Stock Market Wrap-Up: With Coronavirus Relief, Will the U.S. Government Become Airline Shareholders?

Friday was a down day for the stock market, as investors followed the usual adage of buying the lead-up to the passage of the coronavirus stimulus bill and then selling its actually becoming law. The Dow Jones Industrial Average (^DJI 0.69%) and the S&P 500 (^GSPC 1.20%) came into the day with a three-day winning streak, but worries about the rising spread of COVID-19 weighed on hopes that the government's assistance package would be enough to help ailing businesses make it through the coronavirus crisis. Along with the Nasdaq Composite (^IXIC 1.59%), most major benchmarks were down 3% to 4% on the day.

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With coronavirus relief available to businesses, the big questions are which companies will take advantage of it, and what the impact will be on investors. The Treasury Department has left open the door for the federal government to take ownership stakes in companies that receive aid. The airline industry has been among the hardest hit by the pandemic, and some investors increasingly believe that the government could take an equity position in some of the biggest airline stocks in the business.

What airlines could get

The stimulus package provides significant financial assistance to airlines like Delta Air Lines (DAL 0.43%), United Airlines Holdings (UAL 0.17%), Southwest Airlines (LUV -0.91%), and American Airlines Group (AAL -2.06%). The legislation gives the Treasury the discretion to offer up to $25 billion in direct financial assistance grants, representing money that airlines would use to allow their workers to keep getting paid through September. In addition, airlines would qualify for another $25 billion in loans that they'd presumably need to pay back.

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These aid packages come with conditions, however. No layoffs or furloughs are allowed through Sept. 30. Airlines would have to give up paying dividends or buying back their stock until a year after they've repaid any assistance. Airline executives wouldn't be allowed to receive greater compensation in the future than they did in 2019.

The big catch

Perhaps the most interesting aspect of airline aid from the federal government is that the Treasury would have the ability to take an equity stake in companies that take government money. That's reminiscent of the TARP bailouts during the financial crisis in 2008, when the government received so-called TARP warrants from the financial institutions that receive federal money. Those warrants carried a term of 10 years, and the Treasury eventually chose to sell them to investors through public offerings in order to recoup some of the money it spent on bank bailouts.

Some companies have decided that they'll do everything they can to avoid taking federal money precisely because they don't want to deal with the government having an ownership interest in their businesses. Boeing (BA -0.76%) has reportedly refused billions in potential loans, and the possible need to give the Treasury shares of preferred stock or warrants is a key factor in the decision. Whether Boeing will be able to make it through the crisis without taking advantage of the aid in the legislation is uncertain, but its reluctance points to the potential bargaining power that the Treasury would have in negotiating a deal.

For airline investors, the idea of federal government ownership just adds to the pain of losing hundreds of millions of dollars in dividend income as well as the positive impact that stock buybacks have had on share prices over the past decade. If it helps airlines survive the coronavirus crisis and a possible recession to come, however, most investors will find that cost worth it in the long run.