the pandemic, he makes a very regressive argument for government transfers.
- The average cost per job saved in the second and third airlines was approximately $1 million per job.
- There are relatively wealthy people among airline passengers, and his argument is that all taxpayers (even those on low incomes) should be forced to pay out of pocket to ensure reasonable prices for the wealthy. Instead of blaming the airlines for taking public money, consumers could thank their elected representatives for subsidizing their summer travel.
By bailing out the airlines, taxpayers, not equity and debt investors, suffered losses. Only 10 to 15% of the $29 billion in bailout funds from the second and third rounds were actually used to save jobs for people who would otherwise have been laid off. And these employees have not continued to work. American even withheld salary payments from the laid-off workers in order to retain them.
Remember, neither Southwest nor Delta laid off employees even when they were allowed to, and yet they received second and third salaries when they didn’t want to lay anyone off, even without government money. Delta had outages during the Thanksgiving and Christmas holidays, and Southwest had outages in late June. They did not use these resources to keep their operations on standby.
The article says people were counting on the [airlines] and the government had no choice. But this is a misconception that totally misrepresents the nature of the aviation industry. The alternative to a bailout would be bankruptcy, perhaps only for American Airlines, but perhaps also for United. Shareholders were devastated, but United, Delta and American went bankrupt. The predecessor of American Airways, US Airways, even went bankrupt twice. United’s predecessor, Continental, went bankrupt twice. And Delta and Northwest merged, although they went bankrupt at the same time.
The planes and doors still exist. Trained pilots will continue to exist. It was a direct fundraiser, with 90% of the money going to investors and suppliers, not employees. This was sold as a guarantee of flight readiness, even though the money was not spent that way. It was the theft of hundreds of dollars from every American (or our unborn children and grandchildren).
So why does all this matter? Because it will come up. In the future, the airlines will again be looking to the government for subsidies. It’s a move by Congress.
Lake View from the Wing
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