Miami – In late 2020, Congress passed the Consolidated Appropriations Act, 2021, a comprehensive US$900bn COVID relief stimulus package and a US$1.4tn omnibus bill. The bill provides payroll support program (“PSP”) funding for US passenger air carriers and aviation contractors, essentially creating a second round of PSP funding modeled on 2020’s CARES Act.
According to a report on MarketWatch.com, American Airlines Group Inc. (AA) disclosed Tuesday that it reached a Payroll Support Program Extension Agreement (PSP2) with the U.S. Treasury for an expected total of at least US$3.09bn. The company said it received the first installment of the PSP2 agreement (US$1.54bn) on January 15.
The Motley Fool says that as with the initial payroll support program, grants will account for about 70% of the payroll support funds disbursed to these airlines. AA, Delta (DL), and Southwest (WN) will need to repay the other 30%. This loan portion of the payroll support will carry very low interest rates, though: just 1% for the first five years.
PSP Carries Conditions
The main condition attached to the new round of funding is that airlines must recall all of their furloughed workers at full pay for the period from Dec. 1, 2020, through March 31, 2021. That includes retroactive pay for December.
American Airlines, as part of its agreement, will issue warrants to the Treasury to buy shares of common stock. The warrants have an exercise price of $15.66 per share. American Airlines’ stock, which rallied 1.5% in premarket trading yesterday, had climbed 25.5% over the past three months through Friday, January 15.
The Motley Fool on www.fool.com published this chart comparing the current distribution of PSP funds to three airlines relative to what they received in the first such distribution in March 2020.
All three companies reported that they received half of the expected payments under the new payroll support program last Friday. The other half will be disbursed later this quarter. The Treasury Department also might have funds left over after processing all of the payroll support applications. In that case, it would provide a final additional payment toward the end of this quarter.
Some May Benefit More than Others
Motley Fool postulates that AA may benefit most from the funds. It has the weakest balance sheet of any major US airline and is burning the most cash. Last month, it estimated average daily cash burn for the fourth quarter at $30 million. Thus, it had the greatest need for additional government support. American also laid off 19,000 workers last fall and will need to recall them as part of the plan, thus greatly increasing labor costs.
Delta and WN relied on voluntary measures to reduce their labor forces. Also, since they are burning less cash, the PSP funds will go further to helping the airlines to recover.
However, as positive as this news is, simpleflying.com points out that payroll support is only for a few months. After March, there is no guarantee that AA – or other airlines – will not need to furlough any workers again once the funds are depleted. WN has said it will not furlough workers through 2021. But that promise came only after the relief bill was signed.
Featured image: Andrew Henderson/Airways